Market Bulletin

Ref: Y5325

Title

Identif ying regulatory and tax risk location(s)PurposeTo remind the market of the importance of correctly determining the regulatory
and tax risk location(s), clearly identifying who the (re)insureds are on risk andhow to add this to the Market Reform Contract (MRC)

Type

Event

From

Yael Chen, Head of International Regulatory Development & Reporting
Risk and Regulatory
Yael.Chen@lloyds.com
Emma White, Head of Indirect Tax
FinanceEmma.White@lloyds.com

Date

11 February 2021

Deadline

Related links

Risk Locator guidance and tool
CrystalStamp Decision Tool
MRC (Open Market) Guidance
Lloyd's Wordings Repository

Appendices

Appendix 1: How to complete the regulatory risk location field in open market
MRC and declarations off of lineslips
Appendix 2: Binding authorities
Appendix 3: Lloyd’s regulatory tools to determine risk location
Appendix 4: Risk location examples

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Lloyd’s is authorised under the Financial Services and Markets Act 2000

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What is risk location and why is it important to identify?
Risk location(s) determine the country/territory whose laws, regulations and tax rules apply
to a (re)insurance contract. All parties involved in the placement and processing of a risk,
including underwriters and brokers, should comply with regulatory and tax obligations.
For insurance, regulatory risk location is often determined by reference to several different
parameters including, but not limited to:
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The insureds’ domicile(s)/address(es).
Interest/subject matter of insurance.
The class of business and the perils covered.
Situation/territorial scope.
Location of the producing broker and/or overseas broker.
Country/territory in which the vehicle/vessel/aircraft is registered.
Country/territory in which the vessel is being constructed.
Country/territory in which property is located.
Country/territory in which regulated activities are undertaken.
Country/territory of origin.

For reinsurance, the location of the original risk is generally not a factor in determining therisk location of the reinsurance and the number of factors is normally limited to:••

The reinsured’s domicile(s)/location of the cedant.
Location of the producing broker and/or overseas broker.

Please note that each country/territory has its own definition of risk location according tolocal laws. It is not the case that all the above parameters always apply in every
country/territory; the parameters that apply will vary from country to country and for different
classes of business.
Failure to identify the correct territories and compliance with relevant obligations may lead
to:
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delays in premium processing
invalid (re)insurance contracts
non-compliance with local regulations
inaccurate regulatory reporting and funding
incorrect tax returns and tax payments(re)insureds, intermediaries or underwriters subjected to fines
damage to Lloyd’s international reputation
potential loss of licences

Therefore, it is important that the market carries out the necessary due diligence to correctly
identify the risk location(s) and keeps appropriate records of their decision making.

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Multiple risk locations
Generally, the countries/territories for regulatory and tax purposes are the same when
determining the risk location. However, it is possible for a single contract to have different
regulatory and tax locations because they derive from different rules. For example, theregulatory risk location for moveable property insurance in the EU/EEA is thecountry/territory where the insured is resident, but the tax risk location is where themoveable property is normally situated.
Additionally, more than one country’s/territory’s laws, regulations and tax rules may apply toa contract or even the same portion of premium. Reasons why this may occur, include:••••

multiple (re)insureds
contradictory and overlapping regulatory and tax rules
multiple risks insured
involvement of intermediaries

In some countries/territories, the location of the insured’s residence or businessestablishment creates a risk location irrespective of the physical location of the insured
property. Consequently, if the insured property is in a dif ferent country/territory from theinsured’s residence or business establishment, there may be two countries/territories forboth regulatory and tax purposes applicable to the same portion of premium.

How to identify the risk location
To help correctly identify the countries/territories for regulatory and tax purposes, thefollowing initial questions should be considered:••••

Does the contract relate to insurance or reinsurance?
What is the nature of the risk, for example, is it property (fixed/moveable), a vehicle(aircraft, ships and motor vehicles), travel or another type of risk (e.g. general liability)?
Who is the insured and where are they located?
Where is the producing broker/coverholder based?

This bulletin will go into further detail on these points below.

