The date of January 1, 2010 announced as the date that the changes to Part XIII of the federal Insurance Companies Act ("ICA") take effect is less than two weeks away. Nevertheless, there have been considerable last minute developments on the Canadian regulatory landscape. Developments that may be important for foreign insurers wishing to structure the affairs of their Canadian Branches.
In our paper published December 1, we discussed the advisory issued by the Office of the Superintendent of Financial Institutions ("OSFI") of the words "insure in Canada a risk", namely, that the determinative factor is the location of the insurance activities rather than the location of the risk. We highlighted the apparent tension with provincial insurance regulators who concentrate on the location of the risk or the insured. We suggested that the logical conclusion that follows from the OSFI advisory may be that while a foreign insurance company will not require a federal order to carry on activities other than those related to insuring risk, under the various provincial rules the company might need to obtain a license in order to carry on any other type of insurance activity in a province. We noted a series of issues in that respect, particularly that the present provincial regulatory schemes do not contain any mechanism for assessing and overseeing the solvency of foreign companies that are provincially licensed but not federally regulated; there are no provincial mechanisms for placing assets in trust for foreign insurer branches; and that it is unclear how, if at all, provincial regulators would co-ordinate the licensing of a foreign insurance company that is not federally regulated.
On the same day as that our paper was published, in an effort to "facilitate the conduct of insurance business across Canada, and avoid duplication of prudential regulation between jurisdictions,"  OSFI and the regulators of 11 of the 13 provinces (with the exception of British Columbia and Quebec) presented foreign insurers authorized under the ICA to insure in Canada risks with a voluntary option to sign a "Consent and Undertaking" (the "Undertaking") by December 21, 2009. Through the undertaking, a foreign insurer agrees that:
- 1. 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:
- a. communicate to the policyholder
- i. the offer to provide the insurance coverage; or
- ii. the acceptance of the request for the insurance coverage; and
- b. receive payment from the policyholder for the insurance coverage.
- 2. 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.
- 3. The insurer agrees to the above being added as conditions on its insurance license issued by each Province, other than Ontario.
- 4. 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).
According to OSFI, the activities described in sections 1(a) and 2 of the Undertaking would be sufficient for a foreign insurer to fulfill the requirements of insuring in Canada risks under Part XIII of the ICA and the insurer would consequently be required to obtain a federal order and to vest assets in trust in respect of those risks. "If any of those activities are carried out by a third party (e.g. an insurance broker), that third party must act as agent for the foreign insurer in accordance with Canadian common law principles of agency, and where applicable, the Civil Code of Quebec." This is not surprising as the OSFI advisory (as well as the provincial/territorial insurance legislation) makes it relatively easy for insurers to arrange their affairs to become subject to the ICA and the provincial/territorial licensing regimes. In this respect while the stated effect of the Undertaking was to "harmonize the reporting basis for the provincial and the federal insurance regulators and to apply a consistent approach to licensing requirements across Canada," the Undertaking fundamentally reverts to the old regime where a foreign insurer was required to hold a federal order before conducting business in a province and the provinces relied on the federal oversight of those entities.
In this regard the Undertaking avoids the more interesting and challenging issue as to the effect of a foreign insurer wishing to structure its affairs so as not to fall under the federal regulatory scheme. In that circumstance, the questions we posed in our previous paper remain relevant and raise the interesting question of whether provinces are permitted or required to issue licenses directly to foreign companies under their insurance acts. This paper explores this in more detail.
The insurance acts of eight provinces provide that the superintendent may issue a license to "any insurer" coming within an enumerated series of categories which include:
joint stock companies; mutual insurance corporations; cash mutual corporations; fraternal societies; and companies duly incorporated to undertake insurance contracts and do not fall within [any of the previously enumerated categories]. None of these categories are restricted to companies/corporations incorporated in Canada or a province or territory. Indeed, taking the Insurance Act of Ontario as an example, when the legislation wanted to restrict its application to companies/corporations incorporated in a certain location, the provisions expressly so specify giving further support that licensing is available for foreign incorporated companies/corporations. However, the word may has normally been interpreted as conferring discretion on the regulator as to whether or not to issue the license.
By contrast, Alberta allows licensing of a "federally authorized company," which includes a foreign company, as that term is defined in the ICA, and which was approved by an order under that Act to carry on business or insure risks in Canada. Where the foreign company is not federally authorized, Alberta does not seem to have an alternate option for accommodating licensing of a non-federally regulated foreign insurer.
Similarly, the Insurance Act of Newfoundland and Labrador makes reference to an insurer that is registered and holds a certificate of registry under the ICA. As a practical matter, an order under s. 573(1) of the ICA qualifies as a registration. However, the section also references an "extra-provincial insurer," which is defined as "an insurer incorporated or legally constituted in a foreign jurisdiction other than an insurer registered under the ICA." The phrase "foreign jurisdiction" is not defined in the Act and it would be interpreted to mean a jurisdiction outside the province but still within Canada, or could include a jurisdiction other than Canada. In the latter case, and thus this provision could encompass a foreign insurer that organized its affairs so as not to require a federal order under ICA Part XIII.
British Columbia was notably absent as a signatory to the Undertaking and the reason for that absence may lie in the language of its Financial Institutions Act (FIA). Compared to the other provincial insurance statutes, the FIA takes a direct approach with foreign insurers. Firstly, it differentiates between companies whose jurisdiction is within or without Canada, allowing the issuance of a license in both cases. However, the issuance of a license is as of right (i.e. the commissioner must issue it) to an extra-provincial company whose primary jurisdiction is within Canada, but it is discretionary (i.e. the commissioner may issue it) to a company whose primary jurisdiction is outside Canada (i.e. a foreign insurance company). Secondly, new amendments to the FIA require foreign companies conducting business in the province to obtain a provincial authorization irrespective of federal authorizations. These statutory provisions may explain why the province elected not to participate in the Undertaking.
Together with our conclusions from our previous paper, this analysis underscores the complexities resulting from the "new" federal interpretation of when a federal order is required for a foreign insurer undertaking activities involving Canada and/or Canadian risks. The Undertaking approach leaves in limbo those foreign insurers electing not to sign it and ordering their affairs so as not to fall under the federal regulatory. It may be prudent for the provinces/territories to clarify the categories of entities to which provincial/territorial insurance regulators may issue licenses; when those licenses are required; and what additional requirements are to be imposed on foreign insurers operating in or in respect of the province/territory that do not have a federal order.