How Do Insurers Apportion Premiums When the Risks Are Unknown?

Global insurance programmes will cover risks in multiple jurisdictions throughout the world and allocating the premium between all these jurisdictions can be a major challenge for insurers.  It gets even more complicated when the risks of that particular programme are unknown at the time of contract inception.

Bon voyage

This could be, for example, where a ship is being insured for a voyage around the world.  In this particular scenario the exact route, number of port stopovers, or length of time spent at any one port may not be known at the exact time the insurance contract is taken out.

So, how should the premium be allocated and to which jurisdictions?

Many tax regimes don’t provide guidance on how premiums should be apportioned and leave it to the insurer to use a fair and reasonable apportionment method. This needs to be justifiable and shouldn’t be used as a way of reducing tax liabilities. The UK tax authority, HMRC, provide examples of apportionment, including one relating to marine and ships’ journeys. It states that the UK portion of a worldwide marine cargo cover policy can be calculated by taking the number of intra-UK journeys divided by the number of worldwide journeys.

A challenge for insurers

The insurer will therefore need to estimate the premium allocation, which could be based on historical data for such ships or for the type of journey the ship is going to make. This will then create the tax liabilities in the corresponding jurisdictions for which taxes should be declared and settled in the appropriate tax periods. Once the ship’s journey has begun, and a more accurate level of risk can be calculated, the relevant adjustments can be made to the taxes already declared.

This in turn creates additional issues relating to under and over declarations of tax as well as the extra administrative burden in adjusting the returns. Over declaring can be a significant problem in Italy where refunds are not allowed and in jurisdictions with Stamp Duty regimes, such as Malta and Cyprus, where refunds are only allowed after a cooling off period. Not declaring enough tax can also be a problem and may leave taxpayers open to penalties or possible questions from tax authorities.

Reducing the business risk

It is important, therefore, that an insurer can justify their premium apportionment and back this up with reliable and consistent data sets. This will ensure risks are minimised especially when determining the correct amount of tax due in each jurisdiction.

The challenges an insurer faces when allocating their insurance premiums to jurisdictions that may be unknown can be complex and risky. Careful monitoring and valid historical records should help to reduce the risks involved and to ensure a compliant approach to insurance premium taxes around the world.