In 2021 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. There were also global ESG-related initiatives in the insurance sector, which Canada took part in. This article provides a recap of some of the major changes that were made to regulation of insurers in Canada in 2021 and highlights some matters that insurers and other industry participants should watch in 2022.
- REGULATORY CHANGES
OSFI Released Final Guideline Applicable to Foreign Banks and Insurers in Canada
On June 28, 2021, Canada's Office of the Superintendent of Financial Institutions ("OSFI") released its final version of Guideline E-4, Foreign Entities Operating in Canada on a Branch Basis ("Guideline E-4"). Guideline E-4 replaces previous OSFI guidelines E-4A Role of the Chief Agent and Record Keeping Requirements (applicable to foreign insurers) and E-4B Role of the Principal Officer and Record Keeping Requirements (applicable to foreign banks).
Through new Guideline E-4, OSFI places greater emphasis on its expectations of foreign entities operating in Canada and less emphasis on the individual role of the chief agent of a foreign insurer or principal officer of a foreign bank. In particular, Guideline E-4 addresses three key areas: branch management, administration of the business in Canada and supervision of branches.
While Guideline E-4 took effect immediately, OSFI implemented a six-month transition period with the expectation of full compliance by all foreign banks and insurers operating in Canada on a branch basis by January 2022.
For more detail on Guideline E-4, please refer to our article here.
OSFI Introduced Changes to Modernize the Vested Asset Regime for Foreign Insurance Branches
On March 29, 2021, OSFI introduced three proposed amendments to modernize its Securities Administration and Approvals Reporting Unit ("SAAR") regime in order to reduce the administrative burden on foreign insurance companies carrying on business in Canada through a branch.
Under the Insurance Companies Act (Canada), a foreign insurance company is required to vest in trust in a Canadian financial institution a margin of its business assets over its liabilities in respect of its insurance business in Canada. OSFI has created a standard form agreement, the Standard Trust Agreement ("STA"), to establish the relationship among OSFI, the foreign company, and the financial institution. The proposed amendments include changes to the STA forms and other forms under the SAAR regime.
OSFI was expected to publish its final amendments and implementation in spring 2021, but no updates have been issued yet. We will be watching in 2022 to see when these amendments will be rolled out.
For more detail on the proposed amendments, please refer to our article here.
Amendments to the Minimum Qualifying Rate for Uninsured Mortgages
OSFI announced that, effective June 1, 2021, the minimum qualifying rate for uninsured mortgages will be the greater of (a) the mortgage contract rate plus 2 percent or (b) 5.25 percent. Uninsured mortgages are residential mortgages with a down payment of more than 20 percent. OSFI also announced that it is launching a new process to review and communicate the qualifying rate annually at a minimum.
OSFI's consultation process on the benchmark for the qualifying rate for uninsured mortgages, which launched in early 2020, made it clear that there are a wide range of issues facing homebuyers including high indebtedness, rapid rise in home prices, housing supply and competitive bidding.
More details regarding the results of the consultation can be found here.
Alberta Passed Captive Insurance Company Legislation
On December 2, 2021, Alberta's Bill 76, the Captive Insurance Companies Act (the "Captives Act") received Royal Assent.
Alberta's introduction of a captive insurance regime comes as several Alberta-based businesses, including those in the energy, agriculture, forestry and manufacturing sectors have struggled to obtain insurance in the current market. The Captives Act sets out rules for forming, operating and dissolving a captive insurer in Alberta. It also lays out the requirements to ensure that Alberta-based captive insurance companies act in accordance with good financial and corporate governance principles.
The Captives Act will come into force on proclamation, which is expected to occur in 2022, after regulations are prepared and released.
For more detail on the Captives Act, please refer to our article here.
- REGULATORY TRENDS
CCIR Fair Treatment of Customers Review
In October 2021, the Canadian Council of Insurance Regulators ("CCIR") released its Fair Treatment of Customers ("FTC") Consolidated Observations Report (the "FTC Report"). The FTC Report provides a summary of key observations from the CCIR cooperative FTC reviews of insurance companies conducted between 2017 and 2021 to assess their business practices and whether FTC principles are being applied and followed across all distribution channels.
