• The Impact of Five Little Words: "Insure in Canada a Risk"
  • December 9, 2009 | Author: Frank Palmay
  • Law Firm: McMillan LLP - Toronto Office
  • The answer to the question whether a foreign company does or does not "insure in Canada a risk"[1] determines whether it needs to obtain a federal insurance order (akin to a license) to do so. Although the concept has been part of the Insurance Companies Act ("ICA") since proclamation in 1992, it has recently triggered a flood of questions, uncertainties and resistance.

    The Office of the Superintendent of Financial Institutions ("OSFI"), the federal regulator for financial institutions in Canada, including insurance companies, has recently clarified what, from a federal perspective, the words "insure in Canada a risk" are intended to capture and not capture[2].  Apparently there were two co-existing interpretations within OSFI.  One looked at the location of the risk while the other looked at the location of the business activities. In fact, the latter interpretation seems to accord with not only international practice but also the provisions of at least some of the provincial insurance legislation.

    In concluding that these five words were intended to capture the location of the insurance activities rather than the location of the risk, OSFI looked to the concepts contained in the various provincial insurance legislation for guidance, as neither "insurance", "insuring in Canada" nor "insurance business" are concepts defined in the ICA but are concepts that are well described in a number of the provincial insurance acts.

    However, OSFI's decision to apply this interpretation retroactively to activities that foreign companies had conducted in the past has caused serious concerns and ramifications. 

    Additionally, OSFI was not able to obtain agreement from all of the provinces that they would apply the OSFI interpretation and some of the provinces, currently Alberta and British Columbia, have indicated that they have come to a different conclusion for their licensing requirements than those contained in the OSFI interpretation.[3] While this was anticipated in the OSFI advisory, the practical implications to foreign insurers may be severe and may leave the Canadian insurance regulatory landscape in a much more fragmented state than presently exists.

    This paper will explore some of the issues and concerns that have arisen as a result of OSFI's  advisory, its new interpretation of "insure in Canada a risk" and the implications of Alberta's and British Columbia's stated position. Is OSFI's Interpretation Reasonable?

    The constitutional underpinning of the federal and provincial regulatory schemes are clear and bear on the issue.

    Unlike in the United States, under the Canadian federal system both the federal and provincial authorities have the right to incorporate companies.  By far the majority of Canadian insurers (by some estimates, over 90%) are governed by the federal ICA.  This coupled with the fact that banking is an exclusive federal power and is regulated by OSFI, has meant that the federal authorities have developed expertise and dominate the insurance solvency regulatory system in Canada.  A number of the provinces now recognize this and have retained OSFI to analyze the solvency requirements of provincially incorporated insurers.

    The federal government also has the exclusive authority over international trade.  Hence, foreign insurance companies coming to do business in Canada have traditionally, as a first step, been required to satisfy the federal requirements.  In the past, these were contained in the Canadian & British Insurance Companies Act for British companies and the Foreign Insurance Companies Act for other foreign companies.  Now it is Part XIII of the ICA.

    Property and civil rights are an exclusive provincial jurisdiction. Hence the marketplace regulation of insurance, including the licensing requirements of companies wishing to do business in the province, the contractual requirements for insurance polices and the insured/insurer interface in policy and claim matters are within the exclusive purview of provincial insurance authorities and each province and territory has regulatory bodies that deal with these matters. 

    Provinces and territories also share jurisdiction with the federal authorities in the area of taxation.  Each jurisdiction is interested in avoiding unnecessary tax leakage and has imposed tax requirements and burdens on activities originating in the province where premiums leave for foreign insurers.

    Canadian risks have in the past been insured outside Canada with no Canadian federal, provincial or territorial regulatory involvement.  For example, it was not unusual for large Canadian entitles (e.g. utilities) to raise debt financing in the New York bond market.  The credit ratings of certain monoline insurers in the United States were so strong that, having them insure the risk of default under the bond meant significant savings in interest rates such that, even after taking into account the payment of the premium, the end result was a win for the Canadian entity (e.g. the utility).  In these instances both OSFI and the provincial regulator acknowledged that even though the utilities operations were located in Canada there was no engagement of either the federal or the provincial insurance regulatory schemes.[4]  In addition, OSFI has issued Rulings where group insurance issued as an umbrella policy to an offshore parent was not "insuring in Canada a risk" even though the insurance covered employees of a Canadian subsidiary.[5] These interpretations are in keeping with the advisory that OSFI recently issued on the interpretation of the words "insure in Canada a risk." 

