The amendments to Part XIII and the related OSFI Advisory – “Insurance in Canada of Risks” came into force on January 1, 2010. The provinces (except British Columbia and Quebec) are asking foreign insurers to sign a Consent and Undertaking so that if they are carrying on or transacting insurance business in a province under that province’s insurance legislation, they must insure risks in such a way as to be caught by the Advisory and vest assets under the Insurance Companies Act (Canada). British Columbia has made changes to its legislation that will have the same effect as the Consent and Undertaking but goes one step further, namely that if the risk is in B.C. then you are also caught. Quebec may require assets to be vested under its legislation for business carried on there.

This article originally appeared in Canadian Underwriter in February 2010.

The Canadian Council of Insurance Regulators (CCIR) sent a Consent and Undertaking (the “Undertaking”) to all foreign insurers licensed under the Insurance Companies Act (Canada) (the “ICA”) on Dec. 1, 2009. The stated purpose of the Undertaking was to harmonize the reporting basis for provincial and federal insurance regulators and to avoid the need for the provinces to create their own vesting assets in trust regimes. While a revised version of the Undertaking was issued on January 19, 2010 making the language of the Undertaking clearer, the general effect, which is significant, is still the same: where a foreign insurer is engaging in insurance business in a province under provincial insurance legislation, that foreign insurer must also ensure that it is “insuring in Canada risks” under the Advisory so that assets are required to be vested in trust in Canada under the ICA.

Background

The amendments to Part XIII and the related OSFI Advisory 2007-01R1 - “Insurance in Canada of Risks” came into force on January 1, 2010 (“Part XIII”). Part XIII will now regulate foreign insurers on the basis of where they conduct insurance activities regardless of where the risk is located. Over the last year, foreign insurers have prepared for the coming into force of Part XIII by conducting due diligence on their current lines of business to identify which ones were “insured in Canada”, filing quarterly progress reports to OSFI on the status of their work and generally trying to grasp all of the implications that Part XIII will have on their businesses going forward.

Since the issuance of the first draft of the Advisory in 2007, a question that lingered was how the provinces would deal with the changes to Part XIII and whether they would align themselves to the changes. Simply stated, the issue is that, while there is only one solvency regime for federal insurers, including vesting of assets, which is administered by OSFI, each province has its own distinct tests under its provincial insurance legislation for what constitutes the carrying on of insurance business in the province (the “provincial tests”). The provincial tests are different from one province to the other and also different from the test set out in the Advisory. Consequently, a foreign insurer could be “out of Canada” for the purpose of the Advisory but “in Canada” for the purpose of provincial legislation. A potential implication is that the insurer who is engaging in insurance business in a province could be not required to vest assets in Canada with respect to that business if the business is not “insurance in Canada of risks” in accordance with the Advisory. Also, the reporting basis under federal and provincial laws could potentially be different depending on the test that is used, which could lead to administrative burdens for foreign insurers.

In OSFI’s Qs & As on the implementation of Part XIII issued in December 2008 (and revised in December, 2009), OSFI stated that it “is working with the provinces and territories to exchange ideas on how to address potential implications of the amendments on the regulatory framework for insurance in Canada.” However, until the issuance of the Undertaking, there was no clear understanding on what was specifically being done to address potential implications of Part XIII in relation to provincial regulation.

The Consent and Undertaking

Three documents were initially sent to foreign insurers on December 1, 2009 and these documents were also posted on the CCIR website: (i) a covering letter from the CCIR; (ii) a notice from provincial regulators; and (iii) the Undertaking.

The Covering Letter

The letter was sent by the CCIR and explained that the CCIR has agreed to coordinate the distribution and receipt of the enclosed Undertaking. The letter also alerted foreign insurers that the involved Canadian provincial insurance regulators appreciated their swift compliance with the request.

The Notice from Provincial Regulators

The notice was by the Superintendents of Insurance of Alberta, Saskatchewan, Manitoba, Ontario, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, and Yukon Territory, the Northwest Territories and Territory of Nunavut (the “provincial regulators”). Absent from this list are the Superintendents of Insurance of British Columbia and Quebec.

The notice stated the following:

In an effort to mitigate the confusion that might result from foreign insurers dealing with each regulator separately, the provincial regulators listed above have drafted a common Undertaking. A foreign insurer signing this Undertaking will be agreeing to conduct its activities in accordance with the terms of the Undertaking. […] The provincial regulators, through this letter, are asking all foreign insurers authorized to insure in Canada risks under Part XIII to sign and return the enclosed Undertaking. The Undertaking represents the agreement by the foreign insurer to be bound by its provisions, and in all jurisdictions, other than Ontario, consent to have them added as conditions on their licence.

The notice also stated the purpose of the Undertaking:

The conditions listed in the Undertaking have the effect of harmonizing the reporting basis for the provincial and the federal insurance regulators. Putting these licensing conditions in place will avoid the need for a foreign insurer to make arrangements for prudential (solvency) regulation individually with each province that is a party to the Undertaking. This will also reduce the additional regulatory costs that foreign insurers were facing from the coming into force of the revisions to Part XIII by removing the need for additional pages on the quarterly and annual financial statements (P&C2 and Life2), except in Quebec.

