In December 2008, Canada's federal insurance regulator, the Office of the Superintendent of Financial Institutions ("OSFI"), issued documentation relating to the amendments to Part XIII of the Insurance Companies Act respecting foreign companies. The amendments will be effective January 1, 2010. These documents may be accessed on OSFI's website here. OSFI has stated that the amendments are necessary in order to align the Insurance Companies Act with the Winding-up and Restructuring Act as to the rights of policyholders and ceding companies in the event of a winding-up of a Canadian branch of a foreign insurer.
Prior to the amendments to Part XIII, OSFI's jurisdiction over the insuring activities of foreign insurers was based on a combination of the location of the insured risk and the location of the insuring activities. If the foreign insurer had a qualified branch in Canada, all Canadian risks were required to be reflected in the books of the branch. The amendments to Part XIII, together with OSFI's Advisory No. 2007-01 entitled Insurance in Canada of Risks (the "Advisory") make it clear that OSFI's jurisdiction over the activities of foreign insurers will be primarily determined based upon the location of the insuring activities (e.g. where the insurance transaction takes place, based on the location of marketing activities, policy issuance, premium payment, and other factors). If the risk was insured "in Canada", regardless of the location of the risk, then OSFI will have jurisdiction over that part of the foreign company's insurance business. If OSFI has jurisdiction over the business, the foreign company must be licensed in Canada and maintain a Canadian branch operation, including vesting assets in trust as collateral for its obligations insured in Canada, and be subject to Canadian reporting and other regulatory requirements. To the extent the risk was insured "outside Canada" then OSFI will not have jurisdiction over that insurance and there is no obligation to have a Canadian licence for that business or to vest assets in trust as collateral (except that collateralization is required in the case of reinsurance in order for the ceding company to receive capital/asset credit for the reinsurance).
Once these amendments are in force, it will be necessary for foreign companies that have insured, in Canada, risks located outside Canada to report that insurance business through the Canadian branch and vest assets in support of that business. On the other hand, it will be possible for foreign companies that have a Canadian branch operation to apply for release of assets currently vested in trust in Canada to the extent the assets relate to insurance business that was insured outside Canada. This also means that foreign companies may now carry on what is called "unregistered reinsurance" respecting risks located in Canada while at the same time maintaining a Canadian branch. In the case of unregistered reinsurance, the reinsurance would have to have been effected outside Canada and not be recorded on the branch's books.
As these changes are considered to be clarifications rather than amendments, OSFI requires adherence even before the amendments are proclaimed in force. For example, in the case of an application for a portfolio transfer involving a Canadian branch, OSFI will take the opportunity to require the foreign company to perform due diligence to align the books of the branch with the "clarified regime". For branches that took Canadian risks onto their books that were written by the home office, this might mean shedding some business (with OSFI's consent). Conversely, for branches that wrote, in Canada, multi-national business for which the foreign risk was written by head office, this might require bringing those foreign risks onto the branch's books.
Part XIII Progress Reviews
On December 19, 2008, OSFI issued a cover letter enclosing Implementation Instructions with respect to the amendments to Part XIII. All foreign companies that have a Canadian branch are required by OSFI to submit four quarterly progress reports for 2009-2010 relating to their identification of risks located outside Canada that were insured in Canada. The first report is due on May 31, 2009.
The progress review reports must describe the project structure, governance and timelines and key personnel involved, including accountabilities and an assessment of whether resources are sufficient to meet project deliverables. In addition, the reports must describe the internal controls that the foreign insurer will have in place to identify policies that have been insured in Canada prior to January 1, 2010 and set out a description of any significant impact that may result on the branch's vested asset account as a result of the amendments to Part XIII. Finally, the reports must also include the planned schedule for the project and a description of the foreign insurer's adherence to the schedule.
The cover letter describes OSFI's expectation that the foreign insurer must communicate with its auditors and actuaries with respect to its implementation review, as well as involve a senior officer from the home office. If the implementation will significantly impact the assets required to be vested in trust in Canada, OSFI expects the board of directors of the foreign insurer, or a committee of the board, to be involved. OSFI may take supervisory action in the case of any foreign insurers that do not take sufficient steps to identify their insured risks that will be subject to the new Part XIII regime.
Once the amendments are effective, Part XIII will apply to foreign companies undertaking marine insurance in Canada. In addition to the requirement to vest assets in trust, foreign insurers undertaking marine insurance in Canada that already have an established Canadian branch will be required to request to have their Order to Insure in Canada Risks amended to include marine as a class of insurance. Foreign marine insurers that do not have a branch (because marine was previously exempt) will be required to establish a Canadian branch in order to insure marine insurance in Canada.
Statement in Policy Documents
As set out in the Implementation Instructions dated December 2008, in order to comply with the statutory amendments, foreign companies that insure risks in Canada will be required to set out in legible characters in all premium notices, applications and policies a statement that the document was issued or made in the course of the foreign insurer's insurance business in Canada. This will identify risks insured in Canada as distinct from any business of the foreign company (including risks located in Canada) that is insured outside Canada.