The FTC Report also provided observations from individual FTC reviews of insurance companies in their own jurisdictions based on FTC principles. The CCIR plans to continue to conduct entity-specific and systemic reviews to shed a light on some common industry issues and serve as a tool for insurers to achieve better consumer outcomes and protection. In particular, the FTC Report provides certain recommendations based on its observations in seven key areas:
- Corporate Governance and Culture in relation to FTC: Recommendations were made to clearly define and set the roles and responsibilities related to FTC, implement a formal process to periodically review and update FTC policies and procedures, report on FTC goals and indicators to senior management and ensure agents are informed of any changes made to the insurer's Code of Conduct.
- Agent Training and Outsourcing/Delegating Arrangements: Insurers were advised to review and update their contractual agreements and ensure that clear and specific expectations are outlined. The FTC Report also recommended that processes are put in place to ensure that independent agents are adequately trained and knowledgeable. Insurers were also advised to proactively monitor intermediaries who are assigned the responsibility of training agents.
- Incentive Management and Remuneration Structure: The FTC Report recommended that insurers review, monitor and update incentive programs to consider elements of FTC.1 Insurers were also advised to monitor incentive programs run by intermediaries to ensure consumer interests are considered and conflict of interest risks are adequately managed.
- Product Design, Marketing, and Advertising: Insurers were advised to implement formal policies to review and update their marketing and advertising materials on a regular basis. FTC components should be included in the product design and marketing procedures to ensure the product meets the consumers' needs and the information is clear, simple and not misleading.
- Information Provided to Consumers: Insurers were advised to ensure that all information provided to consumers is clear and readily accessible. Formal procedures should be implemented to guide agents and intermediaries on what information should be distributed to consumers.
- Claims Examination and Settlement: The FTC Report noted that, in some instances, the claims process was not explained in a complete and accessible manner. Accordingly, insurers were advised to ensure that any information about the claims process was conveyed in a clear, accessible and understandable manner.
- Complaints Examination and Dispute Settlement: The FTC Report noted that insurers' reporting of complaints was not being done in accordance with the CCIR Annual Statement on Market Conduct("ASMC"). Accordingly, insurers were advised to review and report all complaints in compliance with the ASMC requirements, as well as streamline and simplify their complaint handling procedures to ensure consumers have timely resolution of their complaints.
FSRA Consults on Proposed Rule on Unfair or Deceptive Acts or Practices
The Financial Services Regulatory Authority of Ontario ("FSRA") conducted multiple consultations in 2021 relating to its proposed rule on Unfair or Deceptive Acts or Practices ("UDAP").
The principles-based rule will replace the current UDAP regulation under Ontario's Insurance Act and aims to strengthen the supervision of insurance industry conduct by clearly defining the outcomes that are unfair or otherwise harmful to consumers, and aspires to not be a barrier to innovation as the current UDAP regulation is sometimes seen as being. The proposed rule will apply to all insurers, brokers, intermediaries, adjusters and other providers of goods and/or services engaged in the insurance sector in Ontario.
On December 20, 2021, FSRA submitted the UDAP rule to the Minister of Finance for final approval and the rule will take effect once proclaimed into force. The UDAP rule sent for the Minister's approval provides as follows:
- Defines UDAP to be conduct, including inaction or omission, which results in, or could reasonably be expected to, result in any of the listed outcomes, events or circumstances.
- The conduct, including action or omission, can be committed by:
- An agent, broker, adjuster, or insurer, or any director, officer, employee or authorized representative of such persons.
- Any person, or any director, officer, employee or authorized representative of such person who provides goods or services to a claimant which are fully or partially expected to be paid for through proceeds of insurance.
- An outcome, event or circumstance will be deemed to be reasonably expected if it would be expected by a reasonable person in that person's business or profession with full knowledge of all and any facts and circumstances that person knew about or, with reasonable diligence under the circumstances, ought to have known.
- The outcomes, events or circumstances that would fall under the
definition of UDAP include:
- Non-compliance with the Insurance Act and its regulations and rules.
