Vol. 143, No. 24 — November 25, 2009

Registration

SOR/2009-296 November 5, 2009

INSURANCE COMPANIES ACT

Regulations Amending and Repealing Certain Regulations Made Under the Insurance Companies Act

P.C. 2009-1850 November 5, 2009

Her Excellency the Governor General in Council, on the recommendation of the Minister of Finance, pursuant to sections 465 (see footnote a), 501 (see footnote b), 509 (see footnote c), 610 (see footnote d) and 1021 (see footnote e) of the Insurance Companies Act (see footnote f), hereby makes the annexed Regulations Amending and Repealing Certain Regulations Made Under the Insurance Companies Act.

REGULATIONS AMENDING AND REPEALING CERTAIN REGULATIONS
MADE UNDER THE INSURANCE COMPANIES ACT

INVESTMENTS (FOREIGN COMPANIES) REGULATIONS

1. The long title of the Investments (Foreign Companies) Regulations (see footnote 1) is replaced by the following:

INVESTMENT LIMITS (FOREIGN COMPANIES) REGULATIONS

2. Section 1 of the Regulations and the heading before it are repealed.

3. The heading before section 3 and sections 3 and 4 of the Regulations are replaced by the following:

LIMITS ON INVESTMENT IN REAL PROPERTY

3. For the purposes of section 618 of the Act, the prescribed percentage of the value of the assets in Canada is

(a) 15 per cent in the case of investment by a foreign life company for the classes of insurance referred to in subsection 618(1);

(b) 10 per cent in the case of investment by a foreign life company for the classes of insurance referred to in subsection 618(2); or

(c) 10 per cent in the case of investment by a foreign property and casualty company or a foreign marine company.

LIMITS ON INVESTMENT IN EQUITIES

4. For the purposes of section 619 of the Act, the prescribed percentage of the value of the assets in Canada is 25 per cent.

PROPERTY AND CASUALTY COMPANIES BORROWING REGULATIONS

4. The long title of the Property and Casualty Companies Borrowing Regulations (see footnote 2) is replaced by the following:

BORROWING (PROPERTY AND CASUALTY COMPANIES AND MARINE COMPANIES) REGULATIONS

5. Section 1 of the Regulations and the heading before it are repealed.

6. Section 3 of the Regulations is replaced by the following:

3. For the purposes of section 476 of the Act, a prescribed subsidiary of a property and casualty company or a marine company is any subsidiary of the company other than a subsidiary that is a financial institution that is not engaged in the insuring of property and casualty risks in the case of a property and casualty company or in the insuring of marine risks in the case of a marine company.

7. Sections 5 to 7 of the Regulations are replaced by the following:

5. For the purposes of section 476 of the Act, the aggregate of the total debt obligations of a property and casualty company or a marine company is the aggregate of the following less the total of the stated capital of the company:

(a) the debt obligations of the company, and

(b) any debt obligations of its prescribed subsidiaries that are not held by the company.

TOTAL ASSETS

6. For the purposes of section 476 of the Act, “total assets”, in respect of a property and casualty company or a marine company, at a particular time, means the total of the assets of the company that would be reported on its balance sheet prepared as at that time in accordance with the accounting principles and specifications of the Superintendent referred to in subsection 331(4) of the Act, less the total of the assets, determined in the same manner, of any subsidiary of the company that is not a prescribed subsidiary.

PRESCRIBED PERCENTAGE OF TOTAL ASSETS

7. For the purposes of section 476 of the Act, the prescribed percentage of the total assets of a property and casualty company or a marine company is 2 per cent.

REINSURANCE (CANADIAN COMPANIES) REGULATIONS

8. The long title of the Reinsurance (Canadian Companies) Regulations (see footnote 3) is replaced by the following:

REINSURANCE (CANADIAN COMPANIES) REGULATIONS

9. Section 1 of the Regulations and the heading before it are repealed.

10. The definitions “gross premium income” and “non-approved insurer” in section 2 of the Regulations are replaced by the following:

“gross premium income”, in respect of a company, means the premium income from its policies calculated without reduction in respect of reinsurance premiums paid or payable by it. (produit brut)

“non-approved insurer” means a body corporate incorporated for the purpose of insuring risks that is not authorized under the Act to insure in Canada risks and, in respect of risks that are not insured in Canada by it, a foreign company that is authorized under the Act to insure in Canada risks, but does not include

(a) the Insurance Corporation of British Columbia;

(b) The Manitoba Public Insurance Corporation;

(c) Saskatchewan Government Insurance;

(d) Export Development Canada; or

(e) a body corporate that is either incorporated under the laws of a province or not incorporated under the laws of Canada and has been approved by the Superintendent. (assureur non agréé)

11. Subsection 3(1) of the Regulations is replaced by the following:

3. (1) Subject to subsection (2), these Regulations apply in respect of all companies authorized under the Act to insure risks in respect of the insurance business for any class of insurance.

12. Paragraphs 5(a) and (b) of the Regulations are replaced by the following:

(a) the total premiums paid or payable by the company in that year in respect of the reinsurance against risks insured by it in its policies, other than premiums paid or payable in relation to the class of life insurance or to Export Development Canada in relation to business undertaken for the purpose set out in paragraph 10(1)(a) of the Export Development Act, without reduction in respect of commissions, expense allowances and other considerations received or receivable by the company

by

(b) the gross premium income of the company for that year, other than premiums paid or payable to Export Development Canada in relation to business undertaken for the purpose set out in paragraph 10(1)(a) of the Export Development Act.

