Canada update - October 2009
What is happening?
The previously advised clarification of the definition of “insure in Canada a risk” by the Canadian regulator, the Office of the Superintendent of Financial Institutions (OSFI) comes into force with effect from 1/1/2010 (the effective date).
This applies the Canadian federal regulatory framework to all risks insured in Canada , rather than the current interpretation which applies to all risks located in Canada. This means from the effective date all business insured in Canada from that date, and any such business already on a company’s books at that date, will be subject to federal reporting and funding requirements – regardless of the location of the policyholder or risk, or of the class of business. It should be noted that this includes Wet Marine business, the current exemption for which falls away at the effective date, and any business where the risk is located outside of Canada but sufficient activity takes place within Canada.
Lloyd’s will shortly issue a Market Bulletin discussing in further detail the implications, our solution and the associated implementation issues.
What are the implications for Lloyd’s business models in Canada?
In December 2008, we set out the perceived risks and issues that Part XIII raised for the Lloyd’s market:
• Impaired access to business: Reinsurance business written outside of Canada would be considered “unregistered” federally, Direct business written outside of Canada may be considered “unlicensed” provincially, either would have a severe impact on marketability.
• Increased funding: All risks insured in Canada regardless of the location of the risk or the insured will be subject to federal reporting and funding requirements in Canada possibly increasing the instances where funding is required in multiple jurisdictions.
• Provincial solvency: Provincial regulators may seek to regulate solvency at a provincial level, where it is not funded in the federal trust fund. The risk of funding on differing bases in different provinces would add cost and risk to business in Canada.
• Quebec has recently sought permission to regulate solvency from its legislature.
• British Columbia (BC) has recently stated that it intends to amend its legislation to mandate that only risks “insured in Canada” under the clarified OSFI definition will be considered “authorised” by BC.
Continued uncertainty over the provincial regulators response to Part XIII represents an ongoing risk to Lloyd’s.
So what are we doing to manage these risks?
Lloyd’s has preserved the ability of the market to trade effectively in Canada by securing in May 2009 OSFI’s agreement that Lloyd’s business models are such that sufficient activity is undertaken in Canada by or for and on behalf of Lloyd’s for all of its Canadian business to be considered “insure in Canada a risk”.
In relation to Lloyd’s open market business, the extent to which Canadian domiciled intermediaries undertake activities on Lloyd’s behalf sufficient to meet OSFI’s requirements was critical in that consent. OSFI were convinced by our arguments that the activities of receipt of premium and communication of offers of insurance were undertaken in Canada by or for and on behalf of Lloyd’s.
Lloyd’s will need to conform to these models going forward, meaning that from the effective date, all business where the insured or reinsured is domiciled in Canada or where the risk is located in Canada will need to be written in such a way that sufficient activity is undertaken in Canada. This includes business renewing 1/1/2010.
So what does that mean practically?
Business currently written through a Canadian domiciled coverholder or service company via delegated underwriting authority
Going forward you will need to ensure that the required “made in Canada wording ” is incorporated in relevant documentation, otherwise there is no change.
Business currently written through a Canadian domiciled intermediary (eg OMC or reinsurance broker)
Going forward you will need to ensure that you are dealing with an appropriate Canadian domiciled intermediary . This includes the need for that Canadian intermediary to having signed the relevant Agreement. In order to provide clarity to all stakeholders, Lloyd’s is in the process of having all Canadian domiciled intermediaries sign an agreement stating that they undertake the activities of receiving premium from policyholders and delivering policy documentation to policyholders in Canada for or on behalf of Lloyd’s in relation to open market business. Once the agreement is signed by an intermediary, all business subsequently produced through that intermediary, where they undertake the activities set out therein, will be considered to be “insure in Canada a risk”. You will also need to meet the “made in Canada wording” requirement mentioned above.
Business currently written without a Canadian domiciled intermediary
Going forward, business where the risk or the insured is located in Canada (eg via a non-Canadian domiciled coverholder or “Direct Assured”) will need to have an appropriate Canadian domiciled intermediary in the chain, regardless of the fact that the non-Canadian entity involved may be licensed to trade in Canada. You will also need to ensure that the required “made in Canada wording” is incorporated in relevant documentation.
This will require changes to the way in which global polices, where there is an element of Canadian exposure, are placed.
Other impacts?
Funding position: From the effective date, Lloyd’s will be required to hold sufficient assets in Canada to meet the liabilities connected to all business that is “insure in Canada a risk”, and will make an assessment of these liabilities at year end. At that time, Lloyd’s will be able to determine whether an immediate movement of assets from the non-regulated Canadian trust fund is required, or whether this can be made as part of the normal trust fund process at quarter end. Funding calls from Q1 2010 will include this business.
Impact on currencies used: Settlement to the LCTF can only be undertaken in Canadian or US dollars. As a result, any business that is “insure in Canada a risk” where the premium is paid in currencies other than Canadian or US dollars will need to be converted prior to submission for processing and settlement.
Impact on FIL codes: FIL codes are the primary trigger to determine which trust fund premiums are posted and claims are paid from. In order to ensure minimum disruption to processing, there will be new codes introduced for certain business categories written post 1/1/2010 to ensure that relevant monies are settled to/from the LCTF. Business that currently has a code that produces a “CN” trust fund code will not be cancelled and replaced, but as new items on such business are processed – such as additional or return premiums, movements on existing claims or new claims – the FIL codes and the subsequent trust fund code will be amended to reflect the new position.
Impact on pre 1/1/2010 business: As set out above, the clarification to the definition of “insure in Canada a risk” whilst coming into force with effect from the effective date, applies to all business on an insurers books at that date. Lloyd’s has informed OSFI that, following a review of its business models, intends to presume – in accordance with Lloyd’s understanding of OSFI’s publications – that its open market business conducted via Canadian brokers and written prior to the Agreement meets sufficient of the indicia set out in the Advisory so as to constitute business insured in Canada.
This is particularly relevant for reinsurance business, where cedants will want to continue to treat the reinsurance that they have previously purchased from Lloyd’s as “registered” reinsurance, and to take credit for it for solvency purposes. Lloyd’s wishes to preserve both the ability of its cedants to take credit for Lloyd’s reinsurance as registered business, and the ability for Lloyd’s to provide assets in Canada via its existing trust fund arrangements.
As a consequence, Lloyd’s has told OSFI that it intends to leave this business on its books as at 1 January 2010, and retain the associated assets in its trust funds and that it believes that this should enable cedants to continue to take credit for the associated reinsurance recoveries.
The Lloyd’s International Regulatory Affairs team in London and Lloyd’s Canada are available to answer questions or concerns from the Lloyd’s market or its business partners in Canada regarding these very significant changes. Please contact us at the following addresses for further information:
Andrew Gurney, Senior Manager, International Regulatory Affairs andrew.gurney@lloyds.com
Sean Murphy, VP and AIF, Lloyd’s Canada
sean.murphy@lloyds.com
Deborah Moor, President, Lloyd’s Canada
deborah.moor@lloyds.com
Last updated on 25 Jan 2010
