Over the past ten years, regulation in Canada of insurers has evolved significantly. Prior to the financial crisis, Canada’s primary regulator had begun to move from a "rules-based" approach to regulation to a "principles-based" or "risk-based" approach. After the financial crisis, this trend continued and in many ways accelerated.

Insurers carrying on business in Canada are regulated as to solvency (usually at the federal level by the Office of the Superintendent of Financial Institutions) and as to market conduct (at the provincial/territorial level) by the local insurance regulator. The test for "carrying on business" is not consistent across the country – from a solvency perspective, it usually relates to the location of the insuring activities, such as where negotiations take place, where insuring decisions take place and how marketing is conducted; from a market conduct perspective, it usually relates to the location of the marketing and promotion activities, though in some provinces having a local risk is sufficient.

To square off these competing tests, where a foreign insurer may not be considered to be carrying on insurance business in Canada (referred to in the legislation as "insur[ing] in Canada a risk"), but its activities may nevertheless require that foreign insurer to require a license under one or more insurance statutes of the provinces or territories of Canada, the Canadian Council of Insurance Regulators has sent a "Consent and Undertaking" to foreign insurers licensed in Canada which would require that foreign insurer carrying on provincial insurance business to ensure that the business falls under its federal license and that assets are vested in trust relating to that business. This effectively harmonizes reporting and capital requirements across the provincial/territorial and federal insurance regulators for licensed foreign insurers. Unlicensed foreign insurers will be required to obtain applicable provincial and territorial licenses and potentially deposit assets in trust with the applicable regulators.

One feature of this Canadian regime is that foreign insurers and reinsurers may be able to structure their businesses so that they write business in Canada subject to Canada's solvency and market conduct regimes, with the maintenance of certain assets and reserves in Canada, in some cases and they write business outside of Canada using a home office or affiliate in other cases. The question of business structure will depend on a number of factors, including regulation in the home jurisdiction, the nature of the business, and tax considerations.

As a practical matter:

  • many reinsurers and reinsurance activities may take place outside of Canada's regulatory regime, though (subject to the next comment) ceding insurers would not get capital/asset credit for unregistered reinsurance;
  • unregistered reinsurance may be eligible for capital/asset credits if the ceding insurer benefits from acceptable collateral held in Canada, such as certain letters of credit, funds withheld arrangements, or the Reinsurance Security Agreement regime in which an unregistered reinsurer holds assets in Canada and grants to the ceding insurer a first priority security interest in those assets; and
  • "back office" activities (such as policy administration, underwriting support, product development, claims analysis, investment management) may be carried on outside of Canada or by other parties within Canada, subject to specific requirements such as rules related to outsourcing, privacy laws, and related party transactions.