Risks relating to property
Property risks can be either fixed (e.g. buildings, oil rigs, pipelines, bridges or otherstructures fixed to land) or moveable.
Where the property is fixed, the risk location is usually the country/territory in which theproperty is situated. For moveable property, the risk location is usually where the property isnormally situated. However, for regulatory purposes, EU/EEA member states view the risk
location as the territory in which the insured is resident, or its business establishment isPage 3 of 14

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located. Lloyd’s recommends that Crystal (see Appendix 3) is reviewed in conjunction withthis guidance as country/territory specific information can be found there.
If the contract insures fixed property at more than one location, and those locations are
situated in more than one territory, there may be multiple risk locations.
In some territories, the location of the insured’s residence or business establishment
creates a risk location irrespective of the physical location of the insured property.
Consequently, if the insured property is in a different territory from the insured’s residenceor business establishment, there are two territories for regulation and tax.

Risk relating to vehicles
The term “vehicles” include aircraft, ships and other vessels and motor vehicles. The risk
location for vehicles may be determined by one or more of the following criteria:•••

Jurisdiction in which the vehicle is registered
Physical location of the vehicle
Location of the residence or establishment of the insured

As one country’s/territory’s risk location rules might contradict or overlap with another’s,
there may be multiple risk locations. As with property risks, Lloyd’s recommends that
Crystal is reviewed for country/territory specific guidance.
For most jurisdictions (including all EU/EEA countries) the risk location for vehicles isdetermined by the registration of the vehicle insured. It is important that registrations areshown in all MRCs that insure such vehicles, either to identify the need for tax andregulatory compliance in such territories, or as confirmation that there are no risk locationsin those territories.
Other risks
Risks that fall outside of the property and vehicle categories can be classed as “other”.
Examples of “other” risks could include miscellaneous financial loss risks and most thirdparty liability risks.
The risk location for these types of risks is generally the country/territory in which theinsured is habitually resident, or its business establishment, to which the contract relates, islocated. However, in some instances, the country/territory in which an insured peril or event
takes place could create a regulatory or tax risk location.
Similar to property and vehicle risks, “other” risks can also have multiple risk locations. Thismay occur where the contract is taken out by more than one insured, for example, acontract could be taken out by a company’s head office and it covers the entity’s
subsidiaries and/or affiliated companies that are located in multiple jurisdictions. Again,
Lloyd’s recommends that Crystal is reviewed for country/territory specific guidance.

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Identifying the (re)insured
An insured may be a natural person or a corporate entity, and their location may create arisk location. The location of a natural person is the country/territory in which they live,
which is described as the country/territory of their “habitual residence”.
The location of a corporate entity is generally the country/territory in which it is established 1.
Policies taken out by corporate entities can be more complex than those taken out by
individuals. Where the MRC states that the definition of the insured includes any subsidiary,
affiliate, associated company, branch, representative office, agency or other similarpresence, then these entities should be recorded as multiple insureds under the MRC. Thisis the case even if a parent company arranges the insurance and pays the premium onbehalf of its subsidiaries.
The MRC must clearly identify the principal insured and all other above mentioned“additional insureds” covered by the contract. These should be clearly listed, along with thecountry/territory in which each is located, to ensure that risk locations can be determined.
This requirement also applies to reinsurance business. Where reinsureds are located in
more than one country/territory, they should be listed and the location of each must be
clearly identified.

Where is the producing broker/coverholder based?
In some countries/territories, the location of an intermediary involved in placing an
insurance contract can create regulatory or tax responsibilities. Therefore, the location ofintermediaries should be considered, and Crystal consulted for territory specific guidance.

Premium apportionment
Once the regulatory and tax risk locations have been identified in line with the guidance
above, it is necessary to apportion premium where risks are located in more than one
country/territory.
There are no specific rules covering premium apportionment, or de minimis amounts forprocessing. The method used for any particular contract should be justifiable anddocumented in case of future audits conducted by tax or regulatory authorities.

1

Examples of establishments can include branches of companies, representative offices, factories,
workshops, mines, oil and gas wells and drilling platforms that are fixed to the seabed.

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Common apportionment methodologies used to allocate premium include:o Staff number employed at different locations for insurances linked to employees,
such as directors and officer’s liability, employers’ liability or corporate accident andhealth risks.
o The value of property at different locations for property or stock throughput risks.
o Turnover in relation to liability risks.
o Number of journeys or value of goods for goods in transit risks.
o The number of or value of vehicles for commercial fleet risks.
o The number of flight movements / landing and take-offs or value of hull forcommercial aircraft risks.
Underwriters should adopt a common-sense approach to premium allocation andapportionment. Determining premium is in principle a commercial judgment. Consequently,
if an underwriter decides not to take into account a minor exposure in a particularcountry/territory, as to do so would not be economic, it is reasonable that no premium isallocated to that country/territory. However, the underwriter must be in a position to justify
why they have not charged a premium for a particular risk.
It is important that the apportionment methodology used to allocate premium is evidenced in
the documentation as regulators and tax authorities may request to see and potentiallyquestion the method used.

