Update: 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. Certain parts of the bill, including changes to the Insurance Companies Act relating to foreign insurers, have yet to come into force. According to recent announcements, these changes are not expected to be effective until January 1, 2009, in order to give the federal regulator, the Office of the Superintendent of Financial Institutions ("OSFI"), time to consult with the industry concerning implementation and transition issues.
The changes will clarify the provisions of the Insurance Companies Act that require foreign insurers to be registered in Canada. Registration involves qualification under and ongoing compliance with the Canadian regulatory regime, including maintaining assets vested in trust in Canada to cover policy liabilities. At present, the federal legislation generally combines two separate concepts that apply to the issue of registration and reporting business through a Canadian branch operation: (i) the location of the risk; and (ii) the location of the insurance transaction. The changes will clarify the extent to which foreign companies that have existing Canadian branch operations will be required to vest assets in trust in Canada. This will depend upon whether or not the foreign insurer is "insuring in Canada a risk." What OSFI will consider to be the insurance in Canada of risks will be clarified in OSFI guidance advisories.
What OSFI will Consider to be "Insurance in Canada of Risks"
Stated most simply, OSFI has advised that, following the coming into force of the amendments:
- risks located in Canada, but insured by foreign insurers outside Canada, will no longer be subject to the Insurance Companies Act (including reporting and vested assets requirements); and
- risks located outside Canada, but insured in Canada, will become subject to such requirements.
Based on the most recent draft advisory issued on June 19, 2007, in order to determine whether or not a risk was insured in Canada, OSFI will primarily consider the location at which the interaction between the prospective insured, the foreign insurer and their intermediaries takes place. This will be determined using a number of indicia, such as:
(a) where the foreign insurer solicits applications;
(b) where the foreign insurer receives an application;
(c) where the foreign insurer negotiates the terms and conditions of the policy;
(d) where the foreign insurer makes an offer to provide or renew coverage;
(e) where the foreign insurer accepts of an offer to provide or renew coverage; and
(f) where the foreign insurer issues the policy.
At present, it appears that the foregoing indicia will carry the most weight in determining whether the foreign insurer insures a risk inside or outside Canada. However, the June 19 advisory also indicates that OSFI will consider the following three factors, if an analysis of the foregoing indicia is not readily determinative:
(g) the location from which the foreign insurer will interact with the policyholder after the insurance is effected (e.g. where it will provide information, receive premiums and adjust or settle claims);
(h) the jurisdiction with which the policy has the most substantial connection, having regard to the common law; and
(i) the level of the foreign insurer's promotional activities if done in Canada (e.g. passive general advertising versus targeted marketing).
In addition, the June 19 advisory provides that, where an activity in respect of a policy occurs partly in and partly outside Canada, OSFI will consider the location where most of the material aspects of the activity occur to be the location at which the activity actually occurs. In the case of policy terms that are standard form and not negotiable, and the foreign insurer does not solicit applications in Canada but promotes the insurance in Canada, that promotion will be an indicia for determining whether the risk was insured in Canada, if the promotion contains most of the elements of an offer.
OSFI's Examples of What Is and Is Not "Insuring in Canada a Risk"
The June 19 advisory provides examples of what OSFI will generally conclude to be "insuring in Canada a risk" or "insuring outside Canada a risk." These examples are summarized below.
"Insuring in Canada a Risk"
If the foreign insurer's business model is such that the foreign insurer carries on in Canada:
″ two or more of the interactions listed in paragraphs (a) to (f) above; or
″ any one of the interactions listed in paragraphs (b) to (f) above and all or substantially all of the interactions listed in paragraph (g) above, and the foreign insurer promotes its products through a medium that is primarily intended to be circulated, transmitted, broadcast or otherwise accessed in Canada; or
″ any one of the interactions listed in paragraphs (a) to (f) above, receives premium payments in Canada in Canadian currency and if Canadian common law would conclude that the jurisdiction with which the policy has the most substantial connection is Canada.
"Insuring Outside Canada a Risk"
Presumably, if all or substantially all of the indicia in paragraphs (a) to (i) above appertain to a jurisdiction other than Canada, the policy should be deemed to have been insured outside Canada. However, OSFI's June 19 advisory specifically cites the following as examples of "insuring outside Canada a risk" as long as, in each case, the indicia described in paragraphs (g) and (h) above appertain to the foreign jurisdiction:
″ if the foreign insurer receives in Canada applications for policies under which premiums are payable in a foreign currency and issues policies in Canada, but negotiates the terms of the policies in a foreign jurisdiction and communicates acceptance of the applications for policies from the foreign jurisdiction, or
″ if the foreign insurer communicates the acceptance of applications for policies from Canada and receives in Canada premium payments (payable in a foreign currency), but receives the applications and issues the policies in a foreign jurisdiction.
Whether or not the proposed changes will materially affect the Canadian marketplace is unclear. Certain types of insurance (e.g. financial insurance and certain large, specialized risks) 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.
However, there are business reasons to use "Canadian paper" where the risk or the cedent is located in Canada, even if the transaction is concluded and serviced outside the country. For example, there is a major disincentive for Canadians to contract with unlicensed foreign insurers, because the policyholder or cedent does not have the comfort of knowing that the insurer/reinsurer maintains regulatory capital and is subject to regulatory scrutiny in Canada.
There are other disincentives for placing insurance with unlicensed foreign insurers. For direct business (other than life and accident and sickness), federal and provincial excise taxes – as a percentage of the premium – may apply which, depending on the Canadian jurisdiction in which the insured or the risk is located, may be significant. 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. These cedents will have to maintain reserves on their own books for the ceded business. This will remain an important reason for reinsurers to continue to be licensed in Canada.
Most immediately, the changes will affect foreign insurers with Canadian branch operations. If the branch operation was established on the basis that the risks insured are located in Canada, to the extent that some of the insurance was negotiated, concluded and serviced offshore, the foreign insurer will no longer be required to maintain assets vested in trust for that business. If the whole of the branch's business is of that nature, the branch could ultimately withdraw.
On August 15, 2007, OSFI notified the industry that, following the date on which the changes come into force, risks insured outside Canada will not have to be reported on a 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, where the foreign company has insured in Canada risks located outside Canada and did not previously account for those risks on the books of its Canadian branch, it will be required to vest assets in Canada for those risks.
This article appeared in Corporate Insurance Brief Fall 2007. To subscribe to this publication, please visit our Publications Request page.
This is an update to an article which originally appeared in the International Law Office on May 22, 2007.