The common understanding is that the four para-fiscal charges effective in Iceland apply only on the Property and Fire lines, and the basis of calculation is sum insured. However, there are some other considerations.
There have been a number of enquiries to our IPT helpdesk in recent months regarding the four para-fiscal charges effective in Iceland:
- Building safety fee
- Fire valuation fee
- Catastrophe fee
- Avalanche prevention tax.
The common understanding is that these taxes apply only on the Property and Fire lines, and the basis of calculation is sum insured. However there are some considerations as to whether these levies/taxes apply to only the building value, or building plus contents (movables) value, and whether there should be a split between the fire element and non-fire element for tax purposes.
Fire valuation fee
First of all, we need to understand that in Iceland, building owners are obliged to insure all of their buildings against fire. The meaning of “buildings” here is defined in the law as the whole or part of a building that is intended for residential, commercial, storage or other use and is permanently attached to the land. This mandate thus forms a compulsory insurance against fire (compulsory fire insurance) for the insurance market, and the sum insured reflects the material value of the property that can be destroyed in the fire; namely the replacement value of the property. The assessment on obtaining the sum insured value against fire is performed by the Iceland National Registry (INR) upon request, and a fee of 0.00021% is charged on the assessed sum insured value. This is the fire valuation fee.
It is not difficult to conclude that the sum insured does not include the value of building content or movables. The official website of the Iceland National Registry states that compulsory fire insurance covers only a property, but not the building’s contents or the financial loss thereafter. Property owners need to insure their contents separately if they wish to cover the content against fire. And this cover (building content/movables) is not subject to the fire valuation fee, as no assessment service is required and delivered.
This is a premium paid to the Iceland Catastrophe Insurance (ICI) which was founded as a public undertaking by a special Act of the Parliament. This is a statutory insurance that covers risks against earthquakes, volcanic eruptions, and floods etc. Insurance companies should calculate the sum insured of the fire insurance policies they underwrite and pay a percentage of this amount as premiums to the ICI. To work out a correct calculation, the definition of the fire insurance is vital.
Clearly, the compulsory fire insurance we mentioned above is a pure fire insurance policy. Sum insured, ie. the replacement value provided by the INR, is the basis of calculation for the catastrophe fee and a 0.025% rate applies. In the same vein, the replacement value doesn’t include the value of building contents/movables. However, if any amount covered exceeds the replacement value and it is covered against fire risk, the excess is also subject to the catastrophe charge, although the excess amount or policy is not considered compulsory. Therefore, if the building content/movables are also covered against fire, the total sum insured will be charged.
Avalanche prevention tax
This is a contribution to the avalanche and earth-slide fund. It is collected to support the fire engines and fire protection facilities of Iceland. It follows the same logic as the catastrophe fee in terms of basis of calculation. The tax rate is currently 0.03%.
Building safety fee
The building safety fee functions as a fire brigade charge seen in other countries. It is collected to support the fire engines and fire protection facilities of Iceland. This fee is applicable only in the case of fire coverage. Therefore, strictly speaking, if risks covered can be identified as non-fire risks, the sum assured of which should not be subject to the fee. For example, if business interruption is covered where fire peril is excluded, the sum assured of business interruption is not charged. The tax rate is currently 0.0045%.
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Based on the analysis, the fire valuation fee is charged only on the compulsory fire insurance, and the basis of calculation is the property replacement value stipulated by the authority. Any excess value of fire risk is not included into the charge. In IPT Quote, TMF Group’s online calculation tool, the system clarifies the definition of sum assured which is used as a basis of calculation of the fee.
For the fire valuation fee, the sum assured that is used to calculate the fee is the official registered value of the building. It doesn’t need to be equal to the sum assured that is covered in the insurance policy; and the sum assured for contents covered is not subject to the fee.
For the catastrophe fee and the avalanche prevention tax, if contents are not insured, the tax base is the same as that of the fire valuation fee. Namely, the official registered value of the building covered. However, if contents are also insured, the sum assured for contents need to be included in the basis of calculation. This means the tax base for these two taxes is defined as; official registered value plus the sum assured of the contents.
For the building safety fee, a calculation mechanism is configured to facilitate users in splitting fire element value and non-fire element value. For business interruption cover including fire risks, the sum assured for business interruption should be split out and no tax should be due on this amount.
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