A Seaof Change

Changes to Part XIII of the Insurance Companies Act (Canada) (ICA) with respect to the “insuring in Canada of risks” have received extensive publicity during the past year. However, another important change being implemented on Jan. 1, 2010 will fundamentally affect how marine insurance is regulated in Canada.

Effective Jan. 1, Section 572 of the ICA will no longer provide foreign insurers with an exemption from licensing for “insurance of risks falling within the class of marine insurance.” Foreign marine insurers will be treated like all other foreign insurers underwriting risks in Canada. Foreign insurers writing in Canada marine risks will be subject to federal oversight by the Office of the Superintendent of Financial Institutions (OSFI). Domestic insurers have the option to apply for a federal marine license.

Marine insurance has always been a slightly confusing area to regulate due to the lack of a clear definition of what it actually covers. For example, “ocean marine” has traditionally referred to coverage of international shipping activities, and has not required any form of licensing in Canada. However, “Great Lakes marine” has re- ferred to shipping that occurs in the Great Lakes and in the St. Lawrence. This type of shipping, as well as any marine activities occurring exclusively on lakes or rivers in Canada, has required a provincial marine license (but not an OSFI license).

Further confusion is created by the use of the term “inland marine.” OSFI does not recognize this class of business, which traditionally refers to transit business occurring on land (such as cargo carried by trucks and railroads).This line of business is regulated as either commercial automobile or property business in Canada.

Finally, the unique nature of marine insurance is recognized by the fact that the purchase of unlicensed marine insurance policies by Canadian residents is exempt from federal excise tax. This exemption has been another recognition of the international nature of marine insurance.

The legal framework for marine insurance contracts and marine liability in Canada is currently governed federally by the Marine Insurance Act and the Marine Liabilities Act. However, neither the Marine Insurance Act nor the Marine Liabilities Act deals with the regulation of marine insurance from either a prudential or market conduct standpoint. Some provinces — for example, British Columbia, Manitoba, New Brunswick, Nova Scotia, Ontario and Quebec — have enacted specific marine legislation that applies to marine insurance. However, several Supreme Court of Canada decisions, including Triglav Ltd. v. Terrasses Jewellers Ltd. [1983], have recognized the federal government’s legislative authority over marine insurance contracts and liability through its navigation and shipping power under the Canadian constitution. As a result, provincial insurance regulators began to question their ability to regulate marine insurers. The provinces were concerned that any decisions they made regarding a marine insurer could be challenged and overturned by the courts. The provinces therefore asked the federal government to assume the responsibility for overseeing the prudential regulation of marine insurers.

Canada’s federal government responded to the provinces’ concerns by proposing new legislation to regulate marine insurers. In the 2006 Financial Institutions Legislation Review: Proposals for an Effective and Efficient Financial Services Framework (June 2006), the federal government provided that “it would be in the best interests of consumers of marine insurance and the industry if the federal government were to provide marine insurers with the option to register with the Superintendent of Financial Institutions and be subject to federal prudential oversight, as is currently done for other types of insurance.” It was proposed that relevant sections of the ICA be amended to give insurers that “exclusively” provide marine insurance the option to be subject to federal prudential oversight. The federal government also agreed that the provinces would continue to provide market conduct oversight for the marine insurance industry. Marine insurers would continue to be required to be provincially licensed for marine insurance activities occurring in a particular province.

Amendments to the ICA regarding marine insurance extended beyond what the federal government’s department of finance originally contemplated when it consulted with the marine industry prior to drafting and enacting the legislation. In summary, the amendments to the ICA are as follows:

• Domestic “marine companies” — companies incorporated for the sole purpose of insuring risks within the class of marine insurance — will be required to obtain a commencement order before insuring marine risks in Canada.

• Multi-line domestic insurers that insure marine risks have the option to include the class of marine insurance in their order;

• Multi-peril foreign insurers that insure or plan to continue to insure in Canada marine risks must apply to OSFI to have their order amended to add the marine class of insurance.

• Mono-line foreign marine insurers must seek a commencement order to establish a branch in Canada.

OSFI indicated in a letter to the industry dated Aug. 15, 2007 that it would presume all marine risks reported on the books of a branch on Dec. 31, 2009 to have been insured in Canada. It is expected that marine risks will remain on the books of the branch of the foreign insurer, unless the foreign insurer has satisfied OSFI that, in accordance with the indicia set out in the Part XIII regulations for “insuring in Canada a risk,” some or all of the marine risks were insured outside of Canada. Therefore, foreign marine insurers will be required to vest assets for all marine risks insured in Canada prior to Jan. 1, 2010 and going forward.

A foreign marine insurer will be able, as of Jan. 1, 2010, to write all of its Canadian marine business from outside of Canada on an unlicensed basis. Marine insurers will face a difficult choice. If they are currently licensed in Canada, they will be required to add marine insurance as a class of business and to vest additional assets in trust to cover the policy liabilities. Foreign marine insurers that are not currently licensed in Canada will need to decide whether to apply for a federal marine insurance licence. There appears to be an inconsistency in the treatment of foreign marine insurers since Canadian domestic marine insurers are not required to apply for a federal marine licence (it is optional for them).

If a foreign marine insurer decides not to become licensed in Canada, there will be significant limitations on its activities. Provincial insurance legislation contains a broad definition of “carrying on the business of insurance” that will prohibit unlicensed marine insurers from doing marketing activities, negotiating coverage, delivering policies or collecting premiums in Canada.

It is likely that most foreign marine insurers and reinsurers that currently have a Canadian branch will add marine as a class of business and continue to write it. Canadian marine insurance is an important line of business. Direct written marine premiums for 2008 were Cdn$297.9 million. 1

It is also likely some foreign mono-line marine insurers as well as protection and indemnity (P&I) clubs will decide to become licensed in Canada, so that they might be able to conduct a broader range of insurance activities and increase their premiums written in the Canadian market. It is interesting to note that The Shipowners’ Mutual Protection and Indemnity Association (Luxembourg) (a P&I club) recently applied to OSFI to establish a Canadian branch.

It is unlikely the additional regulation of marine insurance in Canada will discourage most insurers from continuing to write Canadian marine business. However, it wi ll be necessary for unlicensed foreign marine insurers to decide whether to become licensed in Canada or continue to write business on an unlicensed basis.

Vincent van Gogh once stated that sailors “know that the sea is dangerous and the storm terrible, but they have never found these dangers sufficient reason for remaining ashore.” The same statement applies to many marine insurers as they choose to venture into the uncharted waters of Canadian marine insurance regulation and become licensed in Canada.

1 2009 Statistical Issue, Canadian Underwriter, June 2009.

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Amendments to the ICA regarding marine insurance extended beyond what the department of finance originally contemplated when it consulted with the marine industry.