International Delivery

Canada is the world’s ninth largest exporter and 10th largest importer, with trade accounting for more than 71% of the country’s Gross Domestic Product (GDP). According to the World Trade Organization (WTO), Canada exports approximately Cdn$523.7 billion worth of products and services each year. This figure does not even include the supplies required to make products and provide services transported domestically.

Although the United States remains Canada’s biggest export destination, Canadian companies are sending their products and services all over the world. An increasing number of Canadian exports are headed for Europe, Latin America, Asia and Africa, according to the recent Canada’s International Market Access Report 2007, presented by Foreign and International Trade Canada.

Since the country’s current and future economic prosperity depends on Canada’s thriving international trading activity, ensuring that Canadian companies are properly insured globaly is just one aspect of a risk manager’s overall strategy. Compliance, as well as management of local trade, tax and insurance issues, are a growing responsibility for risk managers and brokers that assist them. This requires risk managers to think more globally, but act locally, wherever their companies do business. This is equally true in the area of cargo insurance.

Canada is one of the world’s more open major economies, and cargo insurance is one of the least regulated of coverages, but trade and customs regulations still exist. Therefore, a cargo policy written on a world-to-world basis may not be the best solution for a risk manager with multinational assets.

MOVING PRODUCTS FROM HERE TO THERE

Cargo insurance is deemed one of the oldest types of insurance. It dates back to Babylonian traders who assumed the risks of the caravan trade through loans that were repaid with interest, but only after the goods arrived safely. The Phoenicians and the Greeks applied a similar system to their maritime commerce. The Phoenicians developed the concept of “sharing risk through general average” 3,000 years ago. Under the principle of “general average,” those whose cargo survived a voyage were assessed to repay the loss of another shipper, whose cargo may have been jettisoned or lost. The assessment would apply to the protection of the vessel and the load remaining. By the early part of the 14th century, Europe’s maritime nations widely used marine cargo insurance.

In London, merchants, ship owners, and underwriters met to transact business at Edward Lloyd’s Coffee House, which opened in 1688. The coffee house became known not only as a place to drink coffee, but to buy marine cargo insurance as well. During this era, individuals began insuring a voyage’s risk to cargo. Voyages were written on a board in Lloyd’s coffee house; individuals willing to assume a portion of a voyage’s risk would write their names under that voyage, as well as the percentage of the risk they were willing to accept. This is the origin of the term “underwriter” and of how Lloyd’s progressed into one of the first modern insurance markets.

Today, leading cargo insurers do not typically underwrite a percentage of one voyage on a transactional basis. Cargo policies nowadays are usually written on an open-ended contract, or as an “open cargo policy,” to accommodate all of a company’s cargo exposures. Open policies can be written on an “all-risk” basis, or specifically tailored for “named perils.” It is not uncommon to find much of the form manuscripted. Although the International Chamber of Commerce terms of trade or “Incoterms” outline the duties and responsibilities between the shipper and the consignee (including which party is responsible for insuring the cargo), a typical open cargo policy will offer coverage on a warehouse-to-warehouse or “ex works” basis. Such policies provide coverage for all of the multi-modal transit exposures for goods in the ordinary course of transit – or do they?

THINK GLOBALLY, ACT LOCALLY

Not surprisingly, the regulation of insurance is not always synchronized with the development of global markets and free trade. As such, an open cargo policy written on a world-to-world basis may not cover all exposures due to trade restrictions, local insurance regulations or taxation issues. In today’s global economy, risk managers are increasingly adopting the role of corporate steward, and not just purchasers of insurance. They seek global solutions that integrate corporate governance with local compliance in a seamless product. Additionally, risk managers recognize that local knowledge of customs and practices and local expertise often expdite resolutions and minimizes global frictions.

Advances in information technology have given regulators and tax authorities an unprecented ability to track international trading activity and zero in on companies failing to comply with local rules and regulations. This increasing capability has provided an impetus for companies to “beef up” their compliance efforts. Some high-cost rulings and fines, including the 2001 Kvaerner ruling, have highlighed the urgency in undertaking these efforts.

