On April 20, 2007 Bill C-37, An Act to amend the law governing financial institutions and to provide for related and consequential matters, came into force. However, the changes to Part XIII of the Insurance Companies Act (the “Act”) relating to foreign insurers are not expected to be effective until January 1, 2009. During the interval, Canada’s federal insurance regulator, the Office of the Superintendent of Financial Institutions (“OSFI”), will consult with the industry concerning implementation and transition issues.

The changes – together with OSFI guidance through published advisories – will clarify the circumstances under which foreign insurers will be required to be registered in Canada and, if registered, the extent to which the foreign insurer’s business will be subject to the reporting, vesting of assets and other requirements of the Act. The determination will be based on whether or not a foreign insurer is “insuring in Canada a risk.”

Insurance in Canada of Risks”

Based on the OSFI advisory issued in September 2007, in order to determine whether or not a risk was insured in Canada, OSFI has identified four relevant indicia:

  1. the location at which the interaction between the foreign insurer and the policyholder leading to the insurance of the risk takes place;
  2. verbal or written representations made by the foreign insurer as to the location from which it will interact with the policyholder in performance of activities related to the policy and make decisions on all matters related to the policy;
  3. the jurisdiction with which the policy is “most closely connected,” having regard to the common law; and
  4. where the foreign insurer promotes its insurance products (other than in the course of soliciting applications).

The advisory states that the first indicia will carry the most weight and will be determined having regard to:

  • the location of the policyholder when the application is solicited;
  • the location at which the foreign insurer receives the application;
  • the location of the person(s) who negotiate the terms and conditions of the policy on behalf of the foreign insurer;
  • the location of the person(s) who communicate the offer to provide or renew coverage on behalf of the foreign insurer;
  • the location at which the foreign insurer receives the acceptance of the offer to provide or renew coverage; and
  • the location at which the policyholder receives the policy.

Examples: “Insuring in Canada a Risk”

The September advisory provides four examples of business models that OSFI will generally conclude to be “insuring in Canada a risk.” These are:

  1. Two or more of the activities in (a) to (f) above occur in Canada.
  2. One of the activities in (a) to (f) occurs in Canada; the risks under the policy are located in Canada; the terms and conditions of the policy are prescribed by a Canadian law; and the foreign insurer represents to the policyholder that it will receive the premium payments in Canada.
  3. One of the activities in (b) to (f) occurs in Canada; the foreign insurer’s products are promoted primarily in Canada; and the foreign insurer represents to policyholders that it will, from Canada, interact with them in connection with their policies.
  4. One of the activities in (b) to (f) occurs in Canada; the foreign insurer’s products are promoted primarily in Canada; and the policy is “most closely connected” to Canada.

Examples: “Insuring Outside Canada a Risk”

OSFI’s September 2007 advisory states that OSFI will generally conclude a foreign insurer to be “insuring outside Canada a risk” if:

  1. None of the activities referred to in (a) to (f) above occurs in Canada; or
  2. No more than one of the activities referred to in (a) to (f) occurs in Canada; there is no significant promotion of the products in Canada; the policy is “most closely connected” to a foreign jurisdiction; and the foreign insurer represents that it will interact with the policyholder from outside Canada in the performance of all activities related to the policy.

Implications

Certain types of insurance either cannot be written by Canadian insurers, or are more suitably placed on the international market. Careful attention to the revised rules should provide extra flexibility for foreign insurers covering these risks that do not wish to enter the Canadian insurance regulatory system.

There are, however, disincentives for Canadians to insure with unlicensed foreign insurers, including lack of vested assets and regulatory scrutiny in Canada, and potential federal and provincial excise taxes. Although reinsurance is exempt from federal excise taxes, cedents that place business with unregistered reinsurers are not entitled to receive credit for the reinsurance, except where assets are posted in Canada.

On August 15, 2007, OSFI notified foreign companies that have branches in Canada that, following the date on which the changes come into force, risks insured outside Canada will not have to be reported on the foreign branch’s books and the branch can apply for the release of “excess” vested assets, provided that the foreign company establishes to OSFI’s satisfaction that the risks were insured outside Canada. On the other hand, OSFI advised that, if the foreign company insured in Canada risks located outside Canada and did not previously account for those risks on the books of its Canadian branch, the foreign company will be required to vest assets in Canada for those risks.