The purpose of this Bulletin is to address the Office of the Superintendent of Financial Institutions Canada ("OSFI") Advisory 2007-01-RI, entitled "Insurance in Canada of Risks" issued by OSFI in September, 2007 and revised in May, 2009 (the "Revised Advisory").1
The essential difference between the existing regime and the new (which is to come into force on January 1, 2010) is that the existing was about insuring a risk in Canada, and the new is about insuring in Canada a risk.
For many decades, OSFI has regulated on the basis that if insurance activities were carried out anywhere in the world in relation to insuring a risk in Canada, then the foreign insurer should be licensed in Canada. Also, OSFI maintained that if a foreign insurer insured a risk in Canada from anywhere in the world records and reserves were to be maintained with the Canadian branch. Practically, OSFI would not pursue a foreign insurer to come to Canada if it had Canadian risks including because in nearly all cases, if not all cases, it would not know the foreign insurer had risks here. It was also the case that foreign companies with a Canadian branch would write business through the branch on risks not located in Canada, and would not have to report and reserve for it at the branch.
After careful consideration and consultation OSFI has determined that the right approach should be to regulate insurers based on where they carry out their insurance activity, not where the risk is.
The Common Law
The Revised Advisory provides:
"The ICA does not define 'insuring in Canada a risk' which, when read in the context of Part XIII of the ICA, falls within the 'insurance business in Canada' of a foreign insurer. A review of case law indicates that courts have not interpreted these concepts, but have interpreted the analogous concept of 'carrying on business in Canada'. Based on these interpretations, while each business model must be assessed on the basis of its own components, the location where operations are carried out is of significant importance in determining the location where business is carried on."
The Advisory is virtually all based on the common law. This is a very important point. Although OSFI has developed a new approach in this Advisory, it is based upon case law that has evolved over many decades. Lawyers have given advice and opinions on these kinds of questions (i.e. in which jurisdiction is a company carrying on business) for many decades, particularly for tax liability purposes. One of our strong recommendations to insurers and reinsurers is to seek advice from lawyers (and not necessarily from OSFI) when deciding whether a foreign insurer is insuring in Canada a risk.
Most fundamentally, in considering whether a person carries on business in Canada, the courts have historically looked at the following two basic elements as key factors: (i) the place where contracts are entered into; and (ii) the location of the activities from which profits arise.2
We also refer to Canada Revenue Agency GST/HST Policy Statement P-051R2 entitled "Carrying on Business in Canada", where the following factors were considered in determining whether a non-resident person is carrying on business in Canada:
- the place where the agents or employees of the non-resident are located;
- the place of delivery;
- the place of payment;
- the place where purchases are made or assets are acquired;
- the place from which transactions are solicited;
- the location of assets or an inventory of goods;
- the place where the business contracts are made;
- the location of a bank account;
- the place where the non-resident's name and business are listed in a directory;
- the location of a branch or office;
- the place where the service is performed; and
- the place of manufacture or production.3
Interestingly, a primary difference between OSFI's initial Advisory issued in September 2007 and the Revised Advisory dated May, 2009, is that reference to "proper law of contract" has been eliminated. The accompanying letter to the Revised Advisory states that this reference has been deleted "since it has little or no correlation with the location of a foreign insurer's operations". While the Advisory is meant to provide guidance to the industry, neither OSFI nor any other party suggests that the Advisory supersedes the law and that the law does not apply. Accordingly, one must have regard to the law that applies to the circumstances. OSFI further acknowledges this in Paragraph 3 of the Advisory when it says that the indicia "are not necessarily exhaustive". As such, in our view, it is important to take into consideration all relevant factors, including the proper law of contract, in assessing whether a foreign insurer is insuring in Canada a risk.
