Law Times’[/span] Jan. 14 Insurance Focus section included a story called Changes Effective Jan. 1, 2009.
Ourarticle stated that, “Current law submits foreign insurers withCanadian branches to onerous compliance burdens.” We went on to quoteCarol Lyons of Lang Michener LLP’s Toronto office as stating that beinglicensed in Canada subjected foreign insurers company to variousregulatory burdens.
We erred in failing to clarify the distinction
between foreign insurers with Canadian subsidiaries and foreign
insurers with Canadian branches. Ms. Lyons’ point was that compliance
for branches was “not all that much less stringent” than compliance for
subsidiaries because, among other things, foreign insurers with a
branch structure in Canada became subject to OFSI oversight and
adherence to the federal Insurance Companies Act.
According to some observers, Bill C-37, which effects changes to Part
XIII of the Insurance Companies Act, relating to foreign insurers,
won’t make much practical difference on the ground.
“OSFI’s [Office of the Superintendent of Financial Institution, the federal insurance regulator] interpretation of the changes are unnecessarily complicated and hard to work with, meaning that the legislation will effect only a mild amelioration of some unfortunate hassles for foreign insurers that have Canadian branches,” says Paul Belanger of Blake Cassels & Graydon LLP’s Toronto office.
“The changes will, however, allow foreign insurers to better manage their record-keeping regime under Canadian law. It will also allow them to structure certain complicated commercial risks that have some Canadian component without becoming subject to onerous licensing requirements.”
The changes, not expected to be effective until Jan. 1, 2009, are intended to clarify the circumstances under which foreign insurers will have to register in Canada, and, if registered, the extent to which their business will be subject to the reporting, vesting, and other aspects of the Insurance Companies Act.
Current law submits foreign insurers with Canadian branches to onerous compliance burdens.
“The requirement to be licensed in Canada is a rigmarole, because then the company, among other things, has to have a Canadian board and becomes subject to OSFI oversight,” says Carol Lyons of Lang Michener LLP’s Toronto office.
Bill C-37 now limits these requirements, so that only foreign insurers who, in legal terms, are “insuring in Canada a risk” will become subject to these burdens.
“The amendments mean that fewer companies will need Canadian licenses if they are doing a limited amount of business in Canada,” Lyons says.
OSFI has identified four criteria to determine whether a risk is insured in Canada. They involve consideration of:
• the location where the foreign insurer and the policyholder interact in insuring the risk;
• representations from the foreign insurer as to where it will interact with the policyholder, with regard to policy-related performance activities, and with regard to its decision-making on policy issues;
• the jurisdictions with which the policy is most “closely connected”;
• where the foreign insurer promotes its insurance products, other than in the course of soliciting applications.
The location where the foreign insurer and policyholder interact in insuring the risk will carry the most weight, and will be determined with reference to six criteria:
1. the location of the policyholder when the insurer solicits the application;
2. the location where the foreign insurer receives the application;
3. the location of the individuals negotiating the terms of the policy on behalf of the foreign insurer;
4. the location of those who communicate offers to provide or renew coverage;
5. the location where the insurer receives acceptance of offers to provide or renew coverage;
6. the location where the policyholder receives the policy.
OSFI will generally conclude that a foreign insurer is “insuring in Canada a risk” when:
• two or more of the above six activities occur in Canada;
• one or more of the activities occurs in Canada, the policy risks are located in Canada, the policy terms are governed by Canadian law, and the insurer receives the premium payments in Canada;
• one of the activities included in items 2-6 occurs in Canada, the foreign insurer promotes its products primarily in Canada, and the insurer represents to policyholders that it will interact with them from Canada, in relation to the policies; and
• one of the activities in items 2-6 occurs in Canada, the foreign insurer promotes its products primarily in Canada, and the policy is “most closely connected” to Canada.
Conversely, OSFI will generally conclude that a foreign insurer is “insuring outside Canada a risk” if none of the six activities listed above occurs in Canada. OSFI will reach the same conclusion if only one of the six activities occurs in Canada and there is no significant promotion of the products in Canada, the policy is “most closely connected” to a foreign jurisdiction, and the foreign insurer interacts with the insured from outside Canada.
Lyons believes that the amendments will quell complaints that foreign insurers were avoiding insuring risks for which coverage was not available in the Canadian market, due to it being too expensive from a compliance perspective.
She cautions, however, that there are disincentives for Canadians to insure with unlicensed foreign insurers.
“These include the absence of regulatory and vested-asset scrutiny from Canadian regulators, and issues relating to federal and provincial excise taxes,” Lyons says.
“Although reinsurance is exempt from federal excise taxes, cedents that place business with unregistered reinsurers are not entitled to receive credit for the reinsurance, except where assets are posted in Canada.”
In August 2007, OSFI notified foreign companies with branches in Canada that, after the amendments take effect, they will not have to report risks insured outside Canada on their books. Branches can also apply for the release of “excess” vested assets.
Conversely, OSFI advised that foreign companies who fail to account for risks assumed outside Canada - on the books of their Canadian branches, before the amendments take effect - will have to vest assets in Canada for those risks.
Despite its liberalizing effects, the new scheme will create problems for some foreign insurers who have invested in Canadian branches. Belanger posits the example of a foreign insurer that locates all its marine underwriting experts in Toronto, from where they do all the company’s global marine underwriting.
“Under the current regime, the insurer wouldn’t have to report coverage for risk outside Canada,” he says, “but because the new approach focuses on where the underwriting activity occurs, they would now have to report such coverage.”
The strongest objections to the amendments came from groups who feared the legislation would allow foreign insurers to sell mass-market or consumer policies (such as automobile and property coverage) without accountability to Canadian regulators.
But Belanger says that’s a red herring.
“Canada has a wide provincial regulatory net that supplements the federal net,” he explains. “Because provincial regulations require licensing in a broad range of circumstances, there’s no way that a foreign insurer could sell mass-market policies in Canada, in a practical way, without being licensed.”