Canada: The International Comparative Legal Guide To: Insurance & Reinsurance 2017

Last Updated: March 28 2017
Article by Carol Lyons and Lindsay Lorimer

1 Regulatory

  1. Which government bodies/agencies regulate insurance (and reinsurance) companies?

In Canada, responsibility for lawmaking is shared among the federal government and the governments of 10 provinces and three territories ("provinces"). Under Canada's constitution, there is a division of powers between the federal and provincial governments. The federal government makes laws for the whole of Canada in respect of matters assigned to it by the constitution. Likewise, a provincial legislature has legislative jurisdiction relative to the subject matters over which it has been assigned. In the context of insurance, this jurisdiction is shared but somewhat compartmentalised. The federal government has jurisdiction over the prudential regulation (e.g. solvency) of insurance companies and other entities that are authorised federally to provide insurance products ("insurers"), while the provinces have authority over the market conduct of insurers carrying on business in their jurisdictions. (Although, to be complete, insurers can be provincially incorporated, in which case the province in question regulates solvency as well.) Unlike the rest of the Canadian provinces, which are common law jurisdictions, Québec is a civil law jurisdiction. The general principles of Québec insurance law are contained in the Civil Code of Québec.

As a result of the shared constitutional jurisdiction, in Canada, there is a federal insurance regulator, the Office of the Superintendent of Financial Institutions ("OSFI"), and each province has its own insurance regulatory authority, for example, the Financial Institutions Commission in British Columbia, Alberta Treasury Board and Finance, the Financial Services Commission of Ontario and l'autorité des marchés financiers ("AMF") in Québec. The provincial insurance regulators are typically government agencies that report to the Minister of Finance of the provincial government.

In Canada, reinsurance is regulated in the same manner as insurance. There are no separate regulators, although different rules will apply given the nature of reinsurance, some of which are discussed below.

  1. What are the requirements/procedures for setting up a new insurance (or reinsurance) company?

Forms of insurance business

There are two main vehicles for establishing an insurance business in Canada federally: incorporation of a Canadian insurance company; and qualification of a Canadian branch of a foreign insurancecompany. Insurers may also carry on business in Canada in other forms, such as a fraternal benefit society or a reciprocal exchange, and may be incorporated under the laws of a province. For simplicity, this discussion is restricted to insurers carrying on business in Canada as a company or a branch and whose primary regulator is OSFI. The information requirements and timing for incorporation of a Canadian company and establishment of a Canadian branch are very similar. Both involve an extensive approval application to OSFI. Since a branch is not a separate legal entity from the foreign insurer, one of the main differences between the two vehicles is that a Canadian insurance company requires a board of directors and mandatory board committees, and is subject to the OSFI Corporate Governance guideline which contains comprehensive requirements for board and committee oversight. Although a branch operation does not have a board, OSFI requires the Chief Agent of a branch to fulfil many of the corporate governance functions required of a board of a Canadian company. Despite the legal distinction between a company and a branch, from an accounting perspective (e.g. financial and regulatory reporting), the branch is treated as a separate entity. The requirements for incorporation or qualification of a reinsurer are no different than those applicable to a primary insurer, although the business plan, for example (discussed below), would be tailored appropriately if the insurer proposes to limit its activities to the business of reinsurance. In addition, reinsurers may apply to be exempted from certain consumer-related requirements, such as the requirement to establish procedures for dealing with consumer complaints if they do not deal directly with individuals.

Although there are a number of insurers that are incorporated under the laws of a Canadian province, most of the largest insurance companies in Canada are federally-incorporated, and many companies that were originally incorporated provincially have migrated into federal jurisdiction where the legislation is comparatively modern and solvency regulation is more robust. One provincial insurance regulatory authority (Ontario) recently considered putting a moratorium on the incorporation of insurance companies under its provincial laws, and requiring existing insurers incorporated in that province (other than reciprocal exchanges and farm mutuals) to transfer to federal jurisdiction or another jurisdiction where the insurer is subject to supervision that meets the new solvency standards set by the International Association of Insurance Supervisors ("IAIS").

Focus of OSFI review – business plan

If an applicant wishes to incorporate a Canadian insurer federally, or establish a Canadian branch, the focus of much of OSFI's review will centre on the proposed business plan that is submitted with the application, including the actuarial calculations and proposed initial capital. The business plan must be comprehensive and  include, among other things, descriptions of the proposed activities (by line of business), a complete market analysis/feasibility study, identification of sources of capital, as well as pro forma financial statements and solvency ratio calculations, in each case for three years following start up. The business plan must be stress-tested for the three-year period. OSFI, including its actuarial staff, will probe and assess the business plan, including in particular the actuarial calculations and stress testing. The amount of initial capital that OSFI will ultimately require will be determined based on the business plan's contents, stress testing and OSFI's own assessment. OSFI may require the amount of initial capital to be sufficient to maintain at least a 300% solvency ratio for the first three full years of operation.

Summary information for Federal Applications – incorporation and branch

The following chart contains a summary of the processes and requirements to incorporate a Canadian insurer federally and to qualify a Canadian branch, based on OSFI's issued guidance and instructions.

To view the article in full click here

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2017

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