Bill C-37 has been passed by the Canadian Parliament, enabling the clarification of Part XIII of the Insurance Companies Act (ICA). Part XIII of the ICA covers every aspect of the insurance business that an authorised foreign insurer carries on in Canada, including the insurance in Canada of risks, record-keeping, and vesting of assets.
The key issue is the ‘clarification’ of the definition of “insure in Canada a risk” from the current location of risk/policyholder basis to one of location of underwriting. This has the effect that from 1 January 2010 all business written in Canada, according to the indicia set out in the advisory letter published by the Office of the Superintendent of Financial Institutions (OSFI) and regardless of the location of the policyholder or risk, will be subject to federal reporting and funding requirements.
Further details of the potential implications at both a federal and provincial level will be published in a market bulletin, and Lloyd’s will develop guidance for the market, but some key issues and implications are summarised below.
Impact on funding
OSFI views this as a clarification and not a change. As a result, with effect from 1 January 2010, the clarified definition will be applied to all live policies and claims as well as business written after this date.
Federally Regulated Entities (FREs) must review their arrangements in Canada and ensure that assets are in place to support the liabilities related to all live business that would be deemed under the clarified definition to be written in Canada.
This will include looking at business that is currently funded in Canada, but will be deemed “outside of Canada” under the clarified definition, and business that is not currently funded, but will be deemed “insure in Canada a risk” under the clarified definition.
FREs will be required to top up assets held in Canada in the event that there is a shortfall, and will be able to apply to withdraw surplus assets.
Impact on provincial licences
Provincial regulators are currently assessing the impact of Part XIII from a provincial perspective.
Current indications are that provinces will continue to define a risk by its location or the location of the policyholder. This non-alignment with OSFI’s definition could result in business deemed to be “outside of Canada” by OSFI being considered “unlicensed” provincially. Unlicensed business attracts restrictions on the activities that can be undertaken in many provinces and requires additional fees to be paid by the policyholder of up to 50% of premium. It is also possible that provinces will look to establish funding requirements to cover any Canadian business not captured by the federal regime.
Impact on reinsurance business
OSFI intends to align the definition of “registered reinsurance” with that of Canadian business. This means that from 1 January 2010 only reinsurance written in Canada, according to the terms of the indicia, will be “registered”.
Whilst cedants can take credit for unregistered reinsurance, the arrangements for doing so and placing the required collateral in Canada are more onerous for both the reinsurer and the cedant than the current arrangements. It should also be noted that Canadian cedants are limited to ceding a maximum of 25% of their total
written premium to unregistered reinsurers.
OSFI has indicated that reinsurance contracts written prior to 1 January 2010 as ‘registered’ will retain their registered status for credit for reinsurance purposes, as long as appropriate assets are maintained in Canada.
Next steps
Lloyd’s has been working with both federal and provincial regulators on these matters as this issue has developed over the past 18 months. Significant uncertainty remains, and Lloyd’s continues to work with regulators in Canada to gain a full and clear understanding of the possible implications for Lloyd’s and the possible steps that Lloyd’s could take to address these.
In particular, Lloyd’s continues to seek further clarity from OSFI regarding the application of the indicia in the advisory, in order to better understand what business would be deemed to be written in or outside Canada.
It is likely that there will need to be changes to both business processes and systems to ensure that Lloyd’s continues to enjoy access to the Canadian market and can continue to ensure the accurate reporting and funding of Canadian business at both the federal and provincial levels.
Any necessary changes will be discussed and planned with the market.
