On June 14, 2013, the Act respecting insurance (Quebec)
(the "Act") was amended by sections 1 to
5 of An Act to amend various legislative provisions mainly
concerning the financial sector.
The new sections, 66.1.1 to 66.1.6, have been added to the Act in
order to henceforth allow an insurance company incorporated under
the laws of Quebec ("Quebec Insurer")
that has issued participating policies ("Participating
Policies") to make a transfer from its participating
fund ("Participating Fund") to a surplus
account or a retained earnings account
("Non-Participating Fund"), provided
that the Quebec Insurer adopts a participating fund surplus
management policy approved by its board of directors
("Policy").
These new provisions of the Act respecting insurance are
therefore giving immediate effect to proposal 46 contained in the
Report on the Application of the Act respecting insurance and
the Act respecting trust companies and savings companies,
which was tabled in the National Assembly of Quebec on April 30,
2013 by Quebec's Minister of Finance and the Economy, and which
is currently the subject of public consultations (the
"Application Report").
The purpose of these new sections is to provide a solution to the
problem stemming from the fact that a number of Quebec Insurers
had, for several years now, stopped issuing Participating Policies,
and the fact that their Participating Funds had become closed pools
which benefited, often unfairly, from productivity gains resulting
from the increase in the non-participating business volume of those
insurers. Moreover, the Application Report noted that the actuarial
forecasts for some Participating Policies had been determined on
the basis of mortality assumptions which turned out to be too
pessimistic. Since people have on average been living much longer
than initially anticipated in these assumptions, this was therefore
reflected in the financial results of the Participating Funds of
Quebec Insurers whose performance was better than expected. Several
Quebec Insurers have therefore found themselves with large
surpluses, identified in their net equity as surpluses allocated to
the Participating Fund.
Sections 66 and 66.1 of the Act already provided for certain
rights of the holders of Participating Policies of Quebec Insurers,
including the right to share in the portion of the profits from the
insurer's participating account. However, the Act and
regulation thereunder did not specify how transfers were to be made
between Participating Funds and Non-Participating Funds. Following
certain decisions rendered by Canadian courts with respect to
transactions involving such transfers, and in the absence of a
specific legal framework, Quebec's regulatory authorities had
until now been quite reluctant to permit such transfers, except in
the context of projects to demutualize or convert Quebec Insurers,
which would then entail the adoption of special statutes governing
such transfers, among other things.
If no transfers had been permitted, there would then have been a
serious risk of a tontine effect the result of which would have
been that the profits of some Participating Funds would only have
belonged to the last survivor of the holders of Participating
Policies in the event of the winding-up of the insurer. The effect
of the new sections, 66.1.1 to 66.1.6, of the Act is therefore to
offer a legal solution to Quebec Insurers that enables them to
address this problem.
Section 66.1.1 of the Act states that the Policy must establish a
method for calculating the surplus maintained in the Participating
Fund, including for the purpose of guaranteeing the performance of
the Quebec Insurer's obligations to its holders of
Participating Policies. This Policy must be approved by the Quebec
Insurer's directors, it must be presented (but not approved) at
a general meeting of its shareholders or members, and finally, it
must also be filed with the Autorité des marchés
financiers ("AMF"), pursuant to section
66.1.2 of the Act.
Section 66.1.3 of the Act provides that, before every transfer
from the Participating Fund to a Non-Participating Fund, the Quebec
Insurer's actuary must file a report certifying that the
transfer is in compliance with the Policy, and this report must be
filed with the AMF no less than 30 days before the date of
transfer. Section 66.1.4 enables the AMF to prohibit any transfer,
or to allow it subject to certain conditions, if it finds that the
transfer is advisable in the interests of the Participating
Policyholders. Section 66.1.5 allows the AMF to require the filing
of any relevant information or document relating to the Policy or a
transfer made thereunder. Finally, section 66.1.6 of the Act
permits the AMF to give written instructions to Quebec Insurers
that are issuing Participating Policies regarding the management of
the participating fund surplus.
The addition of these new sections to the Act therefore represents
an initiative by the Quebec legislature that will henceforth give
Quebec Insurers who have issued Participating Policies, or who will
be doing so in the future, an advantage over insurers incorporated
in other Canadian jurisdictions where it becomes necessary to
eliminate or reduce large surpluses identified in their net equity
as surpluses allocated to the Participating Fund.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.