- Unfair discrimination, including any contravention of the Ontario Human Rights Code.
- Unfair claims practices, including the unreasonable or unfair resolution or delay in the adjudication, adjustment or settlement of claims.
- Fraudulent or abusive conduct related to goods and services provided to a claimant.
- Unfair practices with regards to incentives, including certain inducements to insure.
- Misrepresentation with regards to information, materials or advice received by persons which a reasonable person would consider inappropriate, inaccurate or misleading, including persons being charged for any premium or fee other than as stipulated in a contract of insurance.
- Prohibited conduct in automobile insurance quotations, applications or renewals.
- An agent, broker or insurer providing a quote or renewal for automobile insurance from an insurer, and not offering the lowest rate available from amongst that insurer and its affiliated insurers.
FSRA's Innovation Office
In 2020, FSRA established an Innovation Office to facilitate financial services innovation in Ontario, a core part of its mandate. On October 21, 2021, FSRA released its first consultation document which sets out details regarding the Innovation Office and its role, the innovation process, "test and learn" environments and industry engagement and outreach.
While the framework of the Innovation Office produced following FSRA's consultation (the "Innovation Framework") will apply to all areas of financial services regulated by FSRA, the automobile insurance sector will be the first to use the new test and learn environments. FSRA may potentially use its new powers under section 15.1 of the Ontario Insurance Act effective January 1, 2022 to grant exemptive relief from provisions of the Insurance Act and regulations on the application of a person or entity where, in FSRA's CEO's opinion, it would not be prejudicial to the public interest.
- ESG DEVELOPMENTS
OSFI joined the International Network for Greening the Financial System
On November 30, 2021, OSFI announced its membership in the international Network for Greening the Financial System ("NGFS"). The NGFS is an international group of central banks and supervisors that share best practices and help to develop environment and climate risk management measures in the financial sector.
OSFI's membership in the NGFS signifies the Canadian financial sector's increasing commitment to the global effort to address climate-related risks. As part of the NGFS, OSFI will contribute time and resources to the further development of supervisory practices, risk assessment measures and action plans intended to prepare the global economy and financial system for the impacts of climate change.
OSFI has announced that it will communicate the next steps in its climate-related risk assessment work in early 2022.
For more details regarding OSFI's announcement, please refer to our article here.
IAIS Application Paper on the Supervision of Climate-related Risks in the Insurance Sector
OSFI's other international commitments in the insurance sector include participation in the International Association of Insurance Supervisors ("IAIS"), including membership in the Climate Risk Steering Group and collaborating with the United Nations-convened Sustainable Insurance Forum ("SIF") on the drafting of the Application Paper on the Supervision of Climate-related Risks in the Insurance Sector (the "Paper").
As the IAIS Executive Committee Chair noted, "Climate change poses a material and present risk to the insurance sector". Accordingly, the Paper is intended to provide insurance supervisors with concrete tools to further strengthen their efforts in assessing and addressing risks to the insurance sector from climate change. Key recommendations from the Paper include:
- Role of the supervisor: Supervisors should be assessing the relevance of climate-related risks to their supervisory objectives by collecting quantitative and qualitative information on the insurance sector's exposure to climate change.
- Corporate governance: Insurers are expected to integrate climate-related risks into their overall corporate governance framework, including risk management and internal control functions.
- Risk management: Climate-related risks should be considered in insurers' Own Risk and Solvency Assessment and insurers are expected to adopt appropriate risk management actions to mitigate any identified risks.
- Investment policy: Insurers should be assessing the impact from physical and transition climate risks on their investment portfolio, as well as on their asset-liability management. The use of climate-related scenario testing may assist in better identifying these risks.
- Disclosures: Insurers should disclose material risks associated with climate change in line with ICP 20 (Public Disclosure). Supervisors may use the Financial Stability Board Task Force on Climate-related Financial Disclosures framework when designing best practices.
