In 2020, there were numerous changes to regulation of the insurance sector in Canada, both in response to COVID-19 and in keeping with regulators' long-term plans. This article provides a recap of some of the major changes that insurance companies and other industry participants should keep in mind in 2021.
1. REGULATORY CHANGES
Saskatchewan's New Insurance Legislation
The Insurance Act (Saskatchewan) and its regulations came into force on January 1, 2020. The new Act created new licensing categories, new rules regarding fair and unfair practices, and rules regarding self-evaluative audits.
The new legislation creates a licensing regime for insurance intermediaries, which now includes the concepts – and specific regulation – of managing general agents (MGAs) and third party administrators (TPAs). Saskatchewan is the first province/territory in Canada requiring a license to act as an MGA or TPA. An MGA is defined as an insurance agent that manages all or part of the business of an insurer and carries out specific activities on behalf of that insurer, examples of which are provided in the legislation. Once licensed, MGAs have the authority to sponsor selling agents, and are obligated to perform ongoing monitoring of the persons they sponsor. A TPA is defined in the new regulations under the legislation as "a business that, for compensation, carries out activities to administer a contract of insurance on behalf of an insurer, other than solely clerical activities, but does not include a business that is licensed as an insurance agent or managing general agent."
Further, in order to assist with the transition to the new legislation the Financial and Consumer Affairs Authority of Saskatchewan (FCAA) is developing guidelines and interpretation bulletins to help insurers understand the FCAA's expectations.
Fair and Unfair Practices
The new legislation sets out prohibitions on unfair practices and requirements for fair practices.
Regarding unfair practices, the new legislation prohibits insurers, insurance intermediaries and adjusters from: making false or misleading statements, representations or advertisements; engaging in tied selling practices; performing any unfair, misleading, deceptive, fraudulent or coercive acts or practices; and making any statement or committing any act prohibited by regulation. To date, the new regulations have not proscribed any applicable statements or acts. There is also a prohibition on insurance intermediaries providing gifts, payments or anything of value as an inducement to purchase insurance, except if such gift is $25 per year or less.
Regarding fair practices, the new legislation requires: insurers, insurance intermediaries, and adjusters to advise policyholders suffering a loss that they have the right to choose a service provider to make repairs; insurers of life and accident and sickness insurance, other than contracts of group insurance or creditor's group insurance, to provide consumers with a 10-day right of rescission and corresponding right to return of premiums in their contracts of insurance; insurers to notify claimants of applicable limitation periods; and insurers to advise policyholders of their claim resolution options in the event a dispute.
The new legislation creates a process by which the Superintendent may request that an insurer conduct a self-evaluative audit in accordance with the new regulations. An "insurance compliance self-evaluative audit" is defined as an evaluation, review, assessment, audit, inspection or investigation conducted by or on behalf of an insurer, for the purpose of identifying or preventing non-compliance with, or promoting compliance with, legislation, guidelines or industry, company or professional standards. The audit must produce a document containing recommendations and analytical information, and a copy must be provided to the Superintendent. Documents produced during the self-evaluative audit process are privileged. However, such privilege does not apply in a proceeding against the insurer commenced by the Superintendent.
2. REGULATORY TRENDS
The Canadian Council of Insurance Regulators (CCIR) stated that one of its priorities was to partner with industry stakeholders to identify opportunities to increase regulatory and supervisory harmonization where feasible and appropriate. Specifically, CCIR has pledged to: work with industry stakeholders to identify specific differences of importance within the regulatory framework to work toward greater consistency in approach and/or harmonization across jurisdictions; and partner with industry to develop, finalize and monitor progress when implementing of initiatives such as the Guidance on Conduct of Insurance Business and Fair Treatment of Consumers (FTC Guidance), the annual statement on market conduct, Fintech, and travel insurance. The FCAA and the Financial and Consumer Services Commission of New Brunswick (FCNB) have both stated, in their strategic plans, that increasing harmonization with other Canadian jurisdictions was among their goals.
CISRO/CCIR Fintech Advisory Hub
The Fintech Working Group (FWG) published the Fintech Advisory Hub on CCIR's and the Canadian Insurance Services Regulatory Organization's (CISRO's) websites on May 7, 2020. The hub will serve as a portal for interested entities to seek and obtain clarification on what would be required to operate or provide their innovative insurance products or services in one or more jurisdictions across Canada. The FWG is analyzing a list of future projects and will embark on priority items that are in accordance with CCIR's 2020-2023 Strategic Plan. For more detail on the Advisory Hub, please refer to McCarthy Tétrault's article on this initiative here.
