Canada: Insurance & Reinsurance

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This country-specific Q&A gives a pragmatic overview of the law and practice of insurance & reinsurance law in Canada.

It addresses topics such as contract regulation, licensing, penalties, policyholder protection, alternative dispute resolution as well as personal insight and opinion as to the future of the insurance market over the next five years.

This Q&A is part of the global guide to Insurance & Reinsurance. For a full list of jurisdictional Insurance & Reinsurance Q&As visit  http://www.inhouselawyer.co.uk/index.php/practice-areas/insurance-reinsurance

  1. How is the writing of insurance contracts regulated in the jurisdiction?

    Canada’s ten provinces and three territories each have authority over the writing of insurance contracts in their respective jurisdictions. All of Canada’s provinces and territories other than the province of Québec follow the Common Law but have each enacted Insurance Acts or equivalent statutes and regulations which prescribe additional local requirements. The principles relating to the writing of insurance contracts in the province of Québec are set forth in the Civil Code of Québec while the activities of insurers in the province are governed by an Act respecting insurance and the distribution of insurance by another statute. Provinces and territories all have statutes and regulations that prescribe rules pertaining to the licensing of insurance companies insuring risks in their jurisdictions.

  2. Are types of insurers regulated differently (i.e. life companies, reinsurers)?

    Both the Federal Government and most provinces have legislation allowing for the constitution of insurers. The jurisdiction that incorporates an insurer is primarily responsible for its governance, solvency and oversight but, while most domestic and all foreign insurers in Canada now answer to the federal regulator, all insurers, whether domestic or foreign, federal or provincial, are subject to provincial and territorial law and licensing to carry on any insurance or reinsurance activities in a province or territory. While most requirements apply to all insurers, there are different requirements (for example, as to capital or powers) for life and for property and casualty insurers. Reinsurers are generally regulated and subject to the same requirements as insurers although a few jurisdictions, such as Alberta, do have particular rules pertaining to reinsurance. In addition, a foreign insurer wishing to insure risks in Canada must first obtain approval from the federal Minister of Finance (Canada) and the Office of the Superintendent of Financial Institutions (OSFI) to either set up a local insurer subsidiary or to operate as a branch (both options are available under the federal Insurance Companies Act). Canadian insurance regulators (whether OSFI or the provincial or territorial Superintendents of Insurance, or equivalent), generally prescribe certain conditions for a domestic insurer to take capital credit for reinsurance of its risks with non-approved foreign reinsurers, such as maintaining capital equivalent assets in Canada under a reinsurance security agreement.

  3. Are insurance brokers and other types of market intermediary subject to regulation?

    Yes, the regulation, licensing and supervision of insurance agents, brokers, adjusters and other intermediaries in the distribution of insurance products is the responsibility of provinces and territories. In some jurisdictions, this supervision and licensing is delegated to local councils or other self-regulatory organizations which typically issue licenses, oversee proficiency of individuals and administer disciplinary sanctions.

  4. Is authorisation or a licence required and if so, how long does it take on average to obtain such permission?

    A foreign insurer needs to obtain the approval of the Federal Minister of Finance and OSFI before commencing to insure risks in Canada, a process which may take twelve months or more. After that, provincial licensing of an insurer is a matter of two to four months on average. Licensing of intermediaries is exclusively provincial and takes about two to three months on average.

  5. Are there restrictions over who owns or controls insurers (including restrictions on foreign ownership)?

    The federal Insurance Companies Act (ICA) and the laws of certain provinces (such as Québec) require Ministerial approval for a change of control of an insurer incorporated under the laws of that jurisdiction. The ICA identifies the factors that the Minister shall take into account in determining whether or not to approve the transaction, such as the nature and sufficiency of the financial resources of the applicant, the soundness and feasibility of their plans and the best interests of the financial system in Canada, but the criteria are neutral as to foreign ownership except for non-WTO member foreign institutions where the Minister has to be satisfied that treatment as favorable for Canadian companies exists in the relevant jurisdiction. Federally regulated Canadian insurers are also subject to additional ownership rules that limit ownership of large life insurance companies by major shareholders and impose a 35% public holding requirement on insurance companies that have equity of two billion dollars of more.

  6. Is it possible to insure risks without a licence or authorisation? (i.e. on a non-admitted basis)?

    Many provinces allow for an exception whereby a person who holds a valid and subsisting special broker’s licence for that class of insurance can place insurance in the province from a non-licensed insurer to obtain coverage that cannot readily be obtained from licensed insurers. Such exception is also subject to the foreign insurer not triggering the federal regulator’s criteria for “insuring in Canada a risk” which would make it subject to OSFI’s jurisdiction and the federal ICA. This test is usually triggered by the combination of two or more criteria such as the promotion of the foreign insurer’s products through local media, inciting a person in Canada to request insurance coverage, receiving in Canada a request for insurance coverage, negotiating from Canada the terms and conditions of insurance coverage, deciding in Canada to bind a foreign insurer, receiving in Canada payment from a policyholder, interacting in Canada with a policyholder, etc.

  7. What penalty is available for those who operate without appropriate permission?

    At the federal level, the ICA prescribes fines that can be considerable, and possible imprisonment. Provincial sanctions consist of generally more moderate fines. Officers, directors and agents of entities who authorize or assent to the commission of the offence are also liable and subject to penalties.

  8. How rigorous is the supervisory and enforcement environment?

    The Canadian supervisory environment is composed of a professional and very competent body of regulators, both federally and provincially, as well as in the local self-regulatory organizations. These regulators are generally quite cooperative with companies in search of solutions but will not hesitate to take action if they believe a company is acting in violation of their rules.

