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Media reports indicate that General Insurance Corporation of India (GIC) would run a Rs 20 billion fund to support local insurers who cover refineries processing Iranian crude oil.
The fund would get an annual contribution of up to Rs 20 billion from Indian insurers and the oil ministry.
The money will come from the premiums normally paid by insurers for reinsurance cover.
The government would clear the proposal to set up such a fund after it gets approval from the foreign affairs ministry.
The central government took steps to set up such a fund after Indian insurance firms said they may not be able to cover refineries processing Iranian crude oil when policies came up for renewal.
Insurers are reluctant to cover refineries processing Iranian crude oil because they find it difficult to get reinsurance from European companies for such cover.
EU sanctions have blocked European reinsurers from any involvement in covering shipments of Iranian oil, prompting India to set up limited emergency cover.
India is Iran's second-largest buyer, taking around a quarter of its oil exports worth around $1 billion a month. But Tehran slipped to seventh place among New Delhi's suppliers from second in 2011-12.