Next steps
Prior to drafting the MRC, the market should ensure that the relevant due diligence iscompleted to identify the regulatory risk location(s) and ensure that the MRC clearly reflects
the countries/territories identified. The correct stamp(s) should be used to identify whether
the risk is being written by Lloyd’s underwriters, Lloyd’s Europe or both.
Care should be taken to ensure a contract does not have exposure where internationalsanctions apply, prohibiting or limiting insurance transactions. Please refer to the sanctions
and financial crime information available in Crystal.
It is recommended that market practitioners remind themselves of the MRC guidance, which
can be accessed through the London Market Group’s website.
Additional guidance on the completion of the Regulatory Risk Location he ading on the MRC
can be found in Xchanging’s market communication 2019/028 28 March 2019, in addition toappendices 1 and 3 below.

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Further guidance
For further information, please contact:
Lloyd’s International Trading Advice
t: +44 (0) 20 7327 6677
e: LITA@lloyds.com
Lloyd’s Taxation Department
e: taxdept@lloyds.com
Lloyd’s Europe
e: LloydsEurope.Info@lloyds.com
DXC Service Centre
e: service.centre@dxc.com
t: +44 (0) 870 380 0830

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Appendix 1: How to complete the regulatory risk location field in open market MRC
and declarations off of lineslips
Under the heading Regulatory Risk Location, specific countries/territories should be listed
out in the MRC, clearly identifying where all regulatory risk locations arise. In line with
Xchanging’s market communication 2019/028 28 March 2019, it is not sufficient to add“EEA” and/or “non-EEA”. This is so that Xchanging has enough information to determine theForeign Insurance Legislation (FIL) coding, perform tax checks and ensure regulatory
reporting can be completed appropriately. Except on lineslips, where the terms “EEA” and“non-EEA” are used, Xchanging may raise a query back to the broker(s) to clarify the actual
country/territory of the risk location. The use of these terms is permissible under theheading only if properly qualified. Please refer to the MRC (Open Market) Guide forexamples.
Conditional statements under the Regulatory Risk Location heading are also insufficient.
Statements such as, “Country X (unless something else is present somewhere else in theslip)” and “Based on flags if known” do not provide certainty for underwriters or Xchanging.
The regulatory risk location(s) should be identified before the MRC is drafted.
Section E.3 of the MRC (Open Market) Guide states that where there may be more than
one regulatory risk location applicable, a separate schedule which includes all of therelevant locations may be used. In this instance, under the Regulatory Risk Location
heading, a broker can add ‘as per schedule’. Where a schedule is used for more than one
heading (for example where a schedule is used for ‘Taxes Payable by...’ headings and theRegulatory Risk Location heading) it must be clear in that schedule which MRC headings it
relates to.
Care must be taken to ensure that any tax or regulatory allocation of premium acrosscountries/territories does not conflict with any allocations for other purposes: for examp le, if
75% premium is allocated to the BD Pool Re Risk Code, but only 50% of premium to the
UK, Xchanging will query this, delaying signing. Mistakes in calculations are a common
cause of queries back to the broker.
Xchanging will use the identified regulatory risk location(s) to ensure that the correct
stamp(s) have been used. If the stamp(s) have been used incorrectly, for example where
the Lloyd’s Europe stamp has been used for a risk located in a territory where Lloyd’s
Europe is not licensed, a query will be raised back to the broker.
Bordereau relating to bulking lineslips should contain a comparable level of information to
the above, in a similar format to the standards applicable to binding authority bordereaux
that are referred to below.

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Appendix 2: Binding authorities
Copies of model wordings for binding authorities and coverholder appointment agreements
can be found on Lloyd’s Wordings Repository (LWR). These wordings and appointments
contain a section on Territorial Limitations which is split:
9.1

The coverholder is authorised to bind insurances only for risks located in the
territory(ies) stated in 9.1 of the Schedule

9.2

The coverholder is authorised to bind insurances only for insureds domiciled in the
territory(ies) stated in 9.2 of the Schedule.