13. Paragraph 6(2)(a) of the Regulations is replaced by the following:

(a) the total premiums paid or payable by the company in that year to non-approved insurers in respect of the reinsurance against risks insured by it in its policies, other than premiums paid or payable in respect of the class of life insurance, without reduction in respect of commissions, expense allowances and other considerations received or receivable by the company

14. Section 7 of the Regulations and the heading before it are replaced by the following:

REDUCTION OF PREMIUM INCOME FOR ASSUMPTION REINSURANCE

7. For the purposes of section 5 and subsection 6(2), in the case of an agreement by which a company causes itself in any year to be reinsured on an assumption basis against risks insured by it in its policies, the total premiums referred to in paragraphs 5(a) and 6(2)(a) and the gross premium income referred to in paragraphs 5(b) and 6(2)(b) shall be reduced by an amount equal to the premiums paid or payable by the company in that year under that agreement.

15. Subparagraph (a)(i) of the definition “entente de regroupement” in paragraph 8(1)of the French version of the Regulations is replaced by the following:

(i) d’une part, sont constituées en personnes morales sous le régime d’une loi provinciale dans le but d’exercer des activités d’assurances au Canada ou sont autorisées par ordonnance du surintendant prise en vertu des articles 53, 59, 574 ou 586 de la Loi à garantir au Canada des risques dans une branche d’assurance,

REINSURANCE (FOREIGN COMPANIES) REGULATIONS

16. The long title of the Reinsurance (Foreign Companies) Regulations (see footnote 4) is replaced by the following:

REINSURANCE (FOREIGN COMPANIES) REGULATIONS

17. Section 1 of the Regulations and the heading before it are repealed.

18. The definitions “gross premium income” and “non-approved insurer” in section 2 of the Regulations are replaced by the following:

“gross premium income”, in respect of a foreign company, means its premium income from all of its insurance business in Canada calculated without reduction in respect of reinsurance premiums paid or payable by it. (produit brut)

“non-approved insurer” means a body corporate incorporated for the purpose of insuring risks that is not authorized under the Act to insure in Canada risks and, in respect of risks that are not insured in Canada by it, a foreign company that is authorized under the Act to insure in Canada risks, but does not include

(a) the Insurance Corporation of British Columbia;

(b) The Manitoba Public Insurance Corporation;

(c) Saskatchewan Government Insurance;

(d) Export Development Canada; or

(e) a body corporate that is incorporated under the laws of a province and has been approved by the Superintendent. (assureur non agréé)

19. Subsection 3(1) of the Regulations is replaced by the following:

3. (1) Subject to subsection (2), these Regulations apply in respect of all foreign companies, other than fraternal benefit societies, that are authorized under the Act to insure risks in respect of the insurance business in Canada for any class of insurance.

20. Sections 4 to 7 of the Regulations are replaced by the following:

4. (1) Subject to subsection (2), a foreign company shall not cause itself in any year to be reinsured against more than 75 per cent of the risks insured by it.

(2) A foreign company that was registered under either the Foreign Insurance Companies Act or the Canadian and British Insurance Companies Act before January 1, 1990, and that caused itself to be reinsured against more than 75 per cent of the risks insured by it in 1989, may cause itself in 1992 to be reinsured to an extent up to and including the lesser of

(a) 80 per cent of the risks insured by it in 1992, and

(b) the percentage of the risks insured by it against which it caused itself to be reinsured in 1989.

CALCULATION OF PERCENTAGE OF REINSURANCE

5. The percentage of risks insured by a foreign company against which the company causes itself to be reinsured in a year shall be calculated by multiplying 100 by the quotient obtained by dividing

(a) the total premiums paid or payable by the company in that year in respect of the reinsurance against risks insured by it in its policies in respect of its insurance business in Canada, other than premiums paid or payable in relation to the class of life insurance or to Export Development Canada in relation to business undertaken for the purpose set out in paragraph 10(1)(a) of the Export Development Act, without reduction in respect of commissions, expense allowances and other considerations received or receivable by the company

by

(b) the gross premium income of the company for that year other than premiums paid or payable to Export Development Canada in relation to business undertaken for the purpose set out in paragraph 10(1)(a) of the Export Development Act.

REINSURANCE WITH NON-APPROVED INSURERS

6. (1) A foreign company shall not cause itself in any year to be reinsured by non-approved insurers against more than 25 per cent of the risks insured by it.

(2) The percentage of risks insured by a foreign company against which the company causes itself to be reinsured by non-approved insurers in a year shall be calculated by multiplying 100 by the quotient obtained by dividing

(a) the total premiums paid or payable by it in that year to non-approved insurers in respect of the reinsurance of the risks insured by it in Canada, other than premiums in respect of the class of life insurance, without reduction in respect of commissions, expense allowances and other considerations received or receivable by it

by

(b) the gross premium income of that foreign company for that year.

(3) If, in accordance with subsection 4(2), a foreign company has caused itself to be reinsured against more than 75 per cent of the risks insured by it in 1992, the company shall not cause itself to be reinsured by non-approved insurers in that year to an extent greater than the amount of the risks insured by it in that year against which it has not caused itself to be reinsured.