We refer to a passage from Castel and Walker's Canadian Conflict of Law text book, where the authors discuss how the courts devise the proper law to govern a contract:
"Where the parties have not expressed a choice as to the proper law and no such choice can be inferred from the circumstances of the case, the proper law of their contract is the system of law with which the transaction has the closest and most real connection. The court does not seek to find some presumed or fictitious intention of the parties, but rather identifies the system of law with which, in the circumstances, it is most closely and really connected. The court will look at such factors as the place of contracting, the place of performance, the place of residence or business of the parties, and the nature and subject matter of the contract".4
The 1967 case Imperial Life Assurance Co. of Canada v. Colmenares is the leading Supreme Court of Canada case on jurisdiction governing a contract. It endorsed the following statement from Cheshire on Private International Law,
"The court must take into account, for instance, the following matters: the domicile and even the residence of the parties, the national character of a corporation and the place where its principal place of business is situate, the place where the contract is made and the place where it is to be performed, the style in which the contract is drafted, as, for instance, whether the language is appropriate to one system of law, but inappropriate to another, the fact that a certain stipulation is valid under one law but void under another, the economic connection of the contract with some other transaction, the nature of the subject matter, the head office of an insurance company, whose activities range over many countries, and any other fact which serves to localize the contract."5
Many are under the impression that this is an OSFI Advisory, and it is. However, it is really an OSFI Advisory about and based on case law. The OSFI Advisory and its indicia are not new, they are only in the sense that it has been drafted with insurance contracts in mind and on what basis OSFI will consider a foreign insurer to be insuring in Canada a risk.
The OSFI Advisory Indicia And Other Guidance
A: The Indicia
Based upon the foregoing, in the Revised Advisory, OSFI has set key indicia to consider in determining whether a foreign insurer is insuring in Canada a risk. According to paragraph 2 in the Revised Advisory, to determine whether a foreign insurer is insuring in Canada a risk, consideration should be given to whether any person acting for, or on behalf of, the foreign insurer:
- promotes the foreign insurer or the foreign insurer's insurance products through a medium of communication that is primarily circulated, transmitted, broadcasted or otherwise accessible in Canada (other than in the course of the activity referred to in subparagraph (b) below);
- directly incites a person located in Canada to request insurance coverage (where that person is specifically identified and targeted), and that person is provided with the opportunity and/or means with which to make a request for insurance coverage in the course of that activity (e.g., telemarketing, door-to-door solicitation, direct/targeted mail);
- receives in Canada a request for insurance coverage from a policyholder;
- negotiates from Canada the terms and conditions of insurance coverage;
- decides in Canada to bind the foreign insurer to insurance coverage;
- communicates from Canada an offer to provide insurance coverage, or the acceptance of a request for insurance coverage, to a policyholder;
- receives in Canada an acceptance of the foreign insurer's offer to provide insurance coverage from a policyholder;
- receives in Canada payment for insurance coverage from a policyholder; and
- interacts in Canada with the policyholder in the provision of services related to the insurance coverage (e.g., providing information about the coverage and receiving claims)."
B: How OSFI Will Apply Those Indicia
- The indicia are not necessarily exhaustive;
- Where an activity is partly in Canada and partly outside Canada, the place where most of the material aspects of that activity occur should be regarded as the location where it occurs;
- OSFI considers that a foreign insurer is insuring in Canada a risk where its business model encompasses:
- two or more of the activities referred to in any of subparagraphs 2(b) to (h);
- any one of the activities referred to in any of subparagraphs 2(b) to (h) and both of the activities referred to in subparagraphs 2(a) and (i);
- reaching an agreement, actual or in principle, on most or all of the material terms and conditions of the insurance coverage in the course of its negotiations in Canada (i.e., this contemplates that, in addition to 2(d), at least one additional activity referred to in 2(e) through (g) would apply);
- OSFI considers that a foreign insurer is not insuring in Canada a risk where its business model encompasses no more than one of the activities referred to in paragraph 2. One must be very careful in considering this point in the Advisory. It does not mean that, if more than one of the activities in paragraph 2 are referred to, that a foreign insurer is insuring in Canada a risk.
C: Other Guidance From OSFI:
In the Revised Advisory, OSFI has provided further assistance.