9.3

The coverholder is authorised to bind insurances with territorial limits not greaterthan those stated in 9.3 of the Schedule.

For the avoidance of doubt, 9.1 should be completed with the applicable regulatory and tax
definitions of risk location that apply. For classes of business where risk location isdetermined by the domicile of the (re)insured, it therefore follows that 9.1 and 9.2 should be
identical. It is important to note that for some classes of business 9.1 (risk location) and 9.3(territorial limits of declaration) may differ: for example, a coverholder appointment
agreement for EU/EEA vessels would be completed with the Binding Authority Registration(BAR) category Europe A in 9.1 but might show ‘Worldwide’ under 9.3 if those vessels are
sailing worldwide.
Lloyd’s Coverholder Reporting Standards state the core set of regulatory, tax, premiums
and claims information coverholders and Delegated Claims Authorities (DCAs) are required
to report into the Lloyd’s market for all classes of business in all territories. Full details of
the standards along with guidance on completion can be found in the user guide, which isavailable on the Reporting Standards webpage. Care should be taken to ensure that where
there are multiple tax and regulatory risk locations applicable to a single declaration thatthese are all clearly identified in the bordereau along with the relevant premium allocations.

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Appendix 3: Lloyd’s regulatory tools to determine risk location
Pursuant to Lloyd’s Minimum Standard 10, Lloyd’s provides the market with a suite ofregulatory tools to help identify the regulatory and tax risk location(s) and the correct
stamp(s) to be used. The tools include:•••

Risk Locator Tool – provides guidance on how to identify the legal risk location of
an insured risk for tax and regulatory purposes.
Crystal – Lloyd’s international regulatory and tax database.
Stamp Decision Tool – enables underwriters to determine whether a policy should
be underwritten through Lloyd’s underwriters and/or Lloyd’s Europe based on therisk location.

Enhanced access to these tools, along with general guidance on how to identify theregulatory risk location, including class of business guidance, is available throughLloyds.com.
Online training about how to use the regulatory tools is available to Lloyd’s market
participants on the Lloyd’s University market portal. Participants can sign up to access theportal here.

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Appendix 4: Risk location examples
Example 1
Marine – Ship’s Hull & Machinery
Details of the risk••••

The insured is located in Qatar.
The vessel is registered in Germany.
The vessel ordinarily operates in Germany.
Open market business.

Ship’s Hull and Machinery is a risk relating to a “vehicle” and as such the risk location may
be determined by the following factors:•••

The country/territory in which the ship is registered,
The country/territory where the ship is physically located, andThe country/territory in which the insured is resident or has its establishment mostclosely associated with the risk.

Whether or not a factor is relevant will be dependent on the countries/territories identified.
Analysis
Qatar:
Under Qatari law local risk is defined as real estate, properties or assets situated in Qatar.
The fact that the insured is resident in Qatar does not determine a regulatory risk location
here. In this scenario the risk will not fall within the Qatari regulatory or tax regime.
Germany:
EU insurance law which is applicable in Germany states that “a risk is located in an EU/EEA
member state if relates to:••••

A building (and its contents if covered under the same policy) situated in thatmember state.
A motor vehicle, ship, yacht or aircraft registered in that member state.
A travel policy for four months or less taken out in that member state.
For all other types of insurance, it is a risk of that member state if the insured ishabitually resident in the member state or for a business or an organisation if theestablishment to which the contract relates is situated in that member state."

As the vessel is registered in Germany the risk is located in Germany and subject to theGerman regulatory and tax regime. The fact that the vessel operates out of Germany
is irrelevant to the risk location as this concept is not recognised under EU law.
As there is a single risk location and it is located in Germany, the risk must be written by
Lloyd’s Europe using the Lloyd’s Europe stamp.

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Example 2
Marine – Marine cargo (goods in transit)
Details of the risk••

The insured is resident in Hong Kong.
The insured’s goods are going to be in transit by sea from Hong Kong to South
Korea.

For marine cargo risks, the risk location may be determined by the following factors:••

The country/territory in which the insured is resident, or its establishment is situated,
andWhere the goods are physically situated or being transported to and from.

