There are two levels of government that regulate insurers in Canada. Federally, the Office of the Superintendent of Financial Institutions (“OSFI”) is responsible for the prudential regulation of insurers carrying on business in Canada. Federal qualification of insurers is governed by the Insurance Companies Act (Canada) which is overseen by the federal Minister of Finance.
There are also ten provinces and three territories in Canada (collectively, "provinces") which regulate market conduct activities of insurers carrying on business within a particular province. Each province has its own statute and its own regulatory body that oversees the activities of insurers. Therefore, once federally incorporated or qualified, the insurer must obtain a license in each provincial jurisdiction in which it intends to carry on business.
Forms of Insurance Entity
There are two main vehicles for establishing a federally regulated insurance business: (i) incorporation of a Canadian insurance company and (ii) qualification of a Canadian branch of a foreign insurance company. Insurers may also carry on business in Canada in other forms, such as a fraternal benefit society or a reciprocal exchange, and may be incorporated under the laws of a province. For simplicity, this article is restricted to insurers carrying on business in Canada as a company or a branch and whose primary regulator is OSFI.
The information requirements and timing for incorporation of a Canadian company and establishment of a Canadian branch are quite similar. Both involve an extensive application to OSFI. Since a branch is not a separate legal entity from the foreign insurer, one of the main differences between the two vehicles from a legal perspective is that a Canadian insurance company requires a board of directors and mandatory board committees. This is because the federal legislation and guidelines issued by OSFI including, among others, the OSFI Corporate Governance guideline, contain comprehensive requirements for board and committee membership and oversight. Although a branch operation does not have a board of directors in Canada, OSFI requires the Chief Agent of a branch to fulfill many of the governance and risk oversight functions required of a board of a Canadian company. Despite the legal distinction between a company and a branch, from an accounting perspective (e.g. financial, tax and regulatory reporting), the branch is treated as a separate entity from the foreign company.
There are a number of insurers that have been incorporated under the laws of a Canadian province. However, most of the largest insurance companies in Canada are federally-incorporated and many insurers that were originally incorporated provincially have migrated into federal jurisdiction where the legislation is comparatively modern and solvency regulation is more robust. At least one provincial insurance regulator has considered imposing a moratorium on the incorporation of insurers under its provincial laws, and requiring existing insurers incorporated in that province (other than reciprocal exchanges and farm mutuals) to transfer to federal jurisdiction or another jurisdiction where the insurer is subject to supervision that meets the solvency standards set by the International Association of Insurance Supervisors (“IAIS”).
If an applicant wishes to incorporate a Canadian insurer federally, or establish a Canadian branch, the focus of much of OSFI's review will centre on the proposed business plan that is submitted with the application, including the financial projections and actuarial calculations. The business plan must be comprehensive and include, among other things, descriptions of the proposed activities (by line of business), a complete market analysis, identification of sources of capital as well as pro forma financial statements and solvency ratio calculations, in each case for three years following start up. The business plan is to be stress tested for the three year period. OSFI, including its actuarial staff, will probe and assess the business plan, including the actuarial calculations and stress testing.
Although the federal legislation requires a minimum initial paid-in capital of Cdn $5 million for an incorporation, the amount of initial capital that OSFI ultimately will require in the case of both an incorporation and a branch qualification will be determined based on the business plan's contents, stress testing and OSFI's own assessment. As set out in OSFI’s guidance documentation, OSFI generally expects a company and a branch to maintain minimum solvency ratios throughout each of the first three years of operation. The minimum expectations for companies are:
- a Minimum Capital Test ("MCT") of 300% for a property and casualty corporation, and
- a Life Insurance Capital Adequacy Test ("LICAT") of 150% for a life corporation.
- a Branch Adequacy of Assets Test ("BAAT") of 300% for a property and casualty branch, and
- a Life Insurance Margin Test ("LIMAT") of 150% for a life branch.
It is important to note that it is OSFI’s expectation that the initial paid-in capital (for incorporation) or initial assets vested in trust (for a branch) will be sufficient, on “day one”, to maintain the minimum solvency ratios throughout the first three years.
Restrictions and Prohibitions
The company or branch will be authorized to conduct life or non-life business only – i.e. one or the other. No new dual-licensed or "composite" companies are permitted in Canada. Any conditions or limitations will be stipulated in the order issued by OSFI (e.g. "restricted to the business of reinsurance"). Generally speaking, governments, political subdivisions of governments, government agencies and government-controlled entities – other than qualifying foreign institutions – are not permitted to incorporate an insurance subsidiary in Canada.
Summary Information for Federal Applications – Incorporation and Branch
The following chart contains a summary of the processes and requirements to incorporate a Canadian insurer federally and qualify a Canadian branch, based on OSFI's guidance and instructions issued to date.
| Minimum capital | Statutory: Company to have a minimum of Cdn. $5 million paid-in capital (or such greater amount specified by the Minister, e.g. based on the proposed business plan) OSFI Guidance: Company to be initially capitalized such that it can maintain a minimum regulatory solvency ratio (MCT of at least 300% for property and casualty and LICAT of at least 150% for life) for the first three years of operation | OSFI Guidance: Branch to vest and maintain in trust account under the control of OSFI sufficient initial assets to permit the branch to maintain a minimum regulatory solvency ratio (BAAT of at least 300% for property and casualty and LIMAT of at least 150% for life) for the first three years of operation |
| Information Requirements | Financial information (financial statements for applicant, comprehensive business plan for the company – pro forma financial statements and solvency test calculations – planned reinsurance arrangements) | Regulatory information for applicant (details of ownership and financial strength; regulation in applicant's jurisdiction, etc.) Financial information (financial statements for applicant, comprehensive business plan for the branch – pro forma financial statements and solvency test calculations – planned reinsurance arrangements) |
| Entity Infrastructure/ Advisors | ||
| Other | "Letter of commitment" from senior officer of applicant regarding notification of material changes to business plan Reinsurance arrangements and any related OSFI approval and Reinsurance Security Agreement (for “unregistered reinsurance”, if applicable) |
Provincial Licensing
Once qualified as a federal insurance company or branch, the insurer will be required to obtain a license in each province in which it intends to carry on business. Generally, to attract licensing requirements, the provincial legislation contemplates that the insurer will have some kind of presence and/or carry on some insuring activities in the province. However, at the time of preparation of this paper at least three provinces require licensing if the risk (e.g. person or property) or peril is located in the province. Although the legislation of each of the 13 provincial jurisdictions varies, the Canadian Council of Insurance Regulators (“CCIR”)[3] has put together a standardized application form which can be used for applying for a license in all 13 jurisdictions. Although the CCIR form is standardized, each jurisdiction will conduct its own evaluation of the application and may require additional information and documentation. The depth of provincial review and analysis can vary widely. Accordingly, timeframes for issuance of provincial licenses also varies (roughly ranging from one month to six or more) and many provinces will not entertain the insurer's application until after the OSFI qualification process has been completed.
Compliance with other Statutes
If there is a foreign bank in the applicant's corporate group, there are restrictions under the Bank Act (Canada) with respect to having a financial establishment in Canada, such that the provisions contained in that statute may have to be reviewed for compliance. Where the applicant is not Canadian, the establishment of a new Canadian insurance business may require a notification filing under the Investment Canada Act.
Note that OSFI has the authority to consider other criteria and to request additional informational requirements, so the requirements provided herein may not be exhaustive.
[3] CCIR is an association whose membership is made up of the insurance regulators of each province and a representative of OSFI is also a member.
The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.
