Thank you, Mr. Chairman.
I'm Lyn Elliott Sherwood, the executive director of the Heritage Group in the Department of Canadian Heritage. I would like to introduce the colleagues I have with me today.
Keith Wickens is the manager of the indemnification program, and Marie Riendeau, from the Department of Justice, is with legal services in the Department of Canadian Heritage. In the event that I can't answer your questions, I'm counting on the two of them to do so. If they can't, we'll get back to you in writing. That's a commitment.
Today, we would like to give you an overview of the Indemnification Program and its operations over the first five years, share with you the results of the program over that period and the results of the evaluation that was done towards the end of 2005 and, lastly, discuss a number of issues identified in this assessment.
I will make the presentation in English but if there are questions afterwards I will, of course, be pleased to answer in the language of your choice.
I will apologize in advance because it's a relatively lengthy presentation, but we'd like to start your review by making sure everyone is on the same page in terms of the details of the program. So I'll try to go as expeditiously as possible. I believe the clerk has circulated a copy of the presentation.
The act that established the indemnification program was passed in June 1999, and in December of that year the associated regulations were passed. It sets out a complex but relatively simple phenomenon, which is that the government assumes the potential liability for loss or damage to objects in eligible travelling exhibitions, and funds are only dispersed in the event of loss or damage. What that means from the perspective of program administration is that the program is all about managing that potential risk. As you are aware, the act requires parliamentary review following the first five years of operation. The program actually came into implementation in the year 2000-01, and our five years were up last year.
The objectives that were established for the five years were to promote access to Canadian and world heritage through the exchange of exhibitions, and to provide Canadian institutions with a competitive advantage in competing for the loan of prestigious international exhibitions--and we'll come back to some of the details of the accomplishments.
It's essentially a three-way relationship. The Canadian institution that is organizing an exhibition establishes a loan agreement with the institutions or private individual who will lend the objects that will go into the exhibition. That institution then applies to the government for indemnification of the objects, and the government--that is, the program--enters into an indemnity agreement with the owners. So it's a three-way partnership that is involved, and a three-way set of contacts.
The eligible institutions are defined in the act. They are Canadian museums, art galleries, archives, and libraries that are publicly owned, that operate for educational or cultural purposes, that operate solely for the benefit of the public, and that exhibit objects to the public. In practical terms, in the first five years of the indemnification program, the only clients of the program were museums and galleries. We did not see any archives or libraries.
There is a minimum value for eligible exhibitions that is established through the regulations, and that's $500,000. They are focused on matters of Canadian heritage or significant international heritage, and again, this is laid out in regulations.
On the international exhibit, the fair market value of the foreign objects in the exhibit will be greater than 50%, and it will go to at least one Canadian venue. For the Canadian exhibits, the fair market value of Canadian objects is greater than 50%, and it's shown in at least two provinces. In other words, this is focused on exhibitions that are circulating within Canada.
If a Canadian exhibition is going to another country, it is indemnified by the country or countries it's travelling to, just as we indemnify the exhibits that are coming into Canada.
Just to try to bring this alive, in terms of some of the exhibitions that you may have been aware of over the last few years, right now there's an exhibit from Japan at Pointe-à-Callière in Montreal. There was a jade exhibit from China that travelled to a number of venues in western Canada and also to the Musée de la civilisation in Quebec a few years ago. The bog people at the Museum of Civilization got a lot of attention. There was the Eternal Egypt exhibition at the Royal Ontario Museum. Right now the Canadian Museum of Civilization is circulating an exhibit on Rocket Richard to a number of venues in Quebec, B.C., and Alberta, to the best of my knowledge. McMichael circulated an exhibit on Emily Carr, Georgia O'Keeffe, and Frida Kahlo.
That's a sampling of the exhibits. We'd be happy to provide you with a full list, if you would like.
I mentioned that the program was about risk management, and in the next few slides, I'm going to talk about the approach to risk management that is inherent both in the act and in program operations.
First of all, the act lays out a maximum annual program liability of $1.5 billion in indemnified value. It also sets out a cap per exhibition, that it will only cover up to $450 million worth of object value within the exhibition, and we do require an objective third party verification of market value.
In the regulations, we establish a liability limit per conveyance of $100 million. The transport portion of mounting an exhibition is actually the riskiest element in the whole process, and this is the reason for that particular limit.
There's a sliding scale for deductibles that's set out in the regulations, and this depends on the value of the exhibition itself. Obviously the lower priced exhibitions, those up to $3 million, have the lowest deductible at $30,000, but the highest-priced exhibitions, those up to $450 million, have a $500,000 deductible.
Institutions can insure the risk beyond the limits of what we will cover for an exhibit that is more valuable than what we will indemnify. They can also insure the risk of having to pay the deductible. The program is essentially a partnership between the government and the institutions, in which the institutions assume the risk and cost of the lower-value claims—and obviously they share that risk with their insurers—and the government has the risk for the higher-value claims.
I think it's worth pointing out that previously for all risk coverage, a lot of the business went offshore to some of the major reinsurers, and some of that business has now come back to Canada to Canadian insurers. Of course, the Department of Finance is avidly interested in contingent liability for the government, and we do report to them regularly on the liabilities that we've accepted.
The second major piece in managing the risk is what we won't cover: the exclusions. The perils that we normally don't cover are set out in the program guidelines, and can be varied. Each indemnity agreement with an owner actually provides that objects are indemnified against all cause of loss or damage, except for the elements that we specifically exclude. This is obviously an area that is of great interest on each exhibition.
