As more and more insurers confirm they will soon halt or sharply reduce coverage to tankers operating in Iran, China's government may need to step in and take on the risk to ensure Iran's largest oil buyer receives its contracted supplies, said Arthur Bowring, managing director of the Hong Kong Shipowners Association.

Bowring's comments come days after officials at China's P&I club, which covers more than 1,000 ships, told Reuters the insurer would not extend cover to tankers carrying Iranian oil when the new EU sanctions come into force.

Hong Kong insurers have a much more international clientele than their mainland Chinese counterparts, with many European firms having offices in the former British colony.

"For the liability coverage that we now need, the reinsurance is essential and that comes from the international market, which of course is affected by the sanctions," said the head of the Hong Kong Shipowners Association, whose members as a whole own nearly 2,000 ships.

The association does not represent Hong Kong maritime insurers.

"State-provided cover is the only other alternative, but this could also be difficult in a claim situation, especially if the amounts are in U.S. dollars," he added.

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Iran sanctions graphic link.reuters.com/qeh85s

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A combination of U.S. and European sanctions against Tehran have significantly hindered the ability of Iran's oil customers to continue the financing, purchase and transportation of the OPEC member's crude.

Growing pressure by the West has led some Iranian oil buyers to cut imports, but the problem over obtaining maritime insurance could altogether halt shipments to Asian customers. Concerns over the disruption to Iranian oil supplies have helped drive global crude prices by more than 13 percent so far this year to above $122 a barrel.

For the maritime industry, European insurers and reinsurers will be banned from indemnifying ships carrying Iranian crude and oil products anywhere in the world, in line with sanctions on Tehran.

Although many Asian ship insurers, like China and Japan's P&I clubs, do not fall under the sanctions regime, they are largely dependent on the European reinsurance market to hedge their risk.

"Some of our owners have problems with long-term (shipping) contracts that do not expressly exclude the effects of regional sanctions, which puts them in a difficult position of having to trade but not being able to due to a lack of insurance," Bowring said.

Japan and South Korea have lobbied for exemptions to the EU sanctions, but insurance and shipping executives say a complete ban now looked likely.

"The one issue that we have highlighted ... is the unfortunate EU sanctions that would remove the possibility of liability insurance for ships carrying Iranian oil," Bowring said.

"The effect of this is not on the ownership or carriage of the oil but on innocent third parties who would be affected if one of these ships had an accident and spilled oil. Liability insurance covers liability to third parties and removing this just does not make sense," he added.

Protection and indemnity (P&I) clubs, owned by their shipowner customers, were created to cover shipping companies against personal injury or environmental clean-up claims, dauntingly large costs for most commercial insurers.

A supertanker, which typically can hold 2 million barrels of crude oil, must have P&I coverage of around $1 billion to operate within most of the world's ports, industry officials said.

(Editing by Ed Lane)

• A Permanent Economic Emergency