- Under paragraph 6, OSFI states that:
"A foreign insurer that is authorized under the ICA to insure in Canada risks operates in Canada on a branch basis. That Canadian operation is not a separate legal entity. Therefore, depending on its business model, that foreign insurer may insure in Canada a risk (through its Canadian branch) or it may insure outside Canada a risk (through its head office or a branch located outside Canada), irrespective of the location of that risk. However, only risks that are insured in Canada are subject to the ICA regime. In the event that a foreign insurer becomes insolvent, the assets it has vested in trust in Canada under the ICA regime would be available to satisfy claims made under the Winding-up and Restructuring Act by holders of policies covering risks insured in Canada. In that regard, subsection 578(5) of the ICA will assist policyholders in determining whether they benefit from the protection afforded by the ICA, when dealing with foreign insurers. This provision will require a foreign insurer to set out or cause to be set out in legible characters in all premium notices, applications for policies and policies related to its insurance in Canada of risks, a statement that the document was issued or made in the course of its insurance business in Canada."
The comment on the Winding-up and Restructuring Act above exhibits the extent to which OSFI considered the issue when drafting the Revised Advisory. The existing regime appeared to be inconsistent with the Winding-Up and Restructuring Act. A concern has been that, in the event of an insolvency, foreign policyholders could argue they were eligible to be covered by assets maintained in Canada to the prejudice of Canadian policyholders intended to be protected by these assets. There is an issue here of an illusion of protection. If there were assets here it did not necessarily mean the policyholder had access to them. In effect, under the new regime, a foreign policyholder who did an insurance transaction with a foreign insurer outside Canada may well not be able to claim against assets in Canada because the foreign insurer has a Canadian branch and assets in Canada.
Foreign policyholders will still be able to make a claim against the assets of the branch under the new Part XIII. So the new wording of Part XIII does not eliminate the problems with the Winding-Up and Restructuring Act. The change is that now the branches are required to put risks on its books and hold assets to protect the foreign policyholder if the insuring of the risk was done in Canada. Thus the branch assets will cover Canadian and foreign policyholders (if the insuring of the risk was done in Canada).
Note that in the OSFI Implementation Instructions, December 2008, the following statement is made with respect to the Winding-up and Restructuring Act: "foreign companies must assess the benefits from the point of view of the policyholders who have a right, under the Winding-up and Restructuring Act, to make a claim on the assets that have been vested in Canada in respect of those liabilities."
For more on how the Winding-up and Restructuring Act is implicated in the context of reinsurance, see the section on reinsurance, found at the conclusion of this Bulletin.
- Under paragraph 7 of the Revised Advisory, OSFI states:
"Where a foreign insurer is not insuring in Canada a risk, the ICA does not restrict that foreign insurer from carrying on any activity or business in Canada. Subject to other applicable Canadian laws, it could, for example, carry on any insurance business in Canada that does not involve the insurance of a risk by it, such as providing underwriting, policy administration or product development services to other insurers."
- Under paragraph 8 of the Revised Advisory, OSFI states:
"In Canada, the federal and provincial/territorial governments share jurisdiction over foreign insurers. While a foreign insurer may, for the purposes of the ICA, be considered not to be insuring in Canada a risk, its activities may cause that foreign insurer to require a license under one or more of the insurance statutes of the provinces/territories in Canada. For example, some of these statutes require a foreign insurer to obtain a license merely to promote its products in, insure a person domiciled or resident in, or provide insurance coverage on a property situated in the province/territory. Accordingly, OSFI recommends that foreign insurers consult these statutes and the agencies that administer them."
The possible discrepancy between federal and provincial registration requirements has been a concern for many commentators.
Again, legal advice is preferable to asking the regulators. Legal advisors have great experience in reconciling the circumstances of each case to the different requirements of provincial/territorial laws and regulators, the latter of which may be practically and not legally based.
D: Possible Problems
Consider the following:
A Canadian policyholder engages the services of an international broker, who in turn does business directly with the foreign head office of a foreign insurer which also happens to have a branch in Canada. Assume the negotiation, offer and acceptance all took place at that foreign head office. In such a situation, if the broker accepts the policy, the risk is then bound by the foreign head office. Furthermore, the policy is issued at the said head office and the premium is paid by the international broker to the head office. In this situation, the Canadian branch is in no way connected to the transaction.
