Insurers are responsible for premium rating; outside the US they are also responsible for allocating premium between different jurisdictions (in the US, surplus lines brokers are responsible for the payment of surplus lines taxes and therefore for allocating premiums between different US states). If, in practice, the apportionment of premiums between countries is done by a broker, underwriters should ensure that they understand and agree the basis on which it is carried out.
When to apportion premium
It is necessary to apportion premium when an insurance contract insures risks located in more than one country. “Risk location” refers to location for fiscal and regulatory purposes – see the Risk Locator pages for further details.
It is not necessary to allocate premiums to countries where perils exist, but where no risks are located.
Premium apportionment is necessary to ensure that an insurer records premiums for individual countries and reports them to regulatory authorities and collects and pays the right premium taxes and other fiscal charges.
Wherever Lloyd’s is a licensed insurer and subject to fiscal and reporting obligations,
Lloyd’s handles regulatory reporting and tax payment centrally, on an aggregated basis, for all Lloyd’s underwriters.
Example
A company with a single establishment in France purchases products liability insurance, covering exports to 50 countries around the world. Claims under the policy may therefore arise in relation to legal action brought in any of the 50 countries.
Nevertheless, it is not necessary to apportion the premium between the 50 countries. Because there is a single establishment in France, and the contract is protecting the legal liability of the company with that establishment, the risk is located in its entirety in France, and no premium apportionment is necessary.
Methods of premium apportionment
There are no specific rules covering premium apportionment. The method used for any particular contract should be justifiable and documented.
Methods in use with insurers include allocation in accordance with:
- Numbers of staff employed at different locations – may be used for insurances linked to employees, such as workers’ compensation and employers’ liability insurance.
- Values at risk at different locations – may be used for property insurances.
Insurers should adopt a common sense approach to premium apportionment. Determining the premium to charge to insure a risk is, in principle, a commercial judgement. Consequently, if an underwriter considers it uneconomic to allocate premium to an exposure in a particular country it is reasonable for the underwriter to determine that no premium will therefore be allocated to that country. It is not therefore necessary to arrange payment of the small amounts of premium tax arising from such exposures. The underwriter is responsible for this decision and must be in a position to justify why they have not charged a premium for a particular risk.
