As anticipated in our 2021 Year in Review, there were several developments in the regulation of the insurance sector in Canada in 2022. This article provides a recap of some of the substantial changes that were made to the regulation of insurers and insurance intermediaries in Canada in 2022 and will highlight issues that insurers and other industry participants should watch for in 2023.

1. REGULATORY CHANGES

     a. Alberta’s Bill 16 Comes Into Force With a Goal of Increasing Alberta’s Insurance Capacity and Launching an Alberta Captive Insurance Market

On May 31, 2022, Alberta’s Bill 16, the Insurance Amendment Act, 2022 (the “Act”) came into force, making amendments to Alberta’s Insurance Act and the Captive Insurance Companies Act.

The amendments to the Insurance Act include provisions intended to provide easier access to reinsurance and the ability to enter into limited partnerships, as well as administrative changes that align the Insurance Act with insurance laws in other jurisdictions. The Act also amended the Captive Insurance Companies Act by adding “redomestication” provisions which permit foreign captives to relocate to Alberta.

For more detail on the Act, please refer to our article here.

      b. Financial Services Regulatory Authority of Ontario’s (“FSRA”) Unfair or Deceptive Acts or Practices Rule is Approved

The Unfair or Deceptive Acts or Practices (“UDAP”) Rule was approved in Ontario by the Minister of Finance in early 2022 and was effective as of April 1, 2022. The UDAP Rule applies to insurers of life & health, and property and casualty (“P&C”), including auto, risks, and related providers of goods and/or services. The principles-based rule replaced the current UDAP regulation under Ontario’s Insurance Act and is intended to, among other things:

• facilitate improved outcomes by better protecting consumers from harm due to improper practices such as unfair discrimination, unnecessary claims delays and fraudulent activity;
• reduce regulatory burden, and remove barriers to innovation for industry, by being less prescriptive; 
• support the transition to principles-based regulation by focusing on outcomes and eliminating overly prescriptive provisions; and
• further align regulation with FSRA’s Fair Treatment of Customers (“FTC”) guidance.

The approved UDAP Rule can be found here.

      c. OSFI Issues Final Revised Guidance on Reinsurance Practices

On February 11, 2022, the Office of the Superintendent of Financial Institutions (“OSFI”) issued final versions of its Guideline B-3, Sound Reinsurance Practices and Procedures (the “Final B-3 Guideline”) and Guideline B-2, Property and Casualty Large Insurance Exposures and Investment Concentration (the “Final B-2 Guideline” and together with the Final B-3 Guideline, the “Final Guidelines”).

The Final B-2 Guideline sets out OSFI’s expectations relating to large insurance exposures. It applies to all federally-regulated P&C insurers, including branches in Canada of foreign insurers. The B-2 Guideline expectations include:

• P&C insurers will have a comprehensive Gross Underwriting Limit Policy that defines and determines what constitutes a single insurance exposure by class of insurance;
• insurance exposure limits for direct business or assumed business from an affiliated company of a federally-regulated P&C insurer will be specified; and
• investment limits to a federally-regulated P&C insurer’s investment in any one entity or group of affiliated companies will be set by policy.

The Final B-3 Guideline sets out OSFI’s expectations for effective reinsurance practices and procedures and applies to all federally-regulated insurers that are party to reinsurance cessions, retrocessions and assumption reinsurance transactions. The B-3 Guideline expectations include:

• federally-regulated insurers will have a sound and comprehensive reinsurance risk management policy (“RRMP”) that is reviewed annually at a minimum;
• federally-regulated insurers will regularly assess the adequacy of their reinsurance arrangements and they should not in the normal course of business cede all or substantially all of their insurance risks;
• federally-regulated insurers will consider counterparty risks when establishing ceding limits, perform due diligence on their reinsurance counterparties on an ongoing basis, and ensure that the terms and conditions of reinsurance contracts provide clarity and certainty on reinsurance coverage; and
• reinsurance contracts will include an insolvency clause stating that a reinsurer must continue to make full payments to an insolvent cedant, without any reduction resulting solely from the cedant’s insolvency.