Under the current Part XIII the foreign head office is obligated to report such a transaction to its Canadian branch. But under the new Part XIII, if the foreign insurer has not had dealings with the policyholder in Canada, it would likely be the case that the business is not to be on the books of the branch.
Where a branch actually competes with its own head office for the same business this will present interesting situations as well.
OSFI Rulings provide guidance on the application of the above noted indicia.6 Note that the OSFI Rulings mentioned below were decided prior to the issuance of the Revised Advisory, but they are relevant to consider going forward.
A: OSFI Ruling No. 2005-03-R1, Insurance In Canada Of Risks – Group Policy
OSFI Ruling 2005-03-R1 interprets the phrase "insurance in Canada of Risks" in relation to foreign insurers who provide group policy insurance.
The issue, according to the Ruling, is "whether a foreign insurer that provides insurance coverage to Canadian employees under group insurance policies (group policies) solicited and issued outside Canada, was insuring, in Canada, risks and therefore would require an order under Part XIII of the ICA."
OSFI ruled that for the purposes of the ICA, the foreign insurer does not, in Canada, insure risks. In arriving at that conclusion, OSFI considered the following:
- the foreign insurer has no offices or employees in Canada;
- policies are solicited, negotiated, issued and executed outside Canada;
- all insurance functions are performed from offices outside of Canada;
- activities in Canada, performed by employers, are only liaison activities;
- where the liaison function is performed in Canada, it is provided by the Canadian operations of the employer, or a TPA appointed by the employer; and
- the party performing the liaison function is not acting as an agent for the insurer.
B: OSFI Ruling No. 2007-03, Insurance In Canada Of Risks – Financial Guarantee Insurance And Residual Value Insurance
OSFI Ruling No. 2007-03 interprets the phrase "insurance in Canada of risks" as it relates to financial guarantee insurance and residual value insurance.
The issue, according to the Ruling, is "whether the manner in which foreign insurers that proposed to provide financial guarantee insurance or residual value insurance to Canadian entities would cause these insurers to insure in Canada risks and therefore to be subject to Part XIII of the ICA."
OSFI ruled that the foreign insurers will not insure in Canada risks (and thus will not be subjected to Part XIII). In reaching this decision OSFI considered the following:
- the only interaction leading to the formation of the policies to take place in Canada will be the receipt of the policy;
- the policyholders are aware that most, it not all, insurance functions will take place outside of Canada (such as underwriting, issuance, and signing, assessment and adjudication of claims, and the processing and payment of claims);
- the only activities in Canada are those that are incidental to the insurance (such as due diligence);
- third parties in Canada operating for the insurer do not have the ability to bind the insurer;
- the foreign insurer is not going to solicit business in Canada; and
- there is no office of the insurer in Canada.
These are consistent with the Revised Advisory. What if, for example, the insurer did have offices and employees in Canada, but an international broker did business directly with the foreign companies head office? This is the best of both worlds scenario.
Possible Implications/Changes Arising From The Implementation Of The New Part XIII
A: Best Of Both Worlds
A foreign reinsurer or insurer may have the best of both worlds, namely, it can arrange its affairs so that, based upon its own choice, it can write business in Canada which it wishes to and maintain books and assets (representing reserves and surplus) in Canada; and it can not write business in Canada whenever that makes sense, with the result that it is not regulated in Canada with respect to that business.
The former (i.e. reinsurers or insurers which choose to write business in Canada) could include businesses that wish to be active in Canada, promoting its business and being on the ground in order to obtain and service the business. It would also include situations where the insured or reinsured wants to know that it is dealing with a regulated insurer/reinsurer in Canada and obtain credit for reinsurance in the case of reinsurance. It could also include where insurance is available in Canada and the insured does not want to pay federal and provincial excise taxes.
The latter (i.e. reinsurers or insurers which choose not to write business in Canada) would include business for which cover is not available in Canada, so excise taxes would not be payable, so there is not a tax cost incurred by a Canadian insured in obtaining cover outside Canada, and the insurer is careful that it does not carry on insurance activities in Canada in accordance with the Advisory.
