This article addresses certain issues relating to foreign insurers conducting unlicensed insurance in Canada, a few years after the federal regulator's issuance of clarifications regarding the circumstances in which federal licensing is required.
OSFI advisory on insuring risks
In 2009 the Office of the Superintendent of Financial Institutions (OSFI) finalized its advisory entitled "Insurance in Canada of Risks". The advisory describes the circumstances in which a foreign insurer is required to be licensed by OSFI, the Canadian federal insurance regulator. The advisory clarifies OSFI's approach, which is to concentrate on the location of the insuring activities rather than the location of the risk, in determining whether licensing is required for particular insurance transactions. As a result, from an OSFI perspective, licensed branch operations in Canada may omit to record Canadian risks on the books of their branch operations and may be required to record non-Canadian risks, depending on where the insuring activities took place.
In the year or so following the finalization of the advisory, foreign companies that maintained branch operations in Canada were required by OSFI to conduct a due diligence in order to determine whether they had written any insurance business that could be removed from the books of the branch operation (because it was "insured outside Canada"), and conversely whether they had written any insurance business that should be added to the branch's books (because it was "insured in Canada"), in each case based on an analysis in accordance with the advisory. Foreign insurers that sought to remove business from their branches' books were required to follow a regulatory approval process before the business could be removed.
provincial licensing requirements
On the other hand, most of the Canadian provinces and territories ("provinces") – which regulate insurance in their respective jurisdictions – require insurers to be licensed in circumstances where the insurer is "carrying on" or "transacting" insurance business in the jurisdiction, generally determined by enumerated activities that are somewhat similar from jurisdiction to jurisdiction. Most typically, the insurer is caught by the licensing requirements if it has some presence or carries on some activity in the province. However, the legislation in British Columbia (which was amended following issuance of the advisory) and Alberta deems an insurer to be carrying on business in the province if the risk or subject matter of the insurance is property or a person located in the province. Manitoba's legislation contains a somewhat similar deeming provision.
federal and provincial discrepancies and CCIR undertaking
The upshot of the advisory, taken together with certain provincial legislative changes undertaken in reaction, resulted in discrepancies between the OSFI approach to licensing – that is, based on the location of the insuring activities in accordance with the advisory – and the approach of some provincial legislation. It is possible for foreign insurers to insure risks in a manner that, under the advisory, would not require OSFI licensing but, for the same transaction, the foreign insurer could be caught by provincial licensing requirements. Ultimately, through the Canadian Council of Insurance Regulators (CCIR), provincial regulators requested foreign companies with existing branch operations in Canada to sign, on a voluntary basis, an undertaking stating that, to the extent they insure risks in a manner that would require licensing under provincial legislation, they agree to conduct their insuring activities such that the transaction would constitute "insuring in Canada a risk" under the federal Insurance Companies Act (i.e. under the advisory). By signing the undertaking, foreign insurers with existing branches in Canada have obligated themselves to report the particular business on the books of their Canadian branches (and to maintain corresponding reserves vested in their Canadian branches' trust accounts). The provincial regulators wished to ensure that assets are maintained in Canada in circumstances where foreign insurers are carrying on business in their jurisdictions – including, in some cases, simply insuring risks or persons located in their jurisdiction.
What does this mean for foreign insurers that do not have an existing Canadian branch and that wish to provide insurance that covers risks located in a Canadian province without attracting licensing? First, the foreign insurer must ensure that its business methodology for writing the insurance does not constitute "insuring in Canada a risk" within the meaning of the advisory, so that federal qualification will not be required. But that is not the end of the story. Even though foreign insurers with no presence or activities in Canada may have overlooked provincial requirements in the past, there are reasons to be cautious about the consequences of underwriting Canadian business without appropriate due diligence. The foreign insurer should determine the licensing (and other) requirements in the province in which the risk, peril or person or object of the insurance is located to ensure that provincial requirements are not violated. As stated above, it is possible that a foreign insurer would not require a licence issued by OSFI (under the advisory), but may fall afoul of provincial requirements, depending on the province and the activities carried on by the insurer.
For example, in addition to each province's unique indices for carrying on business, most provincial jurisdictions have a regime for "unlicensed insurance", and it is not always clear whether the regime is restricted to certain classes of insurance. In many cases, an insurance intermediary with a special licence is required to be involved in the insurance transaction and there are various limitations and other requirements, including in particular reporting of transactions – either by the insured or, where required, by the special broker – for the purpose of collection of premium taxes and/or application of penalties for unlicensed insurance, depending on the jurisdiction. For example, the charge exacted in Alberta for unlicensed insurance is between 10% and 50% of the premium, depending on whether the insurance is available from Alberta-licensed insurers. These provincial charges are in addition to the federal excise tax of 10% that applies to unlicensed insurance (other than reinsurance, among other specified exceptions).
In some provinces it is an offence for residents to enter into insurance contracts with unlicensed insurers without following the requirements for unlicensed insurance in their regimes. In a number of jurisdictions, the onus is on the unlicensed insurer to ensure that conditions are met before the insurance contract is concluded and losses are inspected and adjusted. In some provinces, adjusting a loss in the province is one of the indices of carrying on business, and this activity is expressly permitted, without a licence, if the unlicensed insurance regime of that province is complied with. However, this important issue is not dealt with uniformly across the country. In the majority of provinces, prosecuting or maintaining an action in the province in respect of a contract of insurance is also one of the indices of carrying on business and requires licensing. But, unlike loss inspection and adjustment (in some provinces), there is no specified relief from this licensing requirement even if the unlicensed insurance regime is followed. Unlicensed insurers could be faced with theoretical barriers to the enforcement of their rights under policies.
Certain provincial legislation exempts insurers from the licensing requirements in the province provided that, among other things, the insurer's business in the province is limited to reinsurance. This may present problems if, for example, a foreign insurer wishes to underwrite direct business as well as reinsurance in Canada on an unlicenced basis. Other provincial legislation permits provincially licensed insurers to reinsure risks in respect of a contract made in the province with an unlicensed reinsurer, provided the reinsurer's business is transacted outside the province. The lack of uniformity of provincial requirements poses issues for reinsurers wishing to ensure that their reinsurance activities are within legal boundaries in each provincial jurisdiction.
In certain respects, the advisory issued by OSFI in 2009 has opened the door to foreign insurers that are not licensed in Canada to consider entering into insurance contracts that cover Canadian risks, provided that the insuring activities are conducted outside Canada within the meaning of the advisory. In this sense, the advisory serves as a safe harbour for foreign insurers wishing to write business covering Canadian risks without a licence. However, before embarking on a business plan to underwrite Canadian risks, unlicensed foreign insurers should ensure that provincial legislation is consulted and that the applicable unlicensed insurance regime is followed. Foreign insurers should also keep in mind that in some instances, the compliance requirements and the amount of applicable premium tax on the unlicensed insurance may be prohibitive or discouraging. Caution should also be taken to determine whether the foreign insurer could encounter procedural barriers to its standing before the courts of the particular province, should a dispute arise.