The notice provided that the Undertaking was being requested on a voluntary basis and was not disciplinary in nature. Finally, the notice requested that the Undertaking be completed and returned by December 21st, 2009, a short deadline given that foreign insurers received the Undertaking in early December, 2009.

The Undertaking

The foreign insurer was asked to undertake and agree as follows:

  1. A. In respect of all insurance coverage resulting from any activity or activities that cause the Insurer to either carry on business under any Province’s insurance legislation or transact insurance in any Province, the Insurer shall maintain an office, or have a representative located, in Canada, from or through which, the Insurer shall:
  1. communicate to the policyholder,

(i) the offer to provide the insurance coverage; or

(ii) the acceptance of the request for the insurance coverage; and

  1. receive payment from the policyholder for the insurance coverage;

and,

B. all risks insured by the Insurer as a result of any activity or activities that cause the Insurer to either carry on business under any Province’s insurance legislation or transact insurance in any Province, shall be insured by the Insurer only in a manner that requires the Insurer to vest assets in trust in respect of those risks, pursuant to the Act.

  1. The Insurer agrees to the above being added as conditions on its insurance licence issued by each Province, other than Ontario.
  2. For the purposes of Ontario, the Insurer hereby acknowledges and agrees that the above are undertakings within the meaning of paragraphs 447(2)(c) and 448(1)(b) of the Insurance Act (Ontario).

The Implications

The intention behind the Undertaking was to avoid the need for the provinces to create their own vesting assets in trust regimes. Since a foreign insurer could be engaging in insurance business in a province while not “insuring in Canada a risk” under the Advisory, it could be that, based on the Advisory only, assets would not be required to be vested in trust in Canada in respect of the insurance coverage/risks that result from the insurer’s business in a province. To protect policyholders in the province, the provincial regulators felt that they would have had to create their own vesting assets in trust regimes and that the simpler alternative is to require that insurers carry on their business in such a way that they are caught by the Advisory and thus would have to vest assets under the ICA. This latter approach was the one chosen by the various provinces (except for British Columbia and Quebec) and the CCIR and which was to be reflected in the Undertaking.

Unfortunately, the wording in the Undertaking was overly restrictive given its purpose and had certain unnecessary implications, notably the Undertaking required that certain specific activities be conducted in Canada (i.e., the maintaining of an office in Canada from which the foreign insurer communicates to the policyholder and receives premiums). This was not necessary to achieve the stated objective of the Undertaking.

On January 19, 2010, a revised version of the Undertaking was circulated by the CCIR. The revised version of the Undertaking removes section 1.A of the Undertaking and only leaves section 1.B. According to the CCIR, these changes were made to provide foreign insurers with greater flexibility in respect of their Canadian business models. While the changes to the Undertaking have brought greater clarity and have removed unnecessary requirements (i.e. maintaining an office or representative in Canada, etc.), the general effect is still the same: where a foreign insurer is engaging in insurance business in a province under provincial insurance legislation, that foreign insurer must also ensure that it is “insuring in Canada risks” under the Advisory so that assets are required to be vested in Canada under the ICA. This is very significant. Essentially, the Undertaking requires that a foreign insurer which is not caught by the Advisory to carry on activities so that it is caught and not only have to vest assets in trust for the business in a given province or provinces, but for all its business in all provinces/Canada.

British Columbia and Quebec

British Columbia has amended its legislation and the effect will be the same as the Undertaking but it also goes one step further as described below. The Extraprovincial Insurance Corporation (Canada) Business Authorization Condition Regulation (British Columbia) was made effective January 1, 2010 (the “B.C. Regulation”). The B.C. Regulation provides the following:

  1. It is a condition of every business authorization issued to an extraprovincial insurance corporation
  1. whose primary jurisdiction is Canada; and
  2. that is the subject of an order of the superintendent under section 574(1) of the Insurance Companies Act (Canada) approving the insuring in Canada of risks by the extraprovincial insurance corporation

that the extraprovincial insurance corporation’s insurance business in British Columbia is carried on as insuring in Canada a risk within the meaning of and in accordance with Part XIII of the Insurance Companies Act (Canada).

Consequently, where a foreign insurer is carrying on insurance business in British Columbia, that foreign insurer needs to be “insuring in Canada risks” under Part XIII. In addition to the activities-based test that already exists under B.C. legislation to determine whether an insurer is engaging in insurance business in B.C., certain amendments to the B.C. insurance legislation have also come into force on January 1, 2010 to provide that if the risk or peril is in B.C., then an activity referred to in paragraph (a) of the definition of “insurance business” in that legislation (namely, the undertaking or offering to undertake to indemnify against loss in respect of a risk or peril), whether or not the activity is in B.C., is deemed to be carrying on insurance business in B.C. As such, where the risk is located in B.C. and the foreign insurer is undertaking to indemnify against loss in respect of that risk, the foreign insurer would also be caught and have to be “insuring in Canada risks” under Part XIII.

There are proposed amendments to the Quebec Insurance Act to provide that Quebec itself may require vested assets in trust for insurers carrying on the business of insurance in Quebec but incorporated outside Quebec. Currently, this regime only applies to Quebec-incorporated insurers and the intention would be to broaden it to extraprovincial insurers. We understand that there will be guidelines issued in the near future related to this including what kind of assets may be vested in trust.