B: No Need To Comply With ICA If Insurance Activities Outside Canada
Whether it is for cover not available in Canada or not, insurers and reinsurers may write Canadian risks and have no need to be licensed in Canada as long as they comply with the Advisory. They will have not had to comply with the costs of regulation but where the cover is available in Canada, excise tax will apply. The likely risks an unlicensed insurer would cover would be large corporate and specialty lines and, of course, reinsurance.
Note that the Revised Advisory provides that a foreign insurer may still conduct certain activities (that do not involve the insurance of a risk) and will not need to be registered as an insurer in Canada, such as providing underwriting, administration, or product development services to other insurers.
C: Other Impacts Of The Advisory And Legislative Changes:
- Will insurers in Canada require reinsurance trusts from unlicensed reinsurers to obtain credit for the reinsurance?
- It is unlikely that any of this will change the way business is conducted for personal lines and small and mid-sized commercial business.
- It is also unlikely that any policyholder will think they are protected by Canadian regulation when they are dealing with a foreign insurer outside of Canada.
- One impact increasingly will be that when a foreign parent or company (an insured, in some other business) with a subsidiary or branch business in Canada is arranging its insurance in the foreign country it will no longer be arranging a separate policy with an insurer in Canada, even an insurer that is itself a subsidiary of the insurer writing the insurance coverage for that foreign parent or company.
- The approach under the Advisory is more consistent with the approach under the Income Tax Act as well as the draft OECD model on allocation of income to permanent establishments, and therefore reporting will be more consistent.
- Generally it will be easier for foreign insurers to keep track of Canadian business because it is more likely they will know where the activities are carried out and whether it needs to be reported in their Canadian branch or not, than to know whether there were Canadian risks included in business written outside of Canada. This will prove particularly helpful when two foreign companies with head offices outside Canada, with branches in Canada, are merging.
- The Advisory may also bring record keeping, accounting and system changes. On February 13, 2008, OSFI announced that it obtained from Finance a 1-year postponement of the implementation for new Part XIII amendments until January 1, 2010. This was to allow stakeholders enough time to make these changes. For more on these changes, see the comments below.
Issues Involved With Transition/Coming Into Force:
A: Risk Presumed Insured In Canada (i.e. No Grandfathering)
According to the letter dated August 15, 2007, from OSFI to foreign life companies and foreign property and casualty companies, once the changes to Part XIII 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 assets kept under the old regime that are not necessary under the new regime.7
OSFI will presume all risks reported on the books to have been insured in Canada – and will therefore be subject to Part XIII unless the foreign company satisfies OSFI otherwise. The benefit of this is a reduction in required assets.
The opposite may also be true – Branches may have to add to risks/reserves for policies where activities were in Canada and the risk is outside. OSFI has indicated that insurers will exercise due diligence to identify all risks located outside Canada, but that were insured in Canada.
Critics have commented that the lack of "grandfathering" is problematic. These critics point to the fact that policyholders, who negotiated their policy and paid their premium outside of Canada (for risks in Canada) could be disenfranchised by the changes. Now there could be assets maintained in Canada but they could be released. Will the policyholder be told is the question. Moreover, again based on the Winding-up and Restructuring Act, assets in Canada may well not be accessible to such policyholders because the risks were not insured in Canada.
Proactive renewing of arrangements, so that they are in accordance with the Advisory, may be a way to mitigate the concerns with the retrospective nature of the legislative and regulatory shift. According to the OSFI December 19, 2008, "Note to Cedants", this approach is particularly important for Cedants who have reinsured with foreign reinsurers (for more on this point, please see the discussion on reinsurance at the conclusion of this Bulletin).8
According to OSFI's letter dated December 19, 2008, regarding "Part XIII of the Insurance Companies Act", it is the companies responsibility to exercise due diligence in identifying risks located outside Canada, but were insured in Canada prior to the coming into force of the new Part XIII.9 This process is to be complete by December 31, 2010.
In order to monitor the implementation process, OSFI is requiring foreign companies to submit four quarterly reports for 2009-2010. According to OSFI:
"The progress review will include a discussion on the foreign company's assessment of its readiness to implement amendments to Part XIII, any challenges it envisions and steps it plans to take on resolving these issues."
