Indian insurance firms depend on large European counterparts to reinsure their risks as they would otherwise end up in deep financial trouble in case of large payout.
With overseas reinsurers no longer willing to cover any business linked with Iran following US and EU sanctions, refining at Mangalore Refinery & Petrochemicals Ltd and Essar Oil Ltd were under threat as the two buy 1,00,000 barrels of oil a day from Iran.
Sources said the Department of Financial Services has proposed that the EIP be created within a month with Rs 1,000 crore from Indian insurers out of the reinsurance premium paid to them by the refiners and an equal amount from the Oil Industry Development Board which collects the cess on crude oil.
The proposal says that these contributions be continued annually for the next three years to eventually build a corpus of Rs 6,000 crore.
State-run Oriental Insurance Company and New India Assurance Company would be the initial contributors as they underwrite risks of state-run MRPL and private Essar Oil Ltd, respectively.
But private insurance firms would also have the option to participate in the EIP fund, said sources.
The proposal is a fallout of the March 6 deliberations chaired by the National Security Advisor to institute a mechanism so that reinsurance coverage would no longer be required by Indian insurance companies.
The US and EU sanctions were inserted in the insurance policy that the refiners are to sign, and they did not guarantee that the refiners would be indemnified against any claim in case of imports from Iran.
India is Irans second-largest buyer after China, taking a quarter of its oil exports worth $1 billion a month.
Indias refiners have already slashed imports from Iran as they joined other major Asian buyers in reducing purchases to secure waivers from the sanctions.