CCIR Joint Regulatory Project with CSA on Segregated Funds
CCIR is collaborating with the Canadian Securities Administrators (CSA) on a joint regulatory project to ensure a consistent approach that discloses comparable information relating to performance and full costs of similar financial products such as segregated funds and mutual funds. Insurance policy holders will be able to directly compare the returns of these products in their investment portfolio and have more detailed information to guide their financial decisions. The joint CCIR/CSA working group intends to consult with the Canadian Life and Health Insurance Association (CLHIA) on this.
FSRA's Key Areas of Market Conduct Assessment
On September 17, 2020, Ontario's insurance regulator the Financial Services Regulatory Authority (FSRA) shared its 2020-2021 key areas of market conduct assessment for the Life and Health Insurance Sector. All FSRA-licensed life insurance companies in Ontario may be subject to a supervisory or thematic review. FSRA identified two key areas of assessment: (1) implementation of the FTC Guidance principles across distribution channels, in collaboration with CCIR and its member regulators; and (2) review of the relationship between insurance companies and MGAs. For more detail on FSRA's conduct assessment priorities, please refer to McCarthy Tétrault's article on this initiative here.
FSB published its 2020 Resolution Report
On November 18, 2020, the Financial Stability Board (FSB), an international body that monitors and makes recommendations about the global financial system, published its 2020 Resolution Report on its progress in implementing policy measures to enhance the resolvability of systemically important financial institutions. With respect to insurance, the FSB stated that it continues to monitor implementation of the Key Attributes for the insurance sector. Progress on implementation of national insurance resolution regimes has slowed down, with no significant reforms, such as finalization of new or enhanced insurance resolution frameworks, reported in this recent cycle. A number of jurisdictions have identified systemically important insurers for purposes of recovery and resolution planning. Key areas of attention for FSB work on resolution planning for insurers are intra-group interconnectedness and funding in resolution.
3. COVID-19 RESPONSES
In response to the COVID-19 pandemic, regulators extended the deadlines for certain filing requirements. In addition, the Office of the Superintendent of Financial Institutions (OSFI) put in place two temporary measures in respect of federally-regulated insurers: the capital treatment of loan, lease, and premium payment deferrals; and adjustments to the LICAT interest rate risk requirements. Please refer to our articles detailing these measures here.
4. Things to Look Forward to in 2021
OSFI released drafts of guidelines E-4 and B-2
OSFI released and launched public consultations on draft Guidelines E-4 and B-2 on October 27, 2020 and November 26, 2020 respectively. Draft Guideline E-4 proposes updates to the governance and supervision of foreign entities operating in Canada on a branch basis. Comments were due on draft Guideline E-4 on December 18, 2020 and OSFI expects to issue the final Guideline E-4 in the spring of 2021. Draft Guideline B-2 addresses large exposures by property and casualty insurance companies. OSFI is accepting comments on draft Guideline B-2 until March 18, 2021. For details on each draft Guideline, please refer to McCarthy Tétrault's articles on E-2 and B-2.
OSFI's Activities with respect to IFRS 17 – Insurance Contracts
OSFI's activities with respect to implementing IFRS 17 underwent adjustments due to COVID-19. In its March 27, 2020 letter the generally addressed operational issues stemming from COVID-19, OSFI confirmed that it would suspend various activities that involved OSFI's IFRS 17 Project, specifically: the public consultation deadline on Draft IFRS 17 Insurance Returns; its semi-annual progress reporting on the implementation of IFRS 17; and the directed consultation on draft capital tests including the launch of a Quantitative Impact Study (QIS) updated for IFRS 17 (which had been previously scheduled for June 2020).
On July 13, 2020, OSFI announced that it would gradually restart policy development work in the fall of 2020, specifically: the public consultation on Draft IFRS 17 Insurance Returns was extended to August 31, 2020; the IFRS 17 semi-annual progress reporting submission requirement would resume September 30, 2020; and directed consultations on capital tests including conducting QIS exercises, would resume in the fall of 2020.
On August 17, 2020, OSFI provided an update regarding the impact of COVID-19 on the IFRS 17 Project and the International Accounting Standards Board's (IASB) deferral of the IFRS 17 effective date to January 1, 2023. It stated that once the Canadian Accounting Standards Board incorporates amendments to IFRS 17 into the CPA Canada Handbook, it would revise its Accounting Advisories on IFRS 17 and deferral of IFRS 9 and update the timeline for the key milestones communicated in its June 27, 2018 capital letter accordingly.
