July 10 2012
On May 8 2012 the Financial Services Commission of Ontario (FSCO), the government agency that regulates the solvency of all Ontario incorporated insurers (including companies/reinsurers, mutuals, reciprocal exchanges and fraternals), released a consultation paper titled Improving Solvency Supervision of Insurers in Ontario: A Proposal to Upgrade Solvency Standards for the Benefit and Protection of Ontario Policyholders. The paper outlines four proposals to reform Ontario's insurance regime. The FSCO requested that submissions from concerned parties be submitted by July 9 2012.
The four proposals are as follows:
The IAIS, an organisation with membership from almost 200 jurisdictions,(2) established more stringent solvency standards in response to the recent global financial turmoil. The Office of the Superintendent of Financial Institutions (OSFI), the government agency that oversees federally incorporated insurers, has adopted the IAIS standards.
According to the FSCO, it is not cost effective for the FSCO to adopt these standards given the limited number of insurers incorporated in Ontario. At the same time, it recognises that without adopting the more stringent IAIS standards, Ontario policyholders that insure with Ontario incorporated insurers could be at greater risk. The FSCO asserts that its new proposals for dealing with Ontario incorporated, non-farm mutual insurance companies are similar to what has already been implemented in respect of loan and trust companies, while its new proposals for dealing with farm mutuals are in line with those undertaken with respect to the credit union sector.(3)
Ontario incorporated insurers, other than farm mutuals (and reciprocal exchanges), will be required to export to a different Canadian jurisdiction. The choices are to continue federally under the Insurance Companies Act(4)(under OSFI jurisdiction) or to continue into another Canadian provincial jurisdiction, provided that the jurisdiction is compliant with the IAIS solvency standards.
Reciprocal insurance exchanges
The proposals do not apply to reciprocal insurance exchanges. Currently, approximately eight reciprocal insurance exchanges are incorporated in Ontario. In 2010, these insurance exchanges had combined direct written premiums of C$214,214,000 with combined direct claims incurred of C$199,247,000.(5)
The FSCO will continue to monitor the solvency of these reciprocal insurance exchanges. Its rationale for not including these insurance instruments in the proposals is that they have a "low solvency risk".(6) Reciprocals are funded by their membership.
Farm mutual insurance companies
Under the FSCO proposals, farm mutual insurance companies are also not required to export into another jurisdiction. Farm mutuals are companies that are owned by their policyholders.(7) There are currently approximately 45 Ontario incorporated farm mutuals, with close to C$500 million in premiums and over 1,000 Ontario employees.(8)
Farm mutuals are currently supervised by both the FSCO and the Fire Mutuals Insurance Fund. The Insurance Act(Ontario)provides that the fund is allowed to examine the solvency of its participants, and all farm mutuals are members of the fund.(9)(10) Since the fund covers 100% of policyholders' claims, it has a vested interest in ensuring that farm mutuals remain solvent.
In order to avoid the replication of tasks, in 1999 the FSCO agreed to have the Ontario Mutual Insurance Association (OMIA) carry out solvency reviews on its behalf. The OMIA conducts the solvency assessments of farm mutuals through the fund. The FSCO proposes to recommend that the Insurance Act (Ontario) be amended to provide that the fund is exclusively responsible for assessing farm mutual insurers' solvency. It proposes that the legislation would contain a condition that the fund must report regularly to the minister of finance on the solvency situation of farm mutuals to ensure that it is undertaking the examinations. Since the fund, and not the FSCO, would be responsible for the solvency examinations of farm mutuals, the FSCO's proposal permits farm mutuals to remain incorporated in Ontario.
Approximately nine insurers would be affected by the FSCO's proposal to require Ontario incorporated insurers to export into a jurisdiction that has adopted IAIS standards. Insurers that were incorporated under Part V of the Corporations Act (Ontario) should look to Section 313 (1.1) of the act, which provides that:
"An insurance company incorporated under this Act, may if authorized by special resolution, by the Superintendent of Financial Services appointed under section 5 of the Financial Services Commission of Ontario Act, 1997 and by the laws of any other jurisdiction in Canada, apply to the proper officer of that other jurisdiction for an instrument of continuation continuing the insurance company as if it had been incorporated under the laws of that other jurisdiction."(11)
This section permits continuance only to other Canadian jurisdictions. Incorporations cannot be transferred somewhere other than a jurisdiction in Canada.
Prior to the enactment of Section 313 (1.1) in 2000, Ontario incorporated insurers wishing to continue into another jurisdiction had to obtain sponsorship of a private member's bill permitting the change of jurisdiction. Since 2000, Ontario incorporated insurers can continue, for example, federally under the Insurance Companies Act, by following the process of continuance under Section 313 (1.1) and the process of continuance under the Insurance Companies Act, which provides as follows:
"A body corporate incorporated otherwise than by or under an Act of Parliament may, if so authorized by the laws of the jurisdiction where it is incorporated, apply to the Minister for letters patent continuing the body corporate as a company under this Act."(12)
OSFI's requirements for continuance into federal jurisdiction are summarised in Transaction Instruction Index A 13, Continuation of a Body Corporate.(13)
Continuance by an Ontario incorporated insurer into federal jurisdiction, although no longer requiring a private member's bill, is very similar to a new incorporation, for which the requirements are substantial.(14)
Ontario incorporated insurers (other than farm mutuals or reciprocal exchanges) will need to consider alternatives. The most viable option includes continuing the organisation under the federal Insurance Companies Act. It is not entirely settled at this point which other provinces are, or will be, requiring the insurers that they regulate to comply with the IAIS standards. In addition, all Ontario licensed insurers need to be aware that, going forward, the FSCO will require compliance with the IAIS standards as a condition of carrying on the business of insurance in Ontario.
For further information on this topic please contact Carol Lyons or Jared Grossman at McMillan LLP by telephone (+1 416 865 7000), fax (+1 416 865 7048) or email (email@example.com or firstname.lastname@example.org).
(2) Ontario, Financial Services Commission of Ontario, Improving Solvency Supervision of Insurers in Ontario (Ontario: Financial Services Commission of Ontario, 2012), at 2, www.fsco.gov.on.ca/en/insurance/Documents/improving-solvency.pdf.
(5) Financial Services Commission of Ontario, Superintendent's Report on Insurance 2010 at 92 http://www.fsco.gov.on.ca/en/about/annual_reports/Documents/suptreport2010.pdf.
(14) Refer to the OSFI's Guide for Incorporating Federally Regulated Insurance Companies, see www.osfi-bsif.gc.ca/app/DocRepository/1/eng/guides/application/insguide_e.pdf.
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