Important Canadian Regulatory Changes Affecting Insurance Branches 


Fall 2009 - (Lang Michener LLP Corporate Insurance Brief )

Lang Michener LLP Corporate Insurance Brief
Also published in AIRROC Matters, Vol. 5, No. 1, Spring 2009
1. Introduction

Although both provincial and federal authorities can incorporate insurance companies in Canada, most insurers and all branches are federally regulated. The federal legislation is overhauled every five years. The last such overhaul in 2007 both clarified and amended the regulations for branches in a fundamental manner. The legislative provisions respecting foreign companies (branches) are contained in Part XIII of the Insurance Companies Act

This paper discusses the clarifications and amendments that should be of particular interest to branches. It also highlights some decisions that branches in run-off should at least consider. 

2. Clarifications of Part XIII

The test as to whether a foreign insurer needs to be authorized by the federal regulator to conduct business through a branch in Canada is whether that foreign company is or is not insuring in Canada a risk. 

The federal regulator had inconsistent internal interpretations of what these words meant. Was it the location of the activities involved in insuring that were the deciding factor or was it the location of the risk? However, once a branch was registered in Canada, the federal regulator required that all Canadian risks be reflected in the branch. 

The regulator has now clarified that the test is no longer where the risk is located but rather where the insurance activities are being carried out. 1 Because this is a clarification as opposed to an amendment, these changes are considered by OSFI to be effective immediately. This has several important effects for your Canadian branch. 

The first significant effect of this clarification is that all foreign companies having branches in Canada are required to submit quarterly progress reports for 2009 to 2010 identifying the risks located outside Canada that were insured in Canada. The first report was due May 31, 2009 and the next one is due at the end of November. OSFI has issued instructions and guidance 2 wherein it indicates that the progress review reports must describe the project structure, governance, timelines and key personnel involved, including accountabilities and an assessment of whether resources are sufficient to meet the project deliverables. In addition, the reports must describe the internal controls that the foreign insurer will have in place to identify policies that have been issued in Canada prior to January 1, 2010 and set out a description of any significant impact that may result in the branch's vested asset accounts as a result. Foreign insurers are expected to communicate with their auditors and actuaries with respect to this implementation review as well as to involve a senior officer from home office. If the implementation will have a significant impact on the assets required to be vested in trust in Canada, OSFI expects the board of directors of the foreign company or committee of that board to be involved. 

It is important to note that this requires head office to examine all past practices as they may impact on whether non-Canadian located risks were really insured in Canada and must now be reflected in the branch. This could have significant adverse implications for Canadian branches as these policies and IBNRs are likely not reflected in the branch books/statements. 

The response apparently has been less than overwhelming. As the regulator sees how various companies address these matters, the companies can expect the regulatory scrutiny and the level of effort required to be devoted to increase over time. 

A second effect of this clarification is that Canadian risks presently reflected in the branch that were insured outside Canada may, with the regulator's consent, be removed from the branch. The guidance from OSFI indicates the steps that a branch must take if it wishes to remove this business from its Canadian book. The deadline for taking these steps is rapidly approaching

The final effect of this clarification is that foreign companies, even those having Canadian branches, can now conduct future insurance activities involving Canadian risks outside Canada without having that business reflected in the books of the Canadian branch.

3. Amendments to Part XIII

The amendments to the portions of the Insurance Companies Act that affect foreign companies (i.e. branches) were so fundamental that the regulator required considerable time to implement the regulations and the detail required to make the amendments work. As such, the amendments do not come into effect until January 1, 2010. 

The amendments fall into two general categories: 

3.1 Marine Insurance
Until the 2007 amendments come into effect, marine insurance is unregulated. 

Starting in January 2010, foreign companies writing marine insurance or those that have marine insurance on their books, whether or not they are in run-off, will now have to have their federal order amended to include marine as a class of insurance. 3  

3.2 Portfolio Transfers
The 2007 amendments reduced considerably the approvals required for portfolio transfers of branch businesses. Prior to the amendments coming into effect, only indemnity reinsurance in the ordinary course of the branch's business was exempt from regulatory requirements. All other transfers, including indemnity insurance not in the ordinary course of business, assumption reinsurance and novation required Ministerial approval. This can be expected to add about a month to the approval process, and longer if a federal election intervenes. 

From and after January 1, 2010, neither indemnity reinsurance of any kind nor novation will require any regulatory approval. Assumption reinsurance 4 of some, all or substantially all of the branch's book of business will require Superintendent approval. Additionally, a transfer of all or substantially all of the policies by means other than assumption reinsurance requires notice to the Superintendent who can then require notice to be given to the policy holders. 

While advertising in a newspaper and the Canada Gazette is normally required, for most assumption reinsurance transfers the only notification to policyholders that is required is the sending of an assumption certificate after the assumption reinsurance is completed. Once regulatory approval is given, the applicable reserves can move. Finally, while the provinces have exclusive constitutional jurisdiction over property and civil rights, none of the provinces has any regulatory approval requirements respecting the transfer from a branch to a federal insurer or another branch.

4. Conclusions

The clarifications and the proposed changes are significant for branches and provide both opportunities, flexibility and additional burdens. Some thoughts and suggestions in this regard are: 

1. Head office can now carry out insurance activities outside of Canada for Canadian risks without reflecting that business on the branch's books. This provides significant added flexibility but care will have to be taken that there be no insurance activities carried on in Canada that undermines this approach.

2. Risks having Canadian situs previously written by head office and not the branch may under certain circumstances be removed from the books of the branch with attendant implications for the assets that need to be left on deposit.

3. Out of Canada risks written from the branch (past, present and future) need to be reflected in the branch. This requires diligent internal inquiry and may increase the branch assets that need to be kept on deposit.

4. Branches that are in run-off may find that 2009 is a good time to consider transferring the branch's business to a Canadian entity and closing down the branch. In this regard:

  • while the approval mechanism in 2009 will normally require Ministerial approval, this may be counterbalanced by the bringing to an end of the need to check and report on a quarterly basis on whether head office had insured risks outside Canada that should have been reflected on the books of the branch;
  • normally, OSFI requires a year end to pass after the portfolio transfer before releasing the branch completely — in special circumstances this may be sped up; and
  • since the test is now where the insurance activities are carried out, head office can reinsure the business transferred by the branch without adversely affecting the withdrawal of the branch. 5

Branches wishing to complete the transfer in 2009 will need to start on the process without delay. 

5. Attention will need to be given as to whether or not the branch, if it is to continue in Canada, needs to be registered for marine insurance.

All of these changes means that at least for the foreseeable future, "business as usual" will not necessarily apply to your branches.