What does 'location of risk' mean?
Location of risk means the country, state or territory in which an insured risk is deemed to be situated for regulatory and tax purposes.
Why does risk location matter?
Risk location determines legal, regulatory and fiscal obligations applying to an insurance contract. It is therefore important to determine the legal location of a risk before consulting Crystal, so that one can ensure that one is consulting the right country information.
How do I determine risk location?
Risk location is determined in accordance with definitions contained in applicable insurance laws. Most jurisdictions have insurance laws, containing definitions of “local” risks - risks whose insurance is governed by the jurisdiction’s insurance laws and are subject to the jurisdiction’s premium taxes or other fiscal charges.
Legal definitions differ: different jurisdictions word definitions differently. Nevertheless, it is possible to identify some common features in approaches taken. This section therefore provides guidance by class of business: see the links to the left of this page.
Example of a legal definition of location of risk
European Union Directive 88/357/EEC (2nd Non-Life Insurance Directive)
Article 2(d)
‘Member State where the risk is situated' means:
- the Member State in which the property is situated, where the insurance relates either to buildings or to buildings and their contents, in so far as the contents are covered by the same insurance policy,
- the Member State of registration, where the insurance relates to vehicles of any type,
- the Member State where the policy-holder took out the policy in the case of policies of a duration of four months or less covering travel or holiday risks, whatever the class concerned,
- the Member State where the policy-holder has his habitual residence or, if the policy-holder is a legal person, the Member State where the latter's establishment, to which the contract relates, is situated, in all cases not explicitly covered by the foregoing indents.
[This definition has been inserted into the insurance laws of all EU member states]
What general points should I bear in mind?
- Identify the correct class of business.
The classification used in this section is based on the OECD’s classification, with additional pages for types of insurance where specific guidance is considered helpful. Within the wider classifications, detailed information is provided for particular types of insurance. It is important to consult the right advice, so you should ensure that you have correctly identified the class of business to which a particular contract belongs.
- Identify the insured(s)
The location of insureds can be an important factor in determining the location of risk.
A contract may have more than one insured. Contracts may specifically name more than one insured, or they may state that the insured’s subsidiaries, associated companies or branches are covered under the contract. If these different entities are located in more than one country, the contract is a global contract and may be subject to regulatory and fiscal requirements in more than one jurisdiction. If the entities are located in more than one US state, the contract is a multi-state placement, subject to the regulatory and fiscal requirements of more than one US state. These pages include reference to global contracts.
- “Peril” is not the same as “risk”
Determining a risk location does not mean identifying every jurisdiction in which an insured loss may arise. For example, if someone takes out a travel insurance policy, the risk of loss is likely to arise in the country to which they travel, rather than in the country in which they are resident, yet the risk location is usually the latter. Similarly, if a company exporting goods abroad takes out a products liability policy, it is seeking cover for claims arising in the countries to which it is exporting, but the risk is located in the country where the insured is established.
This should be borne in mind when global contracts are arranged. So there is no regulatory or fiscal need to break down a products liability premium to reflect the countries to which an insured is exporting, for example.
- Payment of the premium usually does not determine risk location
The location from which the premium is paid is not necessarily relevant to the determination of risk location. In most cases it does not make any difference who pays the premium, the location of the risk is determined on principles outlined in these pages.
For example, if a non-UK parent or other group company pays a premium on behalf of a UK subsidiary, even if the premium is not recharged, it remains subject to UK Insurance Premium Tax (IPT).
There are some exceptions, in relation to global contracts where there is doubt over the location of risk of part of the policy.