IAIS Global Insurance Market Report Provided First Quantitative Study on the Impact of Climate Change on Insurers' Investments
In September 2021, the IAIS also published a special edition of its Global Insurance Market Report ("GIMAR"), which provided the first quantitative global study on the impact of climate change on the financial stability of the insurance sector. The GIMAR gathered quantitative and qualitative data from 32 IAIS members, including Canada, representing approximately 75% of the global insurance market.
Analysis was carried out on the data to better understand insurers' asset-side exposures to, as well as supervisors' views on, climate-related risks. For example, data analysis on insurers' asset-side exposures to climate risks shows that more than 35% of insurers' investment assets (including equities and corporate debt, loans and mortgages, sovereign bonds and real estate) could be exposed to climate risks. In addition, scenarios were developed to assess climate change impact on a forward-looking basis.
Overall, the report acknowledged that there is still little evidence of the magnitude of financial risks posed by climate change, especially at a cross-jurisdictional level, and that climate change scenario analysis is still a relatively new field of study. However, the report was a first global deep dive into the financial risks and climate change scenario analysis, and we expect that future editions of the GIMAR will take deeper looks at the impact of climate change on insurers' financial stability. Furthermore, the report highlighted the importance of supervisors in assessing how climate change may affect the insurance sector and developing an appropriate supervisory response.
Detailed recommendations can be found in the Application Paper on the Supervision of Climate-related Risks in the Insurance Sector. The IAIS will continue to work on climate-related risks by refining its data collection and analytical tools, and developing a more comprehensive analysis by considering other factors including insurance underwriting risk.
Bank for International Settlements Releases Working Paper About Pricing of Carbon Risk
In June 2021, the Bank for International Settlements released its working paper entitled "The pricing of carbon risk in syndicated loans: which risks are priced and why?" (the "Study"). A sample of syndicated loans was analyzed in order to answer the question of whether lead lenders price "carbon risk" (essentially, the financial risk presented by carbon emissions) into syndicated loans and, if so, how.
As we described in our article about the Study, the Study concluded that, while lenders have been pricing carbon risk into syndicated loans since the Paris Agreement on climate change in 2015, the evidence suggest that lenders are not fully internalizing the full extent of carbon risk and are only pricing borrowers' so-called "Scope 1"2 emissions, thereby failing to price a borrower's complete carbon footprint.
These conclusions are noteworthy for the business community generally and, in particular, for the project finance industry. At the same time, they should be viewed in the context of a dynamic and developing field of risk assessment, especially in the field of climate impact analysis.
As the true cost of carbon becomes increasingly clear, it is likely that risk premiums reflecting carbon risk will increase, and that they will capture Scope 2 and Scope 3 emissions,3 including those in the supply chain. Some lenders may choose to avoid high risk firms and projects altogether, while regulators may increase their scrutiny of insurers' exposure to high risk firms and projects, and concomitant financial risk.
- OTHER DEVELOPMENTS THAT WE ARE WATCHING IN 2022
Insurance Regulators Issue Draft Principles of Conduct for Insurance Intermediaries
On May 25, 2021, the Canadian Insurance Services Regulatory Organizations ("CISRO") published its proposed "Principles of Conduct for Intermediaries" to help ensure the fair treatment of customers in the life & health and property & casualty insurance sectors (the "Draft Principles"). The Draft Principles are intended to complement and supplement the Canadian Council of Insurance Regulators ("CCIR") / CISRO Fair Treatment of Customers (FTC) Guidance and are a resource for insurance consumers to better understand the conduct they should expect from intermediaries. CISRO also gathered and published feedback from various stakeholders on the proposed Draft Principles.
While there is no set date as to when the Draft Principles will be officially in place, we will be watching in 2022 to see how CISRO amends its Draft Principles to reflect the feedback it received and when the principles take into effect.
For more detail on the Draft Principles, please refer to our article here.
New Regulations to Support the New Ontario Credit Unions and Caisses Populaires Act, 2020 and Permit Credit Unions and Caisses Populaires to Distribute Insurance Products in Ontario
On November 24, 2021, the Ontario's Regulatory Registry launched a public consultation on three new regulations to support the new Credit Unions and Caisses Populaires Act, 2020.
One of the key regulations would permit credit unions and caisse populaires in Ontario to administer and promote certain types of incidental insurance.
