On May 8, 2012, the Financial Services Commission of Ontario (“FSCO”), the government agency that regulates the solvency of all Ontario incorporated insurers (including companies/reinsurers, mutuals, reciprocal exchanges and fraternals), released a consultation paper titled “Improving Solvency Supervision of Insurers in Ontario: A Proposal to Upgrade Solvency Standards for the Benefit and Protection of Ontario Policyholders”. The paper outlines four proposals to reform Ontario’s insurance regime. FSCO has requested that submissions from concerned parties be submitted by July 9, 2012.
The four proposals are:
- to put a moratorium on the incorporation of insurance companies in Ontario;
- to require insurers (with the exception of farm mutuals) licensed in Ontario to be incorporated in a jurisdiction that requires compliance with the International Association of Insurance Supervisors (“IAIS”) solvency standards;
- to require existing Ontario incorporated insurers (with the exception of farm mutuals and reciprocal exchanges) to transfer within a transition period yet to be specified to a jurisdiction of incorporation that requires insurers to comply with the IAIS standards; and
- to amend the Insurance Act (Ontario)1 to clarify that the Fire Mutuals Insurance Fund (“the Fund”) is solely responsible for solvency regulation of farm mutuals.
The IAIS, an organization with membership from almost 200 jurisdictions,2 created more stringent solvency standards in response to the recent global financial turmoil. The Office of the Superintendant of Financial Institutions (“OSFI”), the government agency that oversees federally incorporated insurers, has adopted the IAIS standards.
According to FSCO, it is not cost effective for FSCO to adopt these standards given the limited number of insurers incorporated in Ontario. At the same time, FSCO recognizes that without adopting the more stringent IAIS standards, Ontario policyholders that insure with Ontario incorporated insurers could be at greater risk. FSCO asserts that its new proposals for dealing with Ontario incorporated, non-farm mutual insurance companies are similar to what has already been implemented in respect of loan and trust companies while FSCO’s new proposals for dealing with farm mutuals are in line with those undertaken with respect to the credit unions sector.3
In short, Ontario incorporated insurers, other than farm mutuals (and reciprocal exchanges, as discussed below) will be required to export to a different Canadian jurisdiction. The choices are to continue federally under the Insurance Companies Act4 (under OSFI jurisdiction), or to continue into another Canadian provincial jurisdiction, provided the jurisdiction is compliant with IAIS solvency standards.
Exceptions to Transfer Requirement:
Reciprocal Insurance Exchanges:
The proposals do not apply to reciprocal insurance exchanges. Currently, there are approximately eight reciprocal insurance exchanges incorporated in Ontario. In 2010, these insurance exchanges had combined direct written premiums of $214,214,000 with combined direct claims incurred of $199,247,000.5
FSCO would continue to monitor the solvency of these reciprocal insurance exchanges. FSCO’s rationale for not including these insurance instruments in the proposals is that they have a “low solvency risk”.6 Reciprocals are funded by their membership.
Farm Mutual Insurance Companies:
Under the FSCO proposals, farm mutual insurance companies are also not required to export into another jurisdiction. Farm mutuals are companies that are owned by their policyholders.7 There are currently approximately forty-five Ontario incorporated farm mutuals with close to $500,000,000 in premiums and over 1000 Ontario employees.8
Farm mutuals are currently supervised by both FSCO and the Fund. The Insurance Act (Ontario) provides that the Fund is allowed to examine the solvency of its participants and all farm mutuals are members of the Fund. 910 Since the Fund covers one hundred percent of policyholders’ claims it has a vested interest in ensuring farm mutuals remain solvent.
In order to avoid the replication of tasks, in 1999, FSCO agreed to have the Ontario Mutual Insurance Association (“OMIA”) carry out solvency reviews on its behalf. OMIA conducts the solvency assessments of farm mutuals through the Fund. FSCO proposes to recommend that the Insurance Act (Ontario) be amended to provide that the Fund is exclusively responsible for assessing farm mutual insurers’ solvency. FSCO proposes that the legislation would contain a condition that the Fund must report regularly to the Minister of Finance on the solvency situation of farm mutuals to ensure that the Fund is undertaking the examinations. Since the Fund, and not FSCO, would be responsible for the solvency examinations of farm mutuals, FSCO’s proposal permits farm mutuals to remain incorporated in Ontario.
Those Affected By Forced Transfer:
Approximately nine insurers would be affected by FSCO’s proposal to require Ontario incorporated insurers to export into a jurisdiction that has adopted IAIS standards. These insurers that were incorporated under Part V of the Corporations Act (Ontario) should look to section 313 (1.1) of the Corporations Act ( Ontario) which provides that:
An insurance company incorporated under this Act, may if authorized by special resolution, by the Superintendent of Financial Services appointed under section 5 of the Financial Services Commission of Ontario Act, 1997 and by the laws of any other jurisdiction in Canada, apply to the proper officer of that other jurisdiction for an instrument of continuation continuing the insurance company as if it had been incorporated under the laws of that other jurisdiction. 11
This section permits continuance only to other Canadian jurisdictions. Incorporations cannot be transferred somewhere other than a jurisdiction in Canada.
Prior to the enactment of section 313 (1.1) of the Corporations Act (Ontario) in 2000 it was necessary for Ontario incorporated insurers wishing to continue into another jurisdiction to obtain sponsorship of a private member’s bill permitting the change of jurisdiction. Our firm was involved in continuing a number of Ontario incorporated insurers using this methodology. Since 2000, Ontario incorporated insurers can continue, for example, federally under the Insurance Companies Act, by following the process of continuance under section 313 (1.1) of the Corporations Act (Ontario) cited above and the process of continuance under the Insurance Companies Act, which provides as follows:
A body corporate incorporated otherwise than by or under an Act of Parliament may, if so authorized by the laws of the jurisdiction where it is incorporated, apply to the Minister for letters patent continuing the body corporate as a company under this Act.12
We have also assisted a number of insurers in continuing under the Insurance Companies Act using this modernized process. OSFI’s requirements for continuance into federal jurisdiction are summarized in Transaction Instruction Index A No. 13 Continuation of a Body Corporate which can be found by accessing the following link: http://www.osfi-bsif.gc.ca/app/DocRepository/1/eng/guides/application/rpto13_e.pdf.
It is important to note that continuance by an Ontario incorporated insurer into federal jurisdiction, although no longer requiring a private member’s bill, is very similar to a new incorporation, for which the requirements are substantial (refer to OSFI’s Guide for Incorporating Federally Regulated Insurance Companies which can be found by accessing the following link: http://www.osfi-bsif.gc.ca/app/DocRepository/1/eng/guides/application/insguide_e.pdf).
If your organization is an Ontario incorporated insurer (other than a farm mutual or a reciprocal exchange), you need to consider your alternatives. Likely, the most viable option includes continuing your organization under the federal Insurance Companies Act. It is not entirely settled at this point which other provinces are, or will be, requiring the insurers they regulate to be compliant with the IAIS standards. In addition, all Ontario licensed insurers need to be aware that, going forward, FSCO will require compliance with the IAIS standards as a condition of carrying on the business of insurance in Ontario.