Legislative Muscle

The Office of the Superintendent of Financial Institutions (OSFI)’s changes to Part XIII of the Insurance Companies Act create an increased risk to the public when unlicensed reinsurance is being used, warns British Columbia’s regulator, Financial Institutions Commission (FICOM). In response to this perception, FICOM took legislative action in February 2010, including placing more responsibility on brokers to act as “gatekeepers” and protect the public when unlicensed insurance is at play.

In a February 2010 bulletin addressed to foreign primary insurers, FICOM said the changes “made under Part XIII of the federal Insurance Companies Act could allow foreign insurers to insure risks in this province without that business being regulated in Canada. This province believes that this creates an increased risk to the public of this province and has taken steps to address that risk.”

Starting this year, OSFI implemented amendments to Part XIII, outlining a new test for “insuring in Canada a risk.” Basically, OSFI’s test no longer focuses specifically on the location of the insured risk, but rather on the location of business activity.

In an interview with Canadian Underwriter, Michael Grist, FICOM’s deputy superintendent of insurance and pensions, says OSFI created complications in determining whether or not business is being written in Canada. “An example would be if a foreign insurer was soliciting business in B.C., it might be viewed under the federal test as not requiring a license, because solicitation is only one of the criteria — it’s not a sole determining factor,” Grist says. “But in B.C., solicitation of insurance business requires you to be licensed. So that’s a situation where you might not be caught under the federal rules, but you would be caught under the B.C. rules.”

FICOM thus placed a condition upon business authorizations of foreign branches. Basically, “if you’re insuring a risk in B.C., you must conduct that business in Canada,” Grist says. “That would prevent a foreign insurer based in London, for example, from having two books of business, where it would solicit into B.C. for business and yet that business would not be subject to the usual protections of the Canadian system.”

OSFI’s amendments reduce the transparency of the regulatory system, FICOM contends, making it easier for bogus insurers to operate in Canada.

“Under the old Part XIII rules, if we came across a bogus insurer, the first question we would ask them is:’Are you licensed federally to provide property and casualty insurance in Canada?’ And if they weren’t, it was fairly easy for us to shut them down. We would just issue a cease-and-desist order,” Grist says.

“Now, because the indicia used to determine whether an insurer needs to be licensed federally are more complicated, we think it’ll be more difficult to shut those companies down. They may argue that they’re in the process of being federally licensed.”

For example, Grist says FICOM issued a cease-and-desist order in 2004 against a bogus insurer domiciled in Costa Rica that had placed approximately 400 liability policies in Canada. The ‘insurer’ used synthetic gemstones and debentures against Costa Rica land as its capital.

Under the new regime, it would be more complicated to put a quick halt to these sorts of bogus insurers, FICOM argues.

B.C. made the move to legislate, whereas the Canadian Council of Insurance Regulators (CCIR) issued a voluntary Consent and Undertaking (C&U) to foreign (re)insurers. The C&U is similar to FICOM’s amendments to its Financial Institutions Act, in that both attempt to offer the same protections. But Grist believes FICOM’s legislation is more flexible: the C&U sets out the specific activities that must be undertaken by foreign insurers, while FICOM’s legislation features more general wording.

“In drafting the requirements, we felt our approach was the simplest,” Grist says. “Things change over time. Ours references the specific section of the federal Insurance Companies Act. If things change over time, as long as we’ve referenced the federal legislation, we think it’ll be okay. Whereas if you get more detailed, and lay out specific requirements, those tend to change from time to time and require further amendments.”

Consumer protection is at the core of FICOM’s action, Grist says. To help navigate through the more complex regulatory environment, new requirements have also been placed on the broker “to ensure that if a consumer in B.C. needs to access the unauthorized insurance market — because, for example, appropriate coverage is not available in Canada — they get the right advice.

The Insurance Council of British Columbia has requested comment on what these requirements should look like, says Doug McLean, FICOM’s executive director of insurance. The draft rules include that the broker should make “appropri ate disclosure to the insured about the credit worthiness of the insurer.” The broker must also take “reasonable steps to ensure that similar coverage is not available from an authorized insurer, and that the client is advised of the risks associated with placing business with an unlicensed insurer.”

The draft rules also require brokers to file a quarterly report detailing how much business is placed with unauthorized insurers.