OSFI also notes that "foreign companies that are not taking sufficient steps and/or making progress in identifying the insured risks subject to Part XIII may be subject to further supervisory actions to address these concerns."
B: Affect To Canadian Business
OSFI is very interested to know how the transition will affect Canadian business. The following questions were posed by OSFI in their April 29, 2008 Letter from Philipe-A. Sarrazin, Legislation and Policy Director, OSFI.
- Does your head office plan to alter their Canadian business model, including their Canadian branch operations?
- What are the specific measures that have been and/or will be taken in respect of your Canadian branch operations in order to meet the above deadline, and what is your schedule for implementation?
- Do you foresee any material change in the amount of assets that you will be required to maintain in trust?
- Do you or your head office have any questions regarding specific challenges you are facing during your implementation of the amended Part XIII.
Some commentators have suggested that, at the very least, a 1 to 2 year transition period is necessary.
Implementation Instructions: Amendments To Part XIII Of The Insurance Companies Act
OSFI has attempted to address the concerns about implementation in the December 2008 Implementation Instructions, Amendments to Part XIII of the ICA.10 These instructions provide guidance with respect to the requirements under the new subsection 578(5) of the ICA, and provide the procedure companies will use when applying for a capital/asset credit (i.e. a risk on the books is presumed reinsured in Canada, but it was actually reinsured outside Canada). What follows is a brief summary of these instructions. It is expected that a review by OSFI of any submissions will take anywhere from several to many weeks depending on the circumstances.
A: Requirements When Insuring In The Course Of A Foreign Company's Business In Canada
For predictability purposes, the new subsection 578(5) of the ICA will require foreign companies to set out clearly when they are insuring in Canada a risk. According to the Implementation Instructions:
"A foreign company will, in respect of risks it insures in Canada, be required to set out in legible characters in all premium notices, applications for policies, and policies, a statement that the document was insured or made in the course of its insurance business in Canada."
Appendix A to the Implementation Instruction provides wording that OSFI feels would fulfill the requirements of 578(5) of the ICA. The requirements under subsection 578(5) will provide certainty for policyholders/cedants attempting to determine if their risk has been insured in Canada. As a result, according to OSFI:
"As a matter of best practice, a foreign company is encouraged to take these steps (i.e. the setting out of the statement in accordance with 578(5)) prior to the coming into force of the new subsection 578(5) of the ICA."
B: Eligibility For A Capital/Asset Credit And Reinsurance
According to OSFI:
"A federally regulated insurance company or society, including a foreign company in respect of its insurance business in Canada, (FRI) that reinsures its risk with a foreign company may be eligible for a capital/asset credit only where the foreign company reinsures in Canada those risks or provides collateral as required in the capital/asset adequacy guidelines. In order to help FRIs determine whether they were reinsured in Canada, new subsection 578(5) of the ICA will require a foreign company, in respect of risks it reinsures in Canada, to set out in all premium notices, applications for policies and policies (which may include cover notes) a statement that the document was issued or made in the course of its insurance business in Canada."
Note that "in cases where the cover note/offer letter/quotation can neither be considered an application for a policy nor a policy, the capital/asset credit will only be available where:
- the reinsurer includes, in the cover note/offer letter/quotation:
- a statement that the reinsurer intends to issue the policy under negotiation in the course of its insurance business in Canada, and
- that it will take measures to ensure that the cedant's risks will be reinsured in Canada in accordance with the Advisory."
C: Risks On The Books At January 1, 2010
- OSFI will presume all risks reported on the books of a branch as of January 2010 to have been insured or reinsured in Canada.
- OSFI will entertain requests to remove some or all of the risks.
D: Procedures For Request
Amendments must have come into force, and the foreign company must have filed the audited OSFI Annual return for 2009. Then requests must be made in the following way:
- The foreign company gives its relationship manager an affidavit
signed by a Senior Officer who is directly or indirectly
responsible for Canadian operations, stating:
- All risks on the books of the Canadian branch, as reported in the Annual Return for 2009 have been kept on its books as of January 1, 2010, and where applicable, have been reported in its most recent 2010 Interim Return.