    Because OSFI treats the recent clarification of "insure in Canada a risk" as a change in interpretation of the statute rather than as an amendment to the statute itself, it has taken the position that it operates retroactively and that foreign insurer branches operating in Canada need to assess their past practices to see:

    • whether insurance activities were carried out in Canada for non-Canadian located risks that previously had not been, but now need be, reflected in the books of the branch under the clarified interpretation; and
    • whether Canadian located risks were in fact a result of activities carried out outside Canada such that the risks need not have been reflected in the books of a branch based on the clarified interpretation and can now be removed.

    This is significantly different from the position previously taken by OSFI that, once a branch was qualified federally, all Canadian sited risks had to be reflected in the books of the branch.  This revised approach has caused considerable concern and problems and can be expected to result in unanticipated future problems.

    For example, if a Canadian situated risk is able to be removed from the books of the branch on the basis that the insurance activities were carried outside Canada, none of the safeguards contained in the ICA for the protection of the Canadian policy holder or reinsured would apply, including assets in trust and OSFI's regulatory insolvency oversight.  The Insurance Bureau of Canada[6] has recently reached an agreement with OSFI in the case of reinsurance contracts whereby a reinsurer can acknowledge that the reinsurance treaties that are expressly described in the schedules to the acknowledgement are going to continue to be treated as insurance in Canada and hence will not be withdrawn from the books of the branch.  One obvious issue that arises from this approach is what happens if a treaty is inadvertently omitted from the acknowledgement? Given historical difficulties with treaty documentation, this is not an unusual or insignificant concern.  Another  problem is posed by instances where old treaties for which no documentation exists must be evaluated to make a determination of the location of the business activity. 

    The Provincial Approach

    The provincial regulatory and taxing approach for insurance products is much more of a patch work, with the harmonization that occurred in the past slowly losing momentum.


    In Ontario for example, a license[7] is required by an insurer if:

    • the insurer undertakes insurance in Ontario; or
    • carries on business in Ontario.

    In a somewhat circular requirement the undertaking of an insurance contract in Ontario is deemed to occur if the act deems the contract to be made in Ontario.  The indicia for deeming the contract to be made in Ontario[8] are:

    • the subject-matter of a contract of insurance is property in Ontario or an insurable interest of a person resident in Ontario;
    • the contract of insurance, if signed, countersigned, issued or delivered in Ontario or committed to the post office or to any carrier, messenger or agent is delivered or handed over to the insured or the insured's assign or agent in Ontario; and
    • money payable under the contract is paid in Ontario.

    A company is deemed to carry on business in Ontario[9] in several circumstances including, but not limited to:

    • undertaking insurance in Ontario;
    • setting up or causing to be set up a sign in Ontario containing the name of an insurer;
    • maintaining or operating in Ontario, either in its own name or in the name of its agent or other representative, an office for the transaction of the business of insurance either in or out of Ontario;
    • distributing or publishing or causing to be distributed or published in Ontario any proposal, circular, card, advertisement, printed form or like document;
    • making or causing to be made in Ontario any written or oral solicitation for insurance;
    • issuing or delivering in Ontario any policy of insurance or interim receipt or collecting or receiving or negotiating for or causing to be collected or received or negotiated in Ontario, any premium for a contract of insurance;
    • inspecting any risk in Ontario;
    • adjusting in Ontario any loss under a contract of insurance; or
    • prosecuting or maintaining in Ontario an action or proceeding in respect of a contract of insurance.


    In Alberta, a license is required[10] for an insurer to:

    • carry on business in Alberta;
    • insure a risk in Alberta; or
    • enter into or renew a contract of insurance to insure a risk in Alberta.

    Similarly to Ontario, an insurer undertaking a contract of insurance that is made in Alberta, whether the contract is original or renewed, except the renewal of life insurance policies, is said to be undertaking insurance in Alberta.[11]

    An insurance company is deemed to carry on business in Alberta where it:

    • undertakes or offers to undertake insurance in Alberta; 
    • sets up or causes to be set up in Alberta any sign or inscription that contains the name of the insurer or that refers to insurance;
    • carries on market conduct activities in Alberta;
    • solicits or negotiates insurance in Alberta orally or in writing or by electronic media or any other medium of communication or by vending machines;
    • issues or delivers any policy of insurance or interim receipt in Alberta;
    • collects or receives or negotiates for or causes to be collected or received or negotiated for any premium for a contract of insurance in Alberta;
    • inspects any risk in Alberta;
    • adjusts any loss under a contract of insurance in Alberta;
    • prosecutes or maintains in Alberta any action or proceeding in respect of a contract of insurance, or
    • is listed in a telephone directory for any part of Alberta.

    British Columbia

    Unlike Ontario and Alberta, insurance companies operating in British Columbia are governed under multiple acts.  Authorizations or licences for insurance companies in the province are governed by the Financial Institutions Act.[12] Under this Financial Institutions Act[13] a person may not carry on insurance business in British Columbia unless the person is:

    • an insurance company or extra-provincial insurance corporation that has a business authorization to carry on insurance business, or
    • a company registered under the Insurance (Captive Company) Act.