As indicated in the 2020 Ontario Budget, the government intends to allow credit unions to work with licensed insurance agents, brokers and companies to provide additional types of insurance in branches and on their websites. The regulations provide protection for consumers and place parameters on the type of insurance credit unions can sell, the promotion of insurance, the location of the sale of insurance, referrals, sharing of consumer information and tied selling.
The proposed regulations are also intended to reduce administrative costs and red tape for credit unions. Comments regarding the consultation are due by January 10, 2022.
Ontario's Innovation Framework
As noted above, FSRA initiated a consultation in respect of Ontario's proposed Innovation Framework. In response to comments received, we expect FSRA to release an Innovation Framework in 2022.
Federal Ministry of Finance Initiatives Relating to Diversity of Directors and Members of Senior Management of Financial Institutions
As we described, Prime Minister Trudeau's mandate letter for the Minister of Finance identified a number of relevant areas for the Minister of Finance to focus on in her mandate, including adapting and applying to federally regulated financial institutions the Canada Business Corporations Act requirements to notify shareholders of information relating to the diversity of directors and members of senior management.
British Columbia Rules Relating to Insurance Distribution Through "Electronic Agents"
In 2020, the province of British Columbia enacted amendments to its Financial Institutions Act.
Among other things, these amendments permit the British Columbia Financial Services Authority to make rules in respect of insurance distributed through "electronic agents". No rules have yet been released for consultation by the public.
We are watching closely to see how the initial draft of these rules compares with the rules and procedures in Québec, which has a specific regulation in respect of online distribution of insurance products, along with other provinces updating their regulation in a similar fashion.
OSFI Updates to Guideline B-10, Relating to Outsourcing by Financial Institutions
OSFI indicated that Guideline B-10 is in the process of being updated and its scope will be expanded to capture other third-party provider arrangements beyond outsourcing. This will likely have material impacts on companies providing technology (including cloud-based services) to financially regulated financial institutions.
Priorities of Regulatory Authorities for the Upcoming Year
- OSFI: In its Departmental Plan for 2021-2022, OSFI indicated it is continuing to prepare for the implementation of the International Financial Reporting Standard (IFRS) 17, Insurance Contracts by January 2023.
- Ontario: FSRA released its statement of priorities earlier this year which, among other things, sets out FSRA's priorities in the insurance sector for 2022-2023. In the Property and Casualty/Auto Insurance sector (P&C), FSRA is focused on empowering and protecting P&C insurance consumers, with a focus on monitoring the auto insurance market and improving Ontario's auto insurance rate regulation framework, as well as implementing an insurance prudential supervisory framework and related guidance. In the Life and Health Insurance sector, FSRA has noticed an increase in insurers outsourcing functions across distribution networks and to intermediaries such as managing general agents. Accordingly, FSRA is focusing on publishing for consultation a proposed framework and supervisory approach for managing general agents. As indicated above, FSRA may also publish consultation guidance on FTC incentives in the upcoming year.
- British Columbia: The British Columbia Financial Services Authority's ("BCFSA") 2021/2022 regulatory roadmap sets out its regulatory guidance priorities for the next three fiscal years. In the insurance sector, the BCFSA is planning on releasing a CCIR Guidance Conduct of Insurance Business and Fair Treatment of Customers. Insurers will be required to adopt and implement this code of conduct with a target implementation in the first quarter of 2022. BCFSA has also indicated that it will launch a consultation on an operational risk guideline in 2022 as well as a consultation on a climate risk guideline in 2023.
1. CCIR members are currently in the process of developing an incentive management guidance, which will further clarify and guide this area.
2. Scope 1 emissions are direct greenhouse gas emissions that occur from sources that are controlled or owned by an organization (e.g., emissions associated with fuel combustion in boilers, furnaces, vehicles).
3. Scope 2 emissions are indirect greenhouse gas emissions associated with the purchase of electricity, steam, heat, or cooling. Scope 3 emissions are the result of activities from assets not owned or controlled by the reporting organization, but that the organization indirectly impacts in its value chain.
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