- The foreign company has completed the process whereby it
exercised due diligence to identify all liabilities in respect of
risks located outside Canada that were insured or reinsured in
Canada prior to January 1, 2010, has recorded the liabilities in
respect of those risks in its Canadian branch's books and,
where applicable, has reported those liabilities on its most recent
2010 Interim Return filed with OSFI.
OSFI expects foreign companies will have internal controls in place to ensure due diligence is exercised. However, OSFI would not expect the foreign company to engage in a detailed review where the benefits are immaterial and the cost of exercising the due diligence are significantly disproportionate to the benefits.
- All other liabilities in respect of risks insured or reinsured in Canada since January 1, 2010 in accordance with the Advisory, regardless of the location of those risks, have been reported on the books of the foreign company's Canadian branch since January 1, 2010.
- The foreign company applied the Advisory to its situation in accordance with Appendix I (see step 2, below).
- The foreign company has identified the portion of risks
mentioned in the first bullet point above as having been insured or
reinsured outside Canada (as per the Advisory), and has accurately
reported the risks mentioned in bullets one, two and three, above,
as well as the vested assets maintained in respect thereof.
- The company supplies the relationship manager with a detailed description of the process it followed (included in the Affidavit as Appendix I).
- The foreign company supplies the relationship manager with a
statement (as Appendix II to the affidavit), showing the following
- all liabilities in respect of risks located outside Canada that were added to the branch's books in accordance with the Advisory. It is unclear if this relates to "in force" risks only, or if this also includes expired risks;
- the amount of vested assets the branch holds for those risks (does this include IBNR? If so, it will be difficult to discern liability for expired risks);
- all liabilities in respect of risks located in Canada that were insured or reinsured by the foreign company outside Canada prior to January 1, 2010 (note that these policies have already been the subject of the Head Office Affidavit executed by the Chief Executive on an annual basis. Furthermore, once reported, they would have been in the normal course of business, as companies most likely do not keep separate records of these);
- the amount of vested assets the branch holds for those risks (again, this will present problems in the context of IBNR);
- all liabilities in respect of risks located in Canada that were insured in Canada by the foreign company at the time the request is made; and
- the amount of vested assets the branch holds for those
- In respect of reinsurance, the company must then obtain authorization from its relationship manager to proceed to the next steps.
- Where the request is attributed in part to risks reinsured
outside Canada, the foreign company sends written notification to
ceding FRI's that:
- it considers the liabilities in respect of those risks to have been reinsured outside Canada and provides an explanation as to why;
- it intends to request OSFI's approval to remove the liabilities in respect of those risks from its Canadian books (i.e. assets will no longer be vested in trust in Canada for the benefit of the ceding FRI);
- if OSFI approves the FRI's Request, OSFI will thereafter consider the foreign company to be an "unregistered reinsurer" with respect to the FRI's reinsurance; and
- it requests the ceding FRI to raise with the foreign company,
within 30 days of receipt of the notification, any objection.
- Where the request is attributed in part to risks reinsured
outside Canada, the foreign company sends confirmation to its RM
- Step (5) has been completed; and
- no objections were received; or
- any objection was satisfactorily addressed.
Although these Implementation Instructions are instructive, they do not deal with all concerns.
How will this process affect expired policies? It could be impossible to identify all of these and how they were originally negotiated.
What about situations where there are outstanding claims as of December 31, 2009? The majority of most insurers reserves are comprised of IBNR, which by definition, cannot attach to any identifiable policy, again making it very difficult if not impossible to determine if it can be reduced due to the changes to Part XIII. To deal with this situation, the branch must retain the right to take the positions they were not Canadian risks or the insurance activities were not in Canada when the claim is reported, which could be long after January 1, 2010. As the branch was never required to post a reserve for "out of Canada risk" how will the actuaries develop an IBNR for that exposure under the new Part XIII for business that was insured in Canada before the new Part XIII comes into force?
Generally, it is our belief that OSFI will be reasonable about these matters.