    Interestingly, neither the Financial Institutions Act nor the  British Columbia Insurance Act has an equivalent provision to the Ontario and Alberta acts describing the meaning of "carrying on business" in British Columbia.

    Similarly, although the language of a contract "being deemed to be made in British Columbia" is not tied into either the Insurance Act or the Financial Institutions Act, the latter deems a contract to be made in British Columbia if it:

    • insures a person domiciled or resident in British Columbia at the date of the contract, or
    • has as its subject matter property or an interest in property located in British Columbia.

    Implications of the Provincial Regulatory Scheme

    In section 8 of the OSFI Advisory,[14] OSFI states that:

    Where a foreign insurer is not insuring in Canada a risk, the ICA does not restrict that foreign insurer from carrying on any activity or business in Canada. Subject to other applicable Canadian laws, it could, for example carry on any insurance business in Canada that does not involve the insurance of a risk by it, such as providing underwriting, policy administration or product development to other insurers.

    While the provincial requirements of "carrying on business" for Ontario and Alberta are for the most part consistent with the factors set out in the OSFI advisory as to what OSFI considers to be "insuring in Canada a risk", they do not constitute a one to one mapping.  For example, the undertaking of insurance, setting up signs or opening an office, as well as inspecting risks and adjusting losses are addressed in the Ontario and Alberta Insurance Acts but are not addressed in the OSFI advisory list of factors that, under the OSFI interpretation, constitute "insuring in Canada a risk." In fact, the undertaking of insurance under the Ontario and Alberta acts depends on the risk being situated in the province which is clearly different from the OSFI position.

    It is, therefore, quite possible that the correct conclusion for one's course of conduct under the OSFI advisory may be that while a foreign insurance company will not require an OSFI order in order to carry on the activity, under the various provincial rules the company would need to be licensed as an insurer in the province.  Indeed some of the provinces (Alberta and British Columbia) have apparently indicated that this could well happen in their jurisdiction.  British Columbia in particular has proposed the addition of a new subsection amending the Financial Institutions Act to state that the selling of insurance to residents of the province (regardless of whether the business is conducted in British Columbia) is deemed the conduct of insurance business in the province if the risk or peril is located there.[15]

    Some of the implications if this were to happen are:

    • The present regulatory scheme does not contain any mechanism for assessing and overseeing the solvency of foreign companies that are provincially licensed only but not federally regulated.  Presently all insurance branches that operate in Canada have a federal order which brings with it the federal solvency regulatory regime and is not duplicated in any of the provincial legislation (which only address the solvency provisions for provincially incorporated insurance companies, not branches).
    • There are no mechanisms for placing assets in trust for other than federally regulated insurance branches (with the exception of unlicensed reinsurers who post assets to permit OSFI rated cedants to take credit for the reinsurance).
    • It is unclear how, if at all, there will be any coordination between provincial insurance regulatory authorities each of whom determines to license a foreign insurance company that is not regulated under the federal jurisdiction.  Will they each require their own separate solvency tests, or assets in trust?

    All of these are issues that are raised by the seeming divergence, for the first time, between the federal and provincial jurisdiction. It is anticipated that other provinces may follow British Columbia's lead and state divergent views from those of OSFI.  We will track and report in subsequent papers.

    We plan to subsequently address other issues involving taxation and future considerations that branches might consider in determining whether or not they wish to shelter under the new federal interpretation of "insure in Canada a risk".


    [1]       Insurance Companies Act, S.C. 1991, c. 47, section 573(1) proclaimed in force June 1, 1992. 

    [2]       OSFI Advisory, "Insurance in Canada of Risks," revised May 2009.

    [3]       "BC Plugs Gap Left by Part XIII Changes" Thompson World Insurance News, Oct 12, 2009.

    [4]       Indeed OSFI in its April, 1991 Memorandum instructed federally regulated property and casualty insurers not to write financial guarantee insurance type products until this type of insurance was added as a separate class, which to date has not been done.

    [5]       "Insuring, in Canada, Risks ¿ Group Policy" Ruling of the Office of the Superintendent of Financial Institutions Canada, 2005-03.

    [6]       "Policy in Canada ¿ Amendments to Part XIII of the Insurance Companies Act ", Insurance Bureau of Canada, Update No. 4, October 28, 2009

    [7]       Insurance Act, R.S.O., section 40(1).

    [8]        Ibid. , section123.

    [9]       Ibid., section 39(2).

    [10]     Insurance Act R.S.A., section 18.

    [11]     Ibid., section 17(1).

    [12]     R.S.B.C. 1996 Chapter 141.

    [13]     Ibid., section 75.

    [14]     Supra, note 4.

    [15]     Supra, note 5.