  9. How is the solvency of insurers (and reinsurers where relevant) supervised?

    The solvency of insurers (and reinsurers) is primarily the responsibility of the regulators under whose jurisdiction the insurer has been incorporated or, where the insurer is operating in Canada as a Branch, the responsibility of OSFI, our federal regulator. Where OSFI is the principal regulator, the local jurisdictions, while retaining jurisdiction, will generally look to OSFI to supervise the solvency and governance of its companies.

  10. What are the minimum capital requirements?

    The ICA requires federally regulated insurance companies to maintain adequate capital and companies operating in Canada on a branch basis to maintain an adequate margin of assets in Canada over liabilities in Canada. In this regard, life insurers must comply with the Minimum Continuing Capital and Surplus Requirements (MCCSR) Guideline while property and casualty insurers must comply with the Minimum Capital Test (MCT) Guideline. Both guidelines outline the capital framework, using a risk-based formula, for target and minimum capital/margin required, and define the capital/assets that are available to meet the minimum standard. In theory, an insurer could commence to carry on business with as little as five million dollars in capital (a minimum set many years ago) but that amount is unlikely to suffice to meet the current risk-based tests. OSFI generally requires companies to maintain a capital target sufficiently above the minimum levels required to satisfy the tests.

  11. Is there a policyholder protection scheme?

    Every life insurance company authorized to sell insurance policies in Canada is required, by the federal, provincial and territorial regulators, to become a member of Assuris, a not-for-profit organization that protects Canadian policyholders if their life insurance company should fail. Similarly, the industry-funded, non-profit Property and Casualty Insurance Compensation Corporation (PACICC) responds to claims of policyholders under most policies issued by P&C insurance companies in the event that a member insurer becomes insolvent. Both protection funds work with regulators to minimize the loss of benefits and ensure a quick transfer of their policies to a solvent company.

  12. How are groups supervised, if at all?

    Groups that control federally or provincially regulated insurers are often called upon to provide certain undertakings with respect to their financial institution subsidiaries (such as letters of comfort to regulators). Most groups are not treated as regulated entities themselves, although provision is made in the ICA for the creation of regulated insurance holding companies that would be supervised by OSFI.

  13. Do senior managers have to meet fit and proper requirements and/or be approved?

    OSFI expects (i) Boards of Canadian insurers to select managers who have the required expertise, skills, experience and perspectives, taking into consideration the insurer’s strategy, risk profile and overall operations, and (ii) foreign insurers to select a chief agent that is able to properly oversee the management of the foreign company branch, including matters of a corporate governance nature that relate to the branch, and who will be accountable for its operations. Candidates for such positions also have to undergo security checks prior to their confirmation.

  14. Are there restrictions on outsourcing parts of the business?

    The federal regulator, OSFI, as well as some of its provincial counterparts, do have rules pertaining to the outsourcing of material business functions by insurers. The applicable rules require that the insurer evaluate the risks associated with all existing and proposed outsourcing arrangements, develop a process for determining the materiality of arrangements, implement a program for managing and monitoring risks commensurate with the materiality of the arrangements, ensure that the board of directors or chief agent receives information sufficient to enable them to discharge their duties and refrain from outsourcing certain business activities to the external auditor.

  15. How are sales of insurance supervised or controlled?

    The provincial and territorial laws and regulations pertaining to the licensing of insurance brokers and agents referred to in 3 above also regulate the sale and distribution of insurance products in their jurisdictions. The provincial and territorial laws require intermediaries to follow codes of practice and industry standards in the distribution of insurance products and the disclosure of certain information to customers such as the amount of premiums and commissions. The provincial and territorial laws and regulations also limit the payment of commissions from the sale of insurance products to properly licensed individuals.

  16. Are consumer policies subject to restrictions? If so, briefly describe the range of protections offered to consumer policyholders.

    The provincial and territorial laws and regulations all prescribe statutory conditions that, depending on the jurisdiction, are included in either all contracts or only certain types of contracts (such as fire or auto policies). The statutory conditions contain provisions for items such as the right of parties to terminate coverage, requirements to report changes to material risk and the process for providing proof of claims. The provincial and territorial laws and regulations also generally prescribe fair market practice guidelines, although these guidelines are for the most part drafted in general terms.

  17. Are the courts adept at handling complex commercial claims?

    Canada has a modern court system and routinely deals with complex commercial claims.

  18. Is alternative dispute resolution well established in the jurisdiction?

    Alternative dispute resolution is well established in Canada, with mediation mandatory in civil actions in some jurisdictions (notably, for any actions commenced in Toronto).

  19. What are the primary challenges to new market entrants?

    Canada is a mature and relatively conservative, risk-adverse market with seasoned competitors. The group life insurance and health benefits market is dominated by a handful of very large life insurers while the non-life market is increasingly subject to consolidation. New market entrants also have the initial hurdle of having to confirm their practices to 13 separate provincial and territorial regulatory schemes as well as federal rules governing foreign insurers.

  20. To what extent is the market being challenged by digital innovation?

    There is a broad recognition in the Canadian insurance market that the growth of InsurTech will cause significant disruption to current business practices in the near future. Some domestic insurers have started to embrace digital innovation by, for example, using tracking technology to provide usage-based auto policies or partnering with FinTech companies to provide insurance to the growing sharing economy.

  21. Over the next five years what type of business do you see taking a market lead?

    As set out in the answer to question 20, domestic insurers are increasingly embracing digital innovation to deliver InsurTech solutions. However, Canada is a fairly conservative market and the adoption of InsurTech is by no means present across all companies. Those established insurance companies that are able to partner with FinTech companies to fully participate in the growth of InsurTech will be well positioned to take a market lead.