Special Cases - The Following Are Areas To Watch
A discussion paper has been released by OSFI that addresses a wide range of reinsurance issues. One subject is collateral requirements that are applied to unregistered reinsurance activities.
Reinsurance regulations will be reviewed as a result of changes to Part XIII, and generally. The road to a system of mutual recognition for reinsurance supervision, as debated in other jurisdictions, and its impact in Canada, is part of the review.
The December 19, 2008 "Note to Cedants" addresses the fact that "in conjunction with the coming into force of Part XIII, there will be a change in how OSFI will administer the credit for reinsurance that a Cedant can claim." OSFI's "Implementation Instructions" address the process for requests by a foreign company to remove some or all liabilities from its books.
What is the implication of Part XIII where no request is made by the foreign company to remove some or all liabilities from its books? As the "Note to Cedants" highlights, in this circumstance, no notice will be given to the Cedant. This may be problematic in the context of a winding-up or restructuring:
"In the event of a winding-up of the Canadian branch, the Winding-up and Restructuring Act may not grant the Cedant a right to make a claim on the assets that the foreign company has vested in Canada. As such, OSFI is of the view that, in the interest of protecting both Cedants and their policyholders, Cedants should determine whether risks ceded to a foreign company were reinsured outside Canada."
The Note goes on to caution that where risks have been reinsured outside Canada:
"a Cedant should not take a credit unless it holds funds as specified in the capital/asset adequacy guidelines. In that regard, OSFI expects Cedants to review cessions to foreign companies to determine whether those risks have been reinsured in or outside of Canada in accordance with the Advisory... In case of uncertainty, Cedants may wish to take the opportunity in 2009 to renew arrangements in a way that would meet the indicia provided in the Advisory".
It would be helpful if provincial regulation would work with this new regime, but often it does not.
In the Advisory OSFI cautions that a foreign insurer that insures outside Canada a risk may nonetheless be required to obtain a license under one or more of the insurance statutes of the provinces/territories in Canada with respect to that risk. For example, some of these statutes require a foreign insurer to obtain a license merely to promote its products in, insure a person domiciled or resident in, or provide insurance coverage on a property situated in the province/territory.
Note the Implementation Instructions: "FRI's are reminded that provincial/territorial and OSFI requirements may differ. As such, FRI's are expected to communicate with provincial/territorial authorities in that respect."
As stated above, it is our view that this advice better comes from lawyers experienced in advising a client as to how their business model can best address the various provincial/territorial requirements.
* The authors acknowledge the assistance of Emmeline Morse, student-at-law.
1. Where appropriate, exact language from the Advisory and other OSFI documentation has been used in this memorandum. A copy of the Advisory can be found at the following website: http://www.osfi-bsif.gc.ca/osfi/index_e.aspx?DetailID=524. Please note that the Revised Advisory is not yet posted on the OSFI website. This memorandum is based on the Revised Advisory, and as such, there may be discrepancy between what is stated in this memorandum and what appears in the original OSFI Advisory available online.
2. F.L. Smidth & Co. v. F. Greenwood (1922), 8 TC 193 (HL) at p. 204.
3. This document can be found at: http://www.cra-arc.gc.ca/E/pub/gi/notice194/notice194-e.html
4. Janet Walker and Jean-Gabriel Castel, Canadian Conflict of Laws 6th Edition (LexisNexis, 2005), pg. 31-5.
5. Imperial Life Assurance Co. of Canada v. Colmenares,  S.C.R. 443 (SCC) at para. 15
6. The OSFI Rulings can be found at: http://www.osfi-bsif.gc.ca/osfi/index_e.aspx?DetailID=526
7. This document can be found at: http://www.osfi-bsif.gc.ca/osfi/index_e.aspx?ArticleID=2729
8. This document can be found at: http://www.osfi-bsif.gc.ca/osfi/index_e.aspx?ArticleID=2727
9. This document can be found at: http://www.osfi-bsif.gc.ca/osfi/index_e.aspx?ArticleID=2727
10. This document can be found at: http://www.osfi-bsif.gc.ca/osfi/index_e.aspx?ArticleID=2727
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.