The Final Guidelines each come into effect on January 1, 2025. Federally-regulated insurers have until then to adjust their business practices to comply with the new guidelines.

For more detail on the Final Guidelines, please refer to our article here.

      d. FCAC Issues Final Version of Product and Service Appropriateness Guideline

On February 24, 2022, the Financial Consumer Agency of Canada (“FCAC”) issued the final version of its Guideline on Appropriate Products and Services for Banks and Authorized Foreign Banks (the “Guideline”). FCAC is encouraging other Federally Regulated Financial Institutions (“FRFIs”) such as insurance companies to review this Guideline to develop and improve their appropriate product or service policies and procedures.

For more detail on the Guideline, please refer to our article here.

    e. OSFI releases final insurance capital guidelines for January 1, 2023

On July 21, 2022, OSFI released its final insurance capital guidelines which reflect the transition to International Financial Reporting Standard 17 – Insurance Contracts (“IFRS 17”) on January 1, 2023.

The transition to IFRS 17 represents the most significant change to insurance accounting requirements in over 20 years as it provides one set of consistent reporting principles to allow for better international comparisons between insurance industries. This is expected to result in increased transparency in financial information for insurance companies, to give investors and analysts more confidence in understanding the insurance industry.

    f. OSFI announces adjustments to regulatory prudential limits and a two-year transitional relief period in advance of transition to IFRS-17

On December 21, 2022, OSFI announced a temporarily relief to regulatory prudential limits related to investments, commercial lending and borrowing for P&C insurers, noting that some P&C insurers would have become non-compliant with one or more regulatory prudential limits due to the transition to IFRS 17.

The transitional relief period will last two years from January 1, 2023 to December 31, 2024 and will increase the statutory investment, lending and borrowing limits for Canadian P&C insurers by 25 per cent in order to give these entities time to transition to and comply with the prudential limits under IFRS 17. 

    g. Budget 2022: Financial Institutions Update

The 2022 federal budget (the “Budget”) proposed a number of legislative measures directed at the financial services sector. In particular the Budget proposed to amend the Bank Act, Insurance Companies Act, Trust and Loan Companies Act and Canada Deposit Insurance Corporate Act to:

• facilitate access to capital for property and casualty insurance companies;
• ensure that approval requirements for financial sector transactions apply regardless of how they are structured;
• adjust the time limited permissions of the investment regime to ensure they are used appropriately;
• strengthen governance at the Canada Deposit Insurance Corporation; and
• update proxy solicitation provisions for certain FRFIs.

In response to the effects of IFRS 17 on financial reporting for Canadian insurers, the federal government has proposed legislative amendments to confirm the support and use of IFRS 17 accounting standards for income tax purposes, with the exception of a new reserve known as the contract service margin, subject to some modifications. Without this exception, profits embedded in the new reserve would be deferred for income tax purposes. The federal government estimates that this measure will increase federal revenues by $2.35 billion over the next five years. The federal government is also proposing relieving transitional rules and consequential changes to protect the minimum tax base.

Additionally, the Budget includes a federal government proposal aimed at strengthening Canada’s health care system, including a new income-based dental care and pharamacare program. The proposed dental care program will allow Health Canada to provide dental care to Canadians with family incomes of less than $90,000 annually. The federal government pledges to continue ongoing work towards a universal national pharmacare program, which would include tabling and passing legislation by the end of 2023, and tasking the Canadian Drug Agency to develop a national formulary of essential medicines and a bulk purchasing plan.

For more detail on the 2022 federal budget, please refer to our article here.

2. REGULATORY TRENDS

     a. OSFI Reaches out to Industry in Advance of Issuing a Guideline Concerning Culture Risk Management

On March 15, 2022, OSFI released a letter (the “Letter”) outlining its plan to issue for consultation a culture risk management guideline applicable to all FRFIs including insurers. The future guideline will be principles-based and outcomes-focused, as OSFI acknowledges that each FRFI’s culture is unique and the managing of culture risks will vary with the size, nature, scope, and complexity of an FRFI’s operations. As part of the Letter, OSFI proposed the