Credit for Reinsurance
Federally-regulated institutions that are Canadian companies or Canadian-licensed foreign companies or societies ("FRIs") that obtain reinsurance for their Canadian business with foreign companies will only be allowed to receive a capital/asset credit for the reinsurance if (a) the foreign company reinsures the business in Canada (through a Canadian branch), or (b) the foreign company otherwise posts collateral as required by OSFI's capital/asset adequacy guidelines. FRIs will be able to rely on the identifying statement (described above) to determine whether their business was reinsured in Canada. Where reinsurance is being negotiated and the documentation has not yet been issued, FRI's will only be entitled to a capital/asset credit if the foreign reinsurer includes a similar statement in the cover note or quote.
Procedure to Request Release of Assets for Business Insured Outside Canada
All business on the books of a Canadian branch as at January 1, 2010 will be presumed to have been insured in Canada, but foreign companies will be permitted to request to have assets released where the business was insured outside Canada. OSFI anticipates that it will take 6-8 weeks to process these requests.
The Implementation Instructions describe the procedure and steps required to be followed to make such requests, as follows:
1. The foreign company must provide OSFI with affidavit evidence attesting:
- as to the nature of the liabilities recorded on the books of its Canadian branch and reported in its regulatory filings (e.g. insured in Canada or outside Canada);
- that the foreign insurer has undertaken a due diligence review to identify all liabilities relating to risks located outside Canada that were insured in Canada prior to January 1, 2010; and
- as to the portion of liabilities that were insured outside Canada in accordance with the Advisory as well as the vested assets maintained in respect of those liabilities.
2. As part of the affidavit, the foreign company must provide OSFI with a detailed description of the process the foreign company followed to verify the information in item 1.
3. Also as part of the affidavit, the foreign company must provide OSFI with a statement itemizing:
- the amount of liabilities it added to its books (i.e. that were insured in Canada but not previously recorded on the branch's books);
- the amount of liabilities relating to risks located in Canada that were insured outside Canada prior to January 1, 2010;
- the liabilities relating to risks located in Canada that were insured in Canada at the time of the request; and
- in each case, the corresponding amount of vested assets held by the branch relating to such category of liabilities.
This statement must also confirm that the branch will meet OSFI's test for adequacy of assets (as applicable to life and property and casualty insurance, respectively) if the request were to be granted.
4. In the case of reinsurance, the foreign company must obtain permission to proceed to the following two steps.
5. Where the request relates to reinsurance business that was reinsured outside Canada, the foreign reinsurer must send written notification to the FRIs that are its ceding companies providing information with respect to the foreign reinsurer's request to OSFI and notifying them that, if the request is granted, assets previously vested in trust with respect to the reinsurer's liabilities will be removed from the trust account and the reinsurance will thereafter be "unregistered", such that the ceding company will not receive capital/asset credit for the reinsurance. The notification will also ask the ceding FRI to provide the foreign reinsurer and OSFI with notice of any objection it has within 30 days.
6. The foreign reinsurer must subsequently provide OSFI with confirmation that the steps in item 5 were completed and information regarding any objections received and, if received, how such objections were resolved (with a copy sent to the ceding FRI).
7. OSFI will then notify the foreign company and its auditors in writing (and the ceding FRI's if applicable) that it approves the request.
In this document, OSFI cautions that the Canadian provinces and territories may impose different requirements which may apply to the extent the foreign company is licensed in those jurisdictions.
Questions and Answers
A Questions and Answers document accompanies the Implementation Instructions to provide guidance to insurers that will be affected by the amendments to Part XIII of the Insurance Companies Act.
Note to Cedants
Also on December 19, 2008, OSFI issued a Note to Cedants designed to assist ceding FRI's to determine whether they areentitled to capital/asset credit in connection with reinsurancethey have placed with foreign companies in light of the changes to Part XIII. The note advises ceding FRI's that the foreignreinsurer may be entitled, on notice to the FRI and subjectto OSFI's consent, to request release of assets vested in trustthat relate to the reinsurance ceded by the FRI which, in turn,means that the FRI would no longer be entitled to capital/assetcredit for the reinsurance. The note also cautions ceding FRI's that, even where no notice is given by a foreign reinsurer to release vested assets, the FRI may find itself without a valid claim against the Canadian branch's vested assets account in the event of a winding up of the Canadian branch (i.e. if the reinsurance activity took place outside Canada). In the case of uncertainty as to the location of the reinsurance activities for historical reinsurance, the note advises a ceding FRI not to take credit for the reinsurance unless assets are specifically vested by the reinsurer for the reinsurance arrangement. It also suggests that the FRI attempt to remove any uncertainty on renewal of the reinsurance by following the Advisory to ensure the reinsurance activities take place in Canada.
On a going-forward basis, the note states that ceding FRI's will be eligible for a capital/asset credit for reinsurance by a reinsurer falling within one of the following four categories:
- a Canadian insurance company or society;
- a foreign company that reinsured the risks in Canada;
- a provincially/territorially regulated insurer where criteria specified in OSFI's capital/asset adequacy guidelines are met; and
- another entity that makes collateral available in Canada as specified in OSFI's capital/asset adequacy guidelines.