REDUCTION OF PREMIUM INCOME FOR ASSUMPTION REINSURANCE

7. For the purposes of section 5 and subsection 6(2), in the case of an agreement by which a foreign company causes itself in any year to be reinsured on an assumption basis against risks insured by it in its policies in respect of its insurance business in Canada, the total premiums referred to in paragraphs 5(a) and 6(2)(a) and the gross premium income referred to in paragraphs 5(b) and 6(2)(b) shall be reduced by an amount equal to the premiums paid or payable by the company in that year under that agreement.

21. (1) Subparagraph (a)(i) of the definition “pooling agreement” in subsection 8(1) of the Regulations is replaced by the following:

(i) is incorporated by or under the laws of a province for the purpose of carrying on the business of insurance in Canada or is authorized under an order of the Superintendent pursuant to section 53, 59, 574 or 586 of the Act to insure in Canada risks falling within a class of insurance, and

(2) Paragraph (e) of the definition “pooling agreement” in subsection 8(1) of the Regulations is replaced by the following:

(e) entering into the agreement would have caused at least one of the parties on June 26, 1986 to be reinsured against more than 75 per cent of the risks insured by it. (entente de regroupement)

FOREIGN COMPANIES PRESCRIBED TRANSACTIONS REGULATIONS

22. The Foreign Companies Prescribed Transactions Regulations (see footnote 5) are repealed.

SUPERVISORY INFORMATION (INSURANCE COMPANIES) REGULATIONS

23. Subparagraph 2(1)(b)(ii) of the Supervisory Information (Insurance Companies) Regulations (see footnote 6) is replaced by the following:

(ii) in the case of a property and casualty company or a marine company, under the Supervisory Guide Applicable to Federally Regulated Insurance Companies;

ANCILLARY ACTIVITIES (INSURANCE COMPANIES, CANADIAN SOCIETIES AND INSURANCE HOLDING COMPANIES) REGULATIONS

24. The heading before section 3 of the Ancillary Activities (Insurance Companies, Canadian Societies and Insurance Holding Companies) Regulations (see footnote 7) is replaced by the following:

PROPERTY AND CASUALTY COMPANIES AND MARINE COMPANIES

25. (1) The portion of subsection 3(1) of the Regulations before paragraph (a) is replaced by the following:

Prescribed activities

3. (1) For the purpose of paragraph 495(4)(f) of the Act, the following activities are prescribed in relation to an entity and a property and casualty company or marine company that acquires control of, or acquires or increases a substantial investment in, the entity:

(2) Paragraph 3(1)(f) of the English version of the Regulations is replaced by the following:

(f) any other activities that are reasonably ancillary to the business of insurance carried on by the company.

(3) Subsection 3(2) of the English version of the Regulations is replaced by the following:

Prescribed term or condition

(2) For the purpose of paragraph 495(4)(f) of the Act, a prescribed term or condition is that the activities referred to in paragraphs (1)(a) to (e) must be reasonably ancillary to the business of insurance carried on by the property and casualty company or the marine company.

COMMERCIAL LOAN (INSURANCE COMPANIES, SOCIETIES AND
INSURANCE HOLDING COMPANIES) REGULATIONS

26. The title of the Commercial Loan (Insurance Companies, Societies and Insurance Holding Companies) Regulations (see footnote 8) is replaced by the following:

COMMERCIAL LOAN (INSURANCE COMPANIES, SOCIETIES, INSURANCE
HOLDING COMPANIES AND FOREIGN COMPANIES) REGULATIONS

27. The portion of subsection 6(2) of the Regulations before the formula is replaced by the following:

Definition of “total assets” of a property and casualty company and a marine company

(2) For the purpose of section 505 of the Act, “total assets”, in respect of a property and casualty company or a marine company, at a particular time, means the amount determined by the formula

28. The Regulations are amended by adding the following after section 11:

FOREIGN LIFE COMPANIES

Prescribed percentage

11.1 For the purposes of subsections 616(1) and (2) of the Act,

(a) in respect of a foreign life company the value of whose assets in Canada for the classes of insurance referred to in those subsections exceeds the aggregate of its liabilities in Canada and the margin of assets in Canada over liabilities in Canada referred to in subsection 608(1) of the Act in respect of those classes by 25 million dollars or less, the prescribed percentage of the value of those assets is five per cent; and

(b) in respect of a foreign life company the value of whose assets in Canada for the classes of insurance referred to in those subsections exceeds the aggregate of its liabilities in Canada and the margin of assets in Canada over liabilities in Canada referred to in subsection 608(1) of the Act in respect of those classes by more than 25 million dollars, the prescribed percentage of the value of those assets is 100 per cent.

FOREIGN PROPERTY AND CASUALTY COMPANIES AND FOREIGN MARINE COMPANIES

Prescribed percentage

11.2 For the purpose of section 617 of the Act, the prescribed percentage of the value of the assets in Canada of a foreign property and casualty company or a foreign marine company is five per cent.

EXEMPTION FROM RESTRICTIONS ON INVESTMENTS (INSURANCE COMPANIES, INSURANCE HOLDING COMPANIES AND SOCIETIES) REGULATIONS

29. The marginal note to section 2 of the Exemption from Restrictions on Investments (Insurance Companies, Insurance Holding Companies and Societies) Regulations (see footnote 9) is replaced by “Prescribed circumstances — property and casualty companies and marine companies”.