Whether or not a factor is relevant will be dependent on the countries/territories identified.
AnalysisHong Kong:
Under the Insurance Ordinance (Chapter 41), a risk is deemed to arise in Hong Kong, for
specific classes of business, where there is:•••

An insured in Hong Kong.
A risk located in Hong Kong.
A policy proposed, issued, signed, accepted, submitted or received in Hong Kong.

In the case of goods in transit business, a risk is deemed to arise in Hong Kong if it isunderwritten in Hong Kong as described in the definition of Hong Kong insurance business.
As the policy will be issued to the insured who is resident in Hong Kong this would fall within
the definition of Hong Kong insurance business. Therefore, under the Insurance Ordinance,
the risk is deemed to arise in Hong Kong.
South Korea:
A risk is deemed to be a South Korean risk where the insured is a South Korean resident,
as defined under the Foreign Exchange Transactions Act. This is an individual whose
address or place of residence is within South Korea or a company whose main office iswithin South Korea.
As the definition of risk location for South Korea does not include the physical location of
goods, i.e. moveable property, a regulatory risk location does not arise in South Korea.
Therefore, in this scenario there is a single regulatory risk location, and this arises in HongKong. As such, the contract will be subject to the regulatory regime in Hong Kong.
This risk must be written by Lloyd’s underwriters using their syndicate stamp.

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Example 3
Goods in transit with storage
Details of the risk••••

The insured is resident in France.
The insured’s goods are going to be in transit by land from Luxembourg to Belgium.
The policy will also cover damage to the insured goods when the y are in storage in
Belgium for 90 days,
The business is placed through a French coverholder.

For goods in transit risks, the risk location may be determined by the following factors:••

The country/territory in which the insured is resident, or its establishment is situated,
andWhere the goods are physically situated or being imported to and from.

Whether or not a factor is relevant will be dependent on the countries/territories identified.
Analysis
France:EU insurance law which is applicable in France states that “a risk is located in an EU/EEA
member state if relates to:••••

A building (and its contents if covered under the same policy) situated in thatmember state.
A motor vehicle, ship, yacht or aircraft registered in that member state.
A travel policy for four months or less taken out in that member state.
For all other types of insurance, it is a risk of that member state if the insured ishabitually resident in the member state or for a business or an organisation if theestablishment to which the contract relates is situated in that member state."

As the insured is located in France, the risk has French risk location and is subject to the
French regulatory and tax regime.
Luxembourg and Belgium:
The EU rules mentioned above are applicable in Luxembourg and Belgium. The fact thatthe goods are going to be in transit by land from Luxembourg to Belgium is irrelevant to theregulatory risk location as this concept is not recognised under EU law, therefore this does
not create a regulatory risk location in either of these countries.
However, as the policy is insuring goods that will be stored in Belgium for more than 60days, a tax risk location will arise in Belgium because the moveable property is locatedthere. Therefore, a premium apportionment will need to be carried out and the premium
allocated to the goods in storage element of the risk will be subject to the Belgian tax
regime.
As there is a single regulatory risk location and it is in France, the risk must be written by
Lloyd’s Europe using the Lloyd’s Europe stamp.

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Example 4
Reinsurance
Details of the risk•••

The reinsured is a head office in the UK.
The cover will also reinsure subsidiaries in Gibraltar and Israel.
Open market business placed through an intermediary in the UK.

For reinsurance risks, the risk location may be determined by the following factors:••

The country/territory in which the reinsured(s) is established, andThe location of the producing broker and/or overseas broker.

Whether or not a factor is relevant will be dependent on the countries/territories identified.
Analysis
The UK:As the risk covers the reinsurance of an insurer’s head office located in the UK, the contract
will have a UK regulatory risk location.

Gibraltar:
As the risk covers the reinsurance of an insurer located in Gibraltar, the contract will triggera regulatory risk location in Gibraltar.
Israel:A reinsurance contract is considered an Israeli risk if it reinsures an insurer located in Israel.
As the Israeli subsidiary is a party to the contract, the contract is subject to the regulatory
regime in Israel.
In this scenario, all three territories create a regulatory risk location. As the risk is located in
more than one territory, it is a global contract. The risk locations are entirely outside of the
EU/EEA therefore, the risk must be written by Lloyd’s underwriters using their syndicate
stamp.
As mentioned earlier in this bulletin, it is necessary to apportion premium where risks arelocated in more than one territory.

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