KVAERNER

In the European Union (EU), the Freedom of Services Policies (FoX), implemented in 1994, intended to allow a single insurance policy to cover insurance risks in all EU countries. When it was enacted, it seemed to make the use of local policies and premium allocations redundant. The European Courts of Justice, however, made a landmark judgment in 2001 in the case of Kvaerner plc v. Staatssecretaris van Financien. The judgment set a precedent for accounting for insurance premium tax (IPT) within the EU. As a result, international companies must pay insurance tax on global premiums whether charged in or out of the EU. Overall, the ruling had a far-reaching affect on all global insurance policies, including global cargo policies.

The facts in Kvaerner are as follows. The U.K.-based Kvaerner plc entered into a global insurance policy with a local insurer to cover professional indemnity and catastrophe risks of Kvaerner’s wholly-owned subsidiary, construction company John Brown plc. John Brown plc, in turn, had a wholly-owned subsidiary in the Netherlands, called John Brown Engineers and Constructors BV (John Brown BV), that was among the insured the policy covered. Kvaerner paid the premium to its local insurer and assumed that it had accounted for the U.K. IPT of 5% on the total premium. The Netherlands tax authorities assessed the Netherlands subsidiary for its IPT on that proportion of the premium relating to the risk based in their jurisdiction. Kvaerner argued that “establishment,” in the context of Article 2(d) of the Second Non-Life Insurance Directive, should not include a separate legal entity such as a subsidiary.

Kvaerner made it clear IPT must be paid in the country where the risk is located. It must also be based on a ‘just and reasonable’ premium allocation. The insurer is responsible for remitting taxes on behalf of its insured and penalties may be imposed for non-compliance.

As Kvaerner makes clear, the task of ensuring that a company is compliant continues to grow in priority for risk managers. Fortunately, global cargo solutions are available from a handful of global insurance companies, offering risk managers not only global coverage, but global assistance to help ensure obligations are met according to local statutes and regulations.

GLOBAL ASSISTANCE

Consider how a Canadian energy corporation with assets in three other countries might use a global cargo product to address its multinational insurance and compliance issues. In this example, the energy firm will have mining operations in Brazil, a storage and distribution facility in China and a refining operation in Mexico.

Brazil, China and Mexico all have local admitted insurance requirements that will affect the transportation exposures of the Canadian parent company. By accessing insurers with a glob
al network of admitted companies, the corporation can obtain a program with locally admitted policies written at good local standard in Brazil, China and Mexico. Premium and taxes will be paid locally, satisfying local compliance issues. The parent company’s policy will be issued on a worldwide basis. To the extent that local standard is more restrictive, the parent company’s policy will act as Difference in Conditions (DIC)/Difference in Limits (DIL) insurance, thus providing a coordinated product. The sophistication of these programs truly comes into focus when the insured suffers a loss where locally admitted insurance is required.

Licensed surveyors and inspectors will generally require evidence of a local admitted policy before they will adjust a claim. However, if a claim is truly unique, the resources of the worldwide policy can be drawn upon to assist the resolution. Conversely, when there is no locally admitted policy, the potential for fines and penalties (both at a monetary and criminal level), as well as the administrative delays in collecting loss information and the disruption of the local operations, exponentially exceeds any perceived benefits.

CONCLUSION

According to Foreign and Inter-national Trade Canada’s International Market Access Report 2007, mentioned earlier, the country’s continued prosperity hinges on Canadian businesses’ ability to access global market opportunities. The Canadian dollar is at its highest level, making acquisitions in foreign markets particularly attractive. When corporations move into new markets, risk managers must have an effective means to insure the goods in their supply chains as well as to satisfy regulators as satutory issues arise. Fortunately for risk managers and their brokers, tapping into an insurer’s global network can have many benefits beyond just insuring a loss.