INVESTMENT LIMITS (INSURANCE COMPANIES) REGULATIONS

30. (1) Paragraph 5(1)(b) of the Investment Limits (Insurance Companies) Regulations (see footnote 10) is replaced by the following:

(b) if the company is a property and casualty company or a marine company, 10% of its total assets.

(2) Paragraph 5(2)(b) of the Regulations is replaced by the following:

(b) if the company is a property and casualty company or a marine company, 25% of its total assets.

(3) Paragraph 5(3)(b) of the Regulations is replaced by the following:

(b) if the company is a property and casualty company or a marine company, 35% of its total assets.

ASSETS (FOREIGN COMPANIES) REGULATIONS

31. (1) The portion of section 3 of the Assets (Foreign Companies) Regulations (see footnote 11) before paragraph (b) is replaced by the following:

3. In addition to the margin of assets in Canada over liabilities in Canada required by section 608 of the Act, and subject to sections 6 and 7, every foreign life company shall, in relation to the classes of life insurance, accident and sickness insurance, credit protection insurance and other approved products insurance, maintain assets in Canada the total value of which, when determined in accordance with the accounting principles referred to in subsection 331(4) of the Act, is at least equal to the aggregate of

(a) the amount of the reserve for actuarial and other policy liabilities of the company in respect of those classes, determined on the same basis as the reserve included in the company’s annual return, minus the amount of all advances that were made by the company on the security or against the cash surrender value of its life policies included in its annual return,

(2) Section 3 of the Regulations is amended by adding “and” at the end of paragraph (b), by striking out “and” at the end of paragraph (c) and by repealing paragraph (d).

32. (1) The portion of section 4 of the Regulations before paragraph (a) is replaced by the following:

4. In addition to the margin of assets in Canada over liabilities in Canada required by section 608 of the Act, and subject to sections 6 and 7, every foreign life company shall, in relation to the classes of insurance other than life insurance, accident and sickness insurance, credit protection insurance and other approved products insurance, maintain assets in Canada the total value of which, when determined in accordance with the accounting principles referred to in subsection 331(4) of the Act, is at least equal to the aggregate of

(2) Section 4 of the Regulations is amended by striking out “and” at the end of paragraph (b), by adding “and” at the end of paragraph (a), and by repealing paragraph (c).

33. (1) The portion of section 5 of the Regulations before paragraph (a) is replaced by the following:

5. In addition to the margin of assets in Canada over liabilities in Canada required by section 608 of the Act, and subject to sections 6 and 7, every foreign property and casualty company and every foreign marine company shall, in relation to a class of insurance, maintain assets in Canada the total value of which, when determined in accordance with the accounting principles referred to in subsection 331(4) of the Act, is at least equal to the aggregate of

(2) Paragraphs 5(a) and (b) of the English version of the Regulations are replaced by the following:

(a) the amount of the reserve for actuarial and other policy liabilities of the company in respect of that class, determined on the same basis as the reserve included in the annual return of the company; and

(b) the total amount of the other liabilities of the company in respect of that class.

(3) Paragraph 5(c) of the Regulations is repealed.

34. Section 7 of the Regulations is replaced by the following:

7. If a foreign company is reinsured against all or any portion of the risks insured or claims payable under policies issued in the course of its insurance business in Canada, the aggregate of the amounts referred to in sections 3 to 5 may be reduced by subtracting from that amount an amount not exceeding the aggregate of the portions of that amount that apply to the risks or claims that are reinsured if the reinsurer is

(a) a company, a society or a provincial company;

(b) a foreign company that has reinsured in Canada the risks under a reinsurance arrangement that provides that the reinsurer does not have any right of set-off against the obligations of the foreign company other than obligations related to its insurance business in Canada;

(c) a body corporate that is incorporated under the laws of a province and has been approved by the Superintendent;

(d) the Insurance Corporation of British Columbia;

(e) The Manitoba Public Insurance Corporation;

(f) Saskatchewan Government Insurance;

(g) Export Development Canada; or

(h) an entity that maintains assets in Canada of a nature and under an arrangement that the Superintendent has determined to be satisfactory.

35. Section 8 of the Regulations is repealed.

INFORMATION TECHNOLOGY ACTIVITIES (PROPERTY
AND CASUALTY COMPANIES) REGULATIONS

36. The title of the Information Technology Activities (Property and Casualty Companies) Regulations (see footnote 12) is replaced by the following:

INFORMATION TECHNOLOGY ACTIVITIES (PROPERTY AND CASUALTY
COMPANIES AND MARINE COMPANIES) REGULATIONS

37. (1) The definition “member of a property and casualty group” in section 1 of the Regulations is repealed.

“member of a company’s group”
« membre du groupe d’une société »

(2) Section 1 of the Regulations is amended by adding the following in alphabetical order:

“member of a company’s group” has the same meaning as in subsection 490(2) of the Act.

38. Section 2 of the Regulations is replaced by the following:

Prescribed purpose or circumstance

2. For the purposes of subparagraph 441(1) (d.1)(iii) of the Act, the prescribed purpose or the prescribed circumstance, in the case of a property and casualty company or a marine company, is a purpose or circumstance that is materially related to the provision of financial products or services by the company or a member of the company’s group.

39. (1) Subsections 3(1) and (2) of the Regulations are replaced by the following:

Prescribed activity

3. (1) For the purposes of paragraph 495(4)(f) of the Act and subject to subsections (2) and (3), a prescribed activity in relation to an entity is designing, developing, holding, managing, manufacturing, selling or otherwise dealing with any data transmission system, information site, communication device or information platform or portal that is used to provide information services.

