Article by Stuart Carruthers
1. Basis of Insurance and Reinsurance Law
1.1 Sources of Insurance and Reinsurance Law
Canada has a federal system of government, whereby jurisdiction over insurance and reinsurance regulation is divided between the federal government and the governments of the ten provinces and three territories (collectively referred to herein as the “provinces”). Generally, the national regulator, the Office of the Superintendent of Financial Institutions (OSFI), conducts prudential regulation. OSFI is a robust, global-level regulator that plays a leading role in all the key international financial services regulatory organisations (the International Association of Insurance Supervisors (IAIS), Basel, etc).
The provincial regulators, which are similar to US state departments or commissioners of insurance, principally regulate market conduct and the licensing and supervision of insurance intermediaries such as agents, brokers and adjusters. The provincial regulators together comprise an umbrella group called the Canadian Council of Insurance Regulators (CCIR), similar to the National Association of Insurance Commissioners in the United States. There is also an umbrella group of insurance intermediary regulators, the Canadian Insurance Services Regulatory Organizations (CISRO).
Each of Canada’s common law provinces (ie all provinces except Quebec) has enacted an Insurance Act governing the formation and content of many types of insurance contracts. These insurance statutes are relatively uniform. In addition, the application and interpretation of insurance contracts in all provinces except Quebec will be governed by common law principles
In Quebec, the form and content of insurance contracts are governed by the Civil Code of Quebec. In an attempt to harmonise civil and common law principles, Quebec has enacted rules that are generally similar to those of the other provinces.
In general terms, all contracts of insurance and reinsurance are regulated. However, certain types of quasi-insurance contracts (for example, extended warranty contracts) are, at common law or by administrative practice, not regulated as insurance contracts in some provinces. In addition, the enrolment of individuals under group insurance contracts is, in most provinces, not regulated as an activity requiring licensing as an intermediary
2. Regulation of Insurance and Reinsurance
2.1 Regulatory Bodies and Legislative Guidance
As noted in 1.1 Sources of Insurance and Reinsurance Law, jurisdiction over insurance regulation is divided between a national prudential regulator, OSFI, and provincial regulators, who are principally market conduct regulators.
Most of the largest Canadian insurers are incorporated under a federal Canadian law called the Insurance Companies Act (the “Federal Act”) and are prudentially regulated by OSFI, which also prudentially regulates licensed Canadian branches of foreign insurers. A number of smaller insurers are incorporated under provincial law and prudentially regulated by provincial regulators.
All insurers and reinsurers must be licensed, federally and provincially, subject to certain exceptions for foreign companies. Insurers and reinsurers are generally regulated in the same way, although certain exceptions apply for reinsurers, given their lack of direct interaction with consumers.
In the provinces of British Columbia, Saskatchewan and Manitoba, compulsory minimum private automobile insurance is provided by a monopoly government insurer.
Both OSFI and certain provincial regulators, particularly the Quebec Autorité des marchés financiers (AMF), are very active at the IAIS level and Canadian capital and market conduct requirements are broadly consistent with, and in many cases significantly exceed, international capital requirements and IAIS Insurance Core Principles (ICPs). There have been no insolvencies or bailouts of insurers in Canada since the onset of the global financial crisis in 2008.
The Federal Act imposes a comprehensive set of operating requirements and limitations for Canadian federal insurance companies, including in relation to corporate governance, investments, transactions with related parties, payment of dividends, issuance of shares for consideration other than cash, issuance of debt obligations and other material or fundamental transactions.
Canadian federal insurance companies and foreign branches must provide corporate and financial information to OSFI on an ongoing basis, including annual audited financial statements and quarterly and annual financial and business returns. OSFI’s continuing supervision includes analysis of this information and regular examination of companies. OSFI has implemented a risk-based methodology for assessing Canadian federal insurance companies and branches, known as its Supervisory Framework. In applying the Supervisory Framework, OSFI considers the inherent risks of the business and the quality of risk management for each significant activity.
Other than in respect of private passenger automobile insurance rates in certain provinces, there is no rate or form filing/ approval required in Canada.
In some provinces, insurance brokers and agents are regulated in the same fashion and by the same regulator. In other provinces — for example, Ontario — agents are regulated by a government regulator, the Financial Services Commission of Ontario (FSCO), while brokers are regulated by a self-regulatory body, the Registered Insurance Brokers of Ontario (RIBO). In some provinces, all regulation of intermediaries is carried out by self-regulatory organisations with delegated powers.
Insurers and reinsurers are generally subject to the same tax rules that apply to other Canadian corporations. However, in addition to standard corporate taxes, additional insurancespecific taxes apply.
2.2 The Taxation of Premium
One of the most significant additional types of tax on insurers is insurance premium tax. Each province administers its own insurance premium tax, although the administration of the tax is similar across the provinces. Generally, the tax is payable by insurers in respect of gross premiums receivable in a tax year for business transacted within the province. Business transacted within the province typically includes life insurance for residents of a province or insurance in respect of persons or property located in the province.
This assumes that the insurer is licensed in Canada, and insured parties who enter into insurance contracts with unlicensed providers of insurance can also be liable for the payment of premium taxes. Federally, a 10% excise tax applies to many types of premiums paid to unlicensed insurers. The excise tax does not apply to reinsurance, and exemptions may be available for types of insurance not otherwise available in Canada. Provincial premium taxes generally are payable by the insured for insurance from unlicensed providers, usually at rates higher than those for insurance from licensed providers.
In addition to the taxes above, some provinces also impose a sales tax on the purchase of certain insurance policies, which is generally payable by the purchaser of the policy.
3. Overseas Firms Doing Business in the Jurisdiction
3.1 Overseas-Based Insurers or Reinsurers Overview
In order for a non-Canadian insurance company to carry on insurance business in Canada, it must comply with the licensing and other requirements of the Federal Act and the applicable insurance legislation in each province in which it wishes to carry on business. It is accordingly, in each case, a question of interpretation as to whether the proposed activities of the insurer in relation to Canada/the province fall within the applicable definition of carrying on insurance business in Canada/the province; put another way, whether there is a sufficient activity connection or nexus to Canada/ the province to require licensing under the Federal Act or the applicable provincial insurance legislation. In some cases, a foreign insurer can readily insure, from outside Canada, a risk located in Canada, without being required to be licensed under the Federal Act or the applicable provincial legislation.
Insuring on an unlicensed basis – Canadian Federal Regime
Under the Federal Act, a non-Canadian insurance company “shall not insure in Canada a risk” unless it is authorised to do so pursuant to an order made by OSFI under the Federal Act. The extent to which a non-Canadian insurance company’s activities in respect of Canada constitute the company “insuring in Canada a risk” is, as noted above, a factual matter dependent on all the facts and circumstances of the proposed arrangements.
In this regard, OSFI has published an Advisory (the “Advisory”), most recently revised in May 2009, which sets out detailed criteria for determining whether a company’s business model would, in OSFI’s view, constitute insuring in Canada a risk (thus requiring licensing). The Advisory focuses on the extent to which the insurance business activity (solicitation, underwriting, servicing, etc) occurs within Canada and not whether the risk is located in Canada.
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