Generally we exclude normal wear and tear; gradual deterioration; damage from vermin; inherent vice—which I had to ask about when I became responsible for this program, and it is a property inherent in a material, so that an inherent vice of iron is that it rusts; pre-existing flaws or conditions; radioactive contamination; wars, strikes, riots, and civil commotion; and repair, restoration, or retouching processes that have not been undertaken at the ministry's request.
Initially we excluded acts of terrorism. In the post 9/11 environment, this was clearly a matter of concern for owners looking for coverage. A number of the major insurers, including Lloyd's, refused to cover terrorism, and in the end, primary insurers either excluded it totally or charged rates that were astronomically high and beyond the rates of museums. So in the context of a series of government decisions to respond to 9/11, we received general consensus within government that we could add terrorism as a general area for coverage.
We also exclude liability for loss or damage due to the wilful misconduct or gross negligence of either the owner or a participating institution. The government is not liable for having granted indemnification to objects that are or may be subject to civil or criminal claims regarding ownership.
The next really key part of risk management is the facilities themselves. In order to be eligible to host indemnified exhibitions, facilities must meet standards that are international norms and that are in areas established through the regulations. The review of the facilities, or analysis of the data and other information about facilities, is carried out by the Canadian Conservation Institute, a national centre of excellence that is actually part of the Department of Canadian Heritage.
Every venue that we approve must meet standards in the areas of security, fire protection systems and access to fire services, and collections preservation and environmental controls. The latter include matters such as temperature and humidity—both the levels and stability of temperature and humidity. That's a particular challenge for smaller institutions; if you think of the average historic home, for example, that's a major challenge. Light levels are also an issue. Venues have to demonstrate a track record and come clean on any issues they may have had with respect, for example, to losses as a result of failure of environmental systems.
We can approve facilities for specific exhibitions because the materials may be less vulnerable. For example, for the jade exhibit that I mentioned earlier, some facilities were only approved for that exhibit because the materials were perhaps less vulnerable than some others. Other institutions are approved globally for any exhibition, but they must requalify every five years.
It's not enough that the building is in good condition; we also take a microscope and magnifying glass to the actual plans for the exhibition, to assess the risks associated with content, with the packing and handling and transportation of the exhibition, and to determine the appropriate levels of liability. So for something like transit and handling, we'll look at issues such as the construction of crates, whether they've been used before, and at who will be crating and uncrating the exhibit. For the transport companies, what security measures do they have in place; do they have two drivers; do they have air suspension systems; and what are the climate controls available within the trucks?
As for the sensitivities of individual objects, some require particularly low light levels, so if an organizing institution is planning to create display cases, what's the lighting inside the display case? Does it correspond to the lux levels that the object needs?
We look at issues such as international conventions. Are they materials composed of something that's on the endangered species list? All of those items are reviewed by a panel of experts for every exhibition.
As quickly as I could go through it, that is the basic operation of the program and the way in which we approach the management of risk.
What I'd like to do now is turn to the second part, to the results and the findings of the evaluation. As I said, this evaluation was carried out in the latter part of 2005 and examined the standard questions that we were required to answer in government evaluations around relevance, cost-effectiveness, etc. It also gave us evidence of the results for the first five years.
The first finding was that the program is indeed relevant. It does address a need and continues to be relevant to the overall goals and objectives of the department and the government in relation to access to heritage. It's actually become increasingly important because of some increases in insurance costs. When the act was passed, the cost of purchasing insurance was roughly $1 for every $1,000 of value within an exhibition. That's now risen, depending on the institution, to somewhere between $2.85 and $4.75 per $1,000. It was about 17% of the cost of creating a major exhibition, and it's now between 25% and 35% of the cost of creating an exhibition. A major exhibition could cost $3 million to mount, $1 million of which would have to go for insurance. So this is very clearly a need that still exists and, in fact, is growing.
The program has proven to be a key enabler to Canadian organizing institutions. As mentioned earlier, there is a need on the part of an exhibition arrangement to cover risks for which it is difficult to acquire private coverage.
It has been cost-effective. We budget about $200,000 a year for the program, including for three staff members and the external panels. So it has cost $1 million in the first five years, while generating $20 million in savings in insurance costs to the institutions.
The evaluation assessed the management of risks positively, as a result of the various elements I've just described. In the first five years of the program, we indemnified 46 exhibitions, valued at $7 billion. I'm very pleased to say that we had no claims. I think that probably is the bottom line that our colleagues in the Department of Finance will be most interested in when assessing the program's value.
We've also been able to add to the competitive advantage and institutional capacity in organizing exhibitions. Foreign institutions are more willing to lend to Canadian institutions than they were. One of the particular features of the Canadian scheme is that we indemnify the transit portion both in and out of the country; many other countries only cover one direction, the movement out. Obviously we are also providing coverage that's important to lenders and owners, coverage that isn't readily available or affordable from private sources. The insurance savings for many institutions are the difference between an exhibition that breaks even and an exhibition that loses money, and that, in turn, affects their overall capacity to function as institutions.
In the first five years, 77% of the institutions upgraded their infrastructure to meet the standards that were required, and that were identified as problematic in the facilities review. We know anecdotally that a number of directors made the case to the board that the projected insurance savings could actually be redirected to improvements in facilities. There is clearly a long-term benefit to the institutions, in terms of their capacity to preserve the permanent collections, as well as the immediate benefit of being able to host the exhibit. And there's a virtuous—