Limit on size of investment

(2) Neither a property and casualty company nor a marine company may acquire control of, or hold, acquire or increase a substantial investment in, an entity engaging in an activity described in subsection (1) if the sum of the following exceeds 5% of the company’s regulatory capital:

(a) the aggregate balance sheet value of the shares and ownership interests that the company and its subsidiaries, whether individually or jointly, would acquire in the entity under paragraph 495(4)(f) of the Act,

(b) the aggregate balance sheet value of the shares and ownership interests held by the company and its subsidiaries, whether individually or jointly, in entities engaging in an activity described in subsection (1) that the company holds control of, or a substantial investment in, under paragraph 495(4)(f) of the Act, and

(c) the aggregate value of outstanding loans made by the company and its subsidiaries, whether individually or jointly, to entities engaging in an activity described in subsection (1) that the company holds control of, or a substantial investment in, under paragraph 495(4)(f) of the Act.

(2) The portion of subsection 3(3) of the Regulations before paragraph (b) is replaced by the following:

Restricted activities

(3) Neither a property and casualty company nor a marine company may acquire control of, or hold, acquire or increase a substantial investment in, an entity engaging in an activity described in subsection (1) if the entity engages in the business of accepting deposit liabilities or if the activities of the entity include

(a) activities that a company is not permitted to engage in under section 466 or 469 of the Act or that a property and casualty company or a marine company is not permitted to engage in under section 478 of the Act;

(3) Subparagraphs 3(3)(f)(i) and (ii) of the Regulations are replaced by the following:

(i) in the case of an entity that is controlled by the property and casualty company or the marine company, the company itself would be permitted under Part IX of the Act to acquire a substantial investment in the other entity, or

(ii) in the case of an entity that is not controlled by the property and casualty company or the marine company, the company itself would be permitted to acquire a substantial investment in the other entity under subsection 493(2), paragraph 493(3)(b) or (c) or subsection 495(1) or (4) of the Act; or

40. Sections 4 and 5 of the Regulations are replaced by the following:

Exemption from restrictions

4. For the purposes of subparagraph 3(3)(f)(ii), subsections 495(6) to (8) of the Act do not apply in determining whether a property and casualty company or a marine company would be permitted to acquire a substantial investment in an entity under subsection 493(2), paragraph 493(3)(b) or (c) or subsection 495(1) or (4) of the Act.

NON-APPLICATION OF SUBSECTION 495(7) OF THE ACT

Non-application

5. Subsection 495(7) of the Act does not apply if, under paragraph 495(4)(f) of the Act, a property and casualty company or a marine company acquires control of, or acquires or increases a substantial investment in, an entity whose business is limited to activities described in subsection 3(1). Nothing in this section limits the operation of subsections 3(2) and (3).

COMING INTO FORCE

41. These Regulations come into force on January 1, 2010.

REGULATORY IMPACT ANALYSIS STATEMENT

(This statement is not part of the Regulations.)

Issue and objectives

Part XIII of the Insurance Companies Act (“ICA”) governs the operations of foreign insurance companies in Canada. The Canadian regulatory framework requires that foreign insurers must back up their liabilities in Canada by vesting assets as collateral for the protection of their policyholders. Part XIII of the ICA dictates the amount of assets that must be vested, whereas the Winding-up and Restructuring Act (“WURA”) determines who has access to these assets in the event of the failure of a foreign insurer.

The Canadian government became aware that there was some ambiguity in the wording of certain provisions in the ICA about whether the Canadian regulatory framework for foreign insurance companies was based on the location of the business activities of the insurer rather than on the location of the risks that it insures. Some uncertainty existed about the scope of the current ICA because one possible interpretation was that Part XIII requires that a foreign insurer vests assets to cover only its risks that are located in Canada. On the other hand, the WURA allows all policyholders insured in Canada by the foreign insurer to make a claim on the assets of the foreign insurer’s estate in the event of the foreign insurer’s failure including policyholders whose risks are located outside Canada. The difference in scopes of these two pieces of legislation creates a gap between assets vested and eligible claims. The gap creates a potential risk that an insufficient amount of assets would be available for all claimants in the event of the failure of a foreign insurer.

As a result, pursuant to Bill C-37, An Act to amend the law governing financial institutions and to provide for related and consequential amendments, which received Royal Assent on March 29, 2007, the Federal Government amended Part XIII. The amendments were aimed at remedying the uncertainty about the scope of Part XIII and ensuring alignment between Part XIII and the WURA on how vested assets would be distributed in the event of the failure of a foreign insurer that is regulated by the Office of the Superintendent of Financial Institutions (“OSFI”). Thus, the amendments allow for a more coherent domestic regulatory environment, to the benefit of policyholders. There are no international norms in this area as each jurisdiction’s insolvency laws operate independently from one another.

The amendments to certain regulations made under the ICA will parallel the above amendments to the ICA to remedy the uncertainty and clarify that the ICA regulates foreign insurance companies on the basis of the location where the business of insuring takes place as opposed to the location where the insured risk is located.

Also, as a result of the Budget Implementation Act, 2009, amendments to certain regulations are being made to allow private credit insurers to take advantage of Export and Development Canada’s Domestic Supplemental Credit Insurance program.

Description and rationale

Amendments to the regulations made pursuant to the ICA deal with four areas, each of which will be discussed below.