Bank of Canada and OSFI launched pilot project on climate risk scenarios
On November 16, 2020, the Bank of Canada and OSFI announced that they would launch a pilot project that would use climate-change scenarios to better understand the risks to the financial system posed by a transition to a low-carbon economy. A small group of institutions from the banking and insurance sectors will participate voluntarily in the project: Intact Financial, Manulife, Royal Bank of Canada, Sun Life Financial, TD Bank Group, and The Co-operators Group Limited. The Bank of Canada and OSFI plan to publish a report on their findings by the end of 2021.
New Approach for Determining Regulatory Capital Requirements for Segregated Fund Guarantee (SFG) Risk
On November 26, 2020, OSFI published a letter detailing how it will develop a new approach to determine capital requirements for SFG risk, which will reflect the International Financial Reporting Standard 17 – Insurance Contracts (IFRS 17) that will become effective on January 1, 2023. Current regulatory capital requirements for SFG risk are determined using an approach that was implemented in the early 2000s. Under IFRS 17, requirements are calculated using a factor-based methodology or, if approved for use by OSFI, an insurer's own internal model. The approach is based on calibrations that were developed several years ago and relies on IFRS 4 (i.e. the Canadian Asset Liability Method, "CALM"). Also, over the years, SFG product offerings have evolved and, in some cases, are not entirely addressed with the current methodology. The new approach is being designed to address these issues. Under the new approach, capital requirements will be calculated by applying shocks to SFG liabilities. Internal models that were previously approved for use by OSFI to calculate SFG capital requirements will no longer be permitted for this purpose, once the new approach is implemented.
Life Insurance Capital Adequacy Test Advisory (LICAT)
There were several developments with respect to the LICAT guideline.
On February 26, 2020, OSFI proposed to update the LICAT framework. OSFI stated that it had identified an aspect in the LICAT that, due to the methodology, could cause some unwarranted volatility in interest rate risk (IRR) requirements for par. Changes to the LICAT guideline were proposed and communicated via a public consultation.
On March 27, 2020, because of the COVID-19 pandemic, OSFI announced that the public consultation and finalization of the proposed updates were put on hold.
On April 9, 2020, OSFI introduced a smoothing technique to mitigate possible unwarranted volatility in the LICAT calculation for IRR for par business. As the measure is sufficient in addressing unwarranted volatility in the test and considering feedback from stakeholders, OSFI decided to retain this measure until at least December 31, 2023.
On November 27, 2020, OSFI released an advisory to the LICAT guideline. The advisory formally includes in the framework a smoothing technique for determining IRR requirements for participating business that OSFI introduced in April 2020. The advisory also includes a clarification to OSFI's expectations related to negative DSRs (Dividend Stabilization Reserves or other similar experience leveling mechanisms). The advisory became effective January 1, 2021.
We understand that OSFI intends to publish a revised LICAT 2023 Guideline for public consultation in June 2021.
Ontario Plans to Allow Credit Unions to Sell Insurance in Branches, on Websites
Ontario credit unions will soon be able to promote and sell insurance in branches and on their websites. These new permissions are contained In the Ontario Government's omnibus budget bill An Act to implement Budget measures and to enact, amend and repeal various statutes (2020 Budget), which repealed the former Credit Unions and Caisses Populaires Act, 1994 and replaced it with the Credit Unions and Caisses Populaires Act, 2020 (Credit Union Act). The bill received royal assent on December 8, 2020, but the new Credit Union Act will not come into force until a day to be named by proclamation of the Lieutenant Governor, along with enabling regulations.
As did the prior legislation, the new Credit Union Act generally sets out the rules that govern credit unions, including in respect of the establishment of credit unions and their membership, capital structure, governance and business powers. The explanatory note in the 2020 Budget states that changes are made to give the FSRA new rule-making powers over certain matters in relation to its function as the sector regulator. In addition, the Lieutenant Governor in Council is given broader regulation-making power, including all matters in respect of which the FSRA may make rules. We expect that regulation of insurance distribution by credit unions will be made by both the Lieutenant Governor in Council and FSRA.
In the 2020 Budget, the government explained that these changes were an effort to modernize the credit union sector. It stated that:
The new framework would remove outdated red tape and increase choice and convenience, including removing restrictions that currently limit credit unions' ability to invest and offer services to consumers. This would include allowing credit unions to sell insurance within branches and on their websites, as well as provide opportunities for insurance intermediaries and credit unions to seek mutually beneficial business relationships that could reduce costs.
The Ontario Government stated that it will continue to work closely with stakeholders on the necessary regulations and with FSRA to develop rules into 2021. It plans for the new framework to come into force in 2022 to provide the sector with sufficient time to transition to new requirements.
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