1. Part XIII applies to foreign companies’ insurance business in Canada and not foreign companies’ insurance of risks that are located in Canada

Bill C-37 clarified that Part XIII applies to foreign companies’ insurance business in Canada as opposed to the foreign companies’ insurance of risks that are located in Canada. As a result of the clarifications, certain regulations that pertain to foreign companies require amendment to reflect the fact that OSFI regulates foreign insurance companies based on the location of their insurance activities, rather than the location of the risks insured. This means that risks located in Canada but insured outside Canada will no longer be subject to Part XIII requirements, and that risks located outside Canada but insured from Canada will become subject to Part XIII requirements.

Consequently, where a regulation made references to “risks in Canada” or “policies in Canada” those references will be replaced with the concept of “business in Canada.” Without making the corresponding amendments to the regulations, there will be inconsistency and a lack of clarity on the basis of the regulation of insurance companies. The amendments to the regulations are technical in nature and do not reflect new policy beyond that of the legislative amendments to Part XIII.

Overall, the amendments provide a better alignment between the vesting regime under the ICA and the recourse to those assets under the WURA, which means that Canadians will be better protected than before. Ultimately, these clarifications will allow OSFI to better meet its mandate, which includes:

• supervising institutions to determine whether they are in sound financial condition and are complying with their governing law and supervisory requirements;
• promptly advising institutions in the event of material deficiencies, and taking or requiring management or boards to take necessary corrective measures expeditiously;
• advancing and administering a regulatory framework that promotes the adoption of policies and procedures designed to control and manage risk; and
• monitoring and evaluating system-wide or sectoral issues that may impact institutions negatively.

The following regulations will be amended or repealed to ensure the consistency of the language between the regulations and the amendments to Part XIII:

• Assets (Foreign Companies) Regulations
• Reinsurance (Foreign Companies) Regulations
• Reinsurance (Canadian Companies) Regulations
• Foreign Companies Prescribed Transactions Regulations (to be repealed)

The amendments to these regulations will be consistent with the amendments to the ICA made pursuant to Bill C-37, the relevant provisions of which are scheduled to come into force on January 1, 2010.

2. Marine insurance

The amendments to the ICA removed the statutory exemption that foreign insurers enjoyed in respect of the class of marine insurance, thereby ensuring that the marine insurance business of all foreign companies will be subject to Part XIII.

The amendments to the ICA which affect Canadian companies also introduced the concept of a “marine company” which is a company incorporated for the sole purpose of insuring risks within the class of marine insurance. Prior to commencing business, a “marine company” is now required to seek an Order to Commence and Carry on Business (“Order”) which authorizes it to carry on business in Canada. The Order is approved by the Superintendent pursuant to section 52 of the ICA. The amended ICA will give a Canadian multi-line company (an insurance company that is engaged in more than two fields of insurance such as property and marine insurance) the option of voluntarily seeking a specific marine insurance authorization, without forcing them to do so.

The overall regulation of marine insurance is currently carried out only by the provinces. For instance, British Columbia, Manitoba, Ontario, New Brunswick and Nova Scotia have specific legislation in place to regulate the class of marine insurance on a provincial basis. The effect of the Part XIII amendments is that the marine class of foreign insurers would be regulated from a prudential perspective at the federal level as is currently the case for other types of insurance such as life and property and casualty insurance. Given their expertise, the provinces will continue to provide market conduct oversight of the class of marine insurance even after Part XIII amendments have been implemented. Given that the federal government will be assuming the role of regulating the class on a prudential basis, any provinces that so desire will now have the opportunity to cease the prudential regulation of marine insurance with the comfort that the federal regulator has assumed that role.

The amendments to the regulations will reflect this federal regime for regulating marine insurance. Certain Regulations currently do not apply to marine insurance business because marine insurance was not regulated prior to the coming into force of Bill C-37. For example, the Reinsurance (Canadian Companies) Regulations and the Reinsurance (Foreign Companies) Regulations provide that these Regulations apply in respect of all companies in respect of any class of insurance other than, inter alia, marine insurance. The amendments to certain Regulations will result in the reinsurance limits contained in those Regulations, namely the 25% limit on premiums that can be ceded by an insurer to “non-approved” insurers (generally an insurer that is not authorized under the ICA to insure risks) or the 75% limit on total premiums that can be ceded, applying in respect of marine insurance business. This is an example of a case where an existing carve-out of marine risks will be removed. Certain regulations will also be amended to add a reference to marine companies to follow all references to property and casualty companies. This will ensure that marine insurers are treated comparably to property and casualty insurers in the regulations.

The following regulations will be amended to ensure that marine companies are subject to the Regulations that are applicable to all regulated property and casualty insurers as is contemplated by the legislation:

• Ancillary Activities (Insurance Companies, Canadian Societies and Insurance Holding Companies) Regulations
• Assets (Foreign Companies) Regulations
• Commercial Loan (Insurance Companies, Societies and Insurance Holding Companies) Regulations
• Exemption from Restrictions on Investments (Insurance Companies, Insurance Holding Companies and Societies) Regulations
• Information Technology Activities (Property and Casualty Companies) Regulations
• Investments (Foreign Companies) Regulations
• Investment Limits (Insurance Companies) Regulations
• Property and Casualty Companies Borrowing Regulations
• Reinsurance (Canadian Companies) Regulations
• Reinsurance (Foreign Companies) Regulations
• Supervisory Information (Insurance Companies) Regulations

The amendments to these regulations will be consistent with the amendments to the ICA made pursuant to Bill C-37, the relevant provisions of which are scheduled to come into force on January 1, 2010.

3. Investment Limits

Investment limits are limits that the ICA imposes on companies which restrict the percentage of investments that insurance companies can make in particular asset classes. The purpose of the investment limits is to ensure that insurance companies do not have an excessive concentration risk in a particular asset class. Investment limits applicable to foreign companies were formerly specified in sections 618 and 619 of the ICA. Sections 618 and 619 of the ICA were amended by Bill C-37 to remove the investment limits from the legislation and instead provide for the authority to establish such limits by regulation. For example, one amendment to the ICA states that the total accepted value of interests in real property that are vested in trust by foreign companies shall not at any time exceed the prescribed percentage of the value of the assets in Canada. As a result, the Investments (Foreign Companies) Regulations will be amended to specify that, for the purposes of subsection 618(1) of the ICA, the prescribed percentage of the value of the assets in Canada is 15% in respect of a foreign life company. This limit was previously housed in the ICA, and is now to be moved to certain regulations pursuant to the coming into force of the Part XIII amendments.

It is important to note that the limits themselves were not amended as a result of amendments to the ICA. Instead, the limits will be set by way of regulation as opposed to being specified in the ICA. Regulations are therefore needed to specify applicable investment limits. Providing investment limits by way of regulation and not legislation will provide OSFI with more flexibility in setting and amending them. It is also consistent with how the investment limits are set for other federally regulated financial institutions, including Canadian insurance companies, and will therefore enable OSFI to make changes to investment limits for foreign insurance companies, if appropriate, at the same time as is done for other federally regulated financial institutions.

The following regulations will be amended to specify the investment limits applicable to foreign insurance companies (which were specified in the ICA until removed by Bill C-37):

• Investments (Foreign Companies) Regulations
• Commercial Loan (Insurance Companies, Societies, and Insurance Holding Companies) Regulations

The amendments to these regulations will be consistent with the amendments to the ICA made pursuant to Bill C-37, the relevant provisions of which are scheduled to come into force on January 1, 2010.

4. Export Development Canada (“EDC”)

Budget 2009 included a number of measures to enhance EDC’s capacity to extend additional support to private sector insurance companies during the credit crisis. These measures will allow EDC to indirectly support financing in the domestic market by providing reinsurance for accounts receivable insurance. EDC will thereby fill gaps in the reinsurance market that appeared during the financial crisis and resulted in insurers limiting the amount of account receivable insurance made available to their customers.

Amendments will be made to two restrictions set out in Reinsurance (Canadian Companies) Regulations and Reinsurance (Foreign Companies) Regulations to facilitate the purchase of reinsurance from EDC.

The first restriction caps at 25% the total premiums that can be ceded by insurers to “non-approved” insurers. This limit aims at reducing an insurer’s exposure to reinsurers that are not authorized under the ICA. An amendment to the regulations will exclude EDC from the category of non-approved insurer since, as a federal government body (with a rating of Aaa by Moody’s Investors Service as of August 2009) EDC does not pose counterparty credit concerns to insurers.

The second restriction caps at 75% the total premiums that insurers can cede through reinsurance. This cap incites insurers to pursue prudent business practices since they must retain a portion of the risks of the policies they underwrite. The Reinsurance (Canadian Companies) Regulations and Reinsurance (Foreign Companies) Regulations will be amended to exclude premiums paid or payable to EDC from the calculation of this 75% limit. This amendment will ensure that insurers will not be constrained by the limit in their acquisition of domestic insurance from EDC.

Amendments will therefore be made to the following regulations:

• Reinsurance (Canadian Companies) Regulations
• Reinsurance (Foreign Companies) Regulations

In anticipation of these amendments, OSFI has previously announced that it would not apply the above limits in the case of insurers that reinsure risks with EDC, thereby allowing them to take advantage of this budget measure effective immediately. As a result of this announcement, EDC has already entered into reinsurance arrangements with such insurers.

These amendments to the regulations reflect provisions of the Budget Implementation Act, 2009, which came into force on March 12, 2009.

Consultation

Stakeholders have been consulted regarding the proposed regulatory amendments in each of the four areas.

1. Part XIII applies to foreign companies’ insurance business in Canada and not foreign companies’ insurance of risks that are located in Canada

Over the last two and a half years, OSFI has conducted extensive consultations on Part XIII amendments. These consultations included written correspondences, participating in meetings and delivering presentations with various stakeholders including all provinces and territories, the Canadian Council of Insurance Regulators (“CCIR”), industry associations including the Insurance Bureau of Canada (“IBC”) and the Canadian Life and Health Insurance Association (“CLHIA”) and some of their members. For example, in September 2007, OSFI presented an overview of Part XIII changes to CCIR and, in April 2008, OSFI participated in the regulatory sub-committee to work with CCIR members with a view towards resolving any issues that they had raised. In January 2008, OSFI met with members of the IBC to discuss the impact of Part XIII amendments on their members. OSFI also met with members of the IBC and the CLHIA in June and December 2007 and again in December 2008. In addition, OSFI has visited all provinces and territories with the objective of assisting them in understanding the Part XIII amendments and to outline any potential impacts on the provincial regimes, so that the provinces are able to determine whether adjustments are required to their legislation or policies. OSFI has also worked together with some insurance companies, as well as with members of the accounting and auditing professions to address any concerns and to strive to achieve a smooth transition upon the coming into force of Part XIII amendments.

In addition, OSFI has asked foreign companies to submit reports on a quarterly basis that explain the impact of Part XIII amendments on their progress in implementing the amendments. The quarterly reports allow OSFI to assist individual insurance companies in transitioning to the amended regime. OSFI uses these reports to assess the impact of the amended regime, monitor progress and to determine when insurance companies require further assistance in adapting to the amendments. The quarterly reports received thus far have demonstrated that the overwhelming majority of insurers are taking the necessary steps to prepare for implementation and that few changes will be required to their business models. Where the quarterly reports indicated that the company had some issues or questions, OSFI has been working with those companies to ensure they will be able to resolve those issues or answer their questions. In addition, OSFI has informed foreign insurance companies that it will provide them with rulings on a without cost basis. Through these rulings, OSFI provides requesting companies with certainty as how the Part XIII amendments apply to them in consideration of their individual circumstances. OSFI has also implemented a link on its external Web site with information to assist stakeholders in adapting to the amendments which includes a question and answer section. This page includes links to various public communications that were issued on the topic of Part XIII amendments which have been issued regularly since 2006.

Although these consultations did not specifically focus on the amendments to the Regulations, stakeholders were informed through the consultations that certain regulations will require changes as a result of the amendments to Part XIII. They were also informed of the nature of the proposed changes.

2. Marine insurance

OSFI met with stakeholders to discuss amendments to the ICA which impacted marine insurers and to discuss the more general implications of Part XIII amendments. In particular, in August and September 2008, OSFI met with representatives of Property and Indemnity Clubs, which are non-profit mutual insurance associations that individually insure third party liabilities relating to the use and operation of ships. Due to the marine exemption that existed prior to the amendments to Part XIII, these clubs had never been regulated in Canada. Their concerns over the extent to which the amended legislation and regulations would apply to them were addressed. Property and Indemnity Clubs that had remaining concerns or questions were directed to obtain cost-free rulings, which are documents by which OSFI certifies how the legislation applies to an individual insurer. As a result of these consultations, any issues were resolved to the satisfaction of the Property and Indemnity Clubs. OSFI did not receive any further requests from them to meet or discuss since the last meeting in 2008.

Several written communications have been directed to the industry on the topic of amendments to marine insurance as a result of Bill C-37. Letters to the industry were posted on the OSFI external Web site on December 19, 2008 and August 11, 2009. In addition, OSFI also posted a notice on its Web site on July 24, 2009. This notice outlined the amendments to the ICA affecting marine insurance and addressed the consequential amendments to the regulations. In addition, OSFI discussed the issue of amendments to marine insurance with provincial regulators via meeting with CCIR. While these consultations primarily focused on the amendments to marine insurance in the ICA, stakeholders were also made aware that corresponding amendments to certain regulations will be necessary to ensure consistency between the regulations and the ICA.

3. Investment Limits

Stakeholders were consulted when Bill C-37 removed the investment limits applicable to foreign companies from the legislation and provided for the authority to establish such limits by regulation. As the only amendments to the regulations regarding investment limits reflect the amendments to the ICA as a result of Bill C-37, no additional formal consultation has been conducted.

4. EDC

In the spring of 2009, EDC worked in close cooperation with several insurance companies in the development of its temporary program to offer accounts receivable insurance. The regulatory changes related to this program aim at facilitating the participation of insurers to the program and were developed following consultations with insurers. No concerns were raised by insurers regarding the regulatory changes.

Implementation, enforcement and service standards

Stakeholders are taking the necessary steps to be ready for implementation of the amendments to the regulations by January 1, 2010 as these amendments are consequential to amendments to Part XIII which is scheduled to come into force on January 1, 2010.

The amendments to regulations will not require any significant change in OSFI procedures or significant additional personnel resources. The amendments to the regulations will not result in significant changes to OSFI’s systems and OSFI is taking the necessary measures to ensure that it will be prepared to regulate the amendments to the ICA by January 1, 2010. No additional staff will be needed as the existing supervisory framework will be sufficient to monitor compliance with the amendments to the regulations. In the event of non-compliance with the amendments to the regulations, the Superintendent has the authority to issue a direction of compliance to companies to ensure that the requirements set out in the regulations are being met.

Contact

Jane Pearse
Director
Financial Institutions Division
Finance Canada
Ottawa, Ontario
K1A 0G5
Telephone: 613-992-1631
Fax: 613-943-1334
Email: finlegis@fin.gc.ca

Footnote a
S.C. 2007, c. 6, s. 226

Footnote b
S.C. 2001, c. 9, s. 426

Footnote c
S.C. 2001, c. 9, s. 426

Footnote d
S.C. 2001, c. 9, s. 447

Footnote e
S.C. 2005, c. 54, s. 364

Footnote f
S.C. 1991, c. 47

Footnote 1
SOR/92-274

Footnote 2
SOR/92-281

Footnote 3
SOR/92-298

Footnote 4
SOR/92-302

Footnote 5
SOR/98-570

Footnote 6
SOR/2001-56

Footnote 7
SOR/2001-366

Footnote 8
SOR/2001-368

Footnote 9
SOR/2001-385

Footnote 10
SOR/2001-396

Footnote 11
SOR/2002-450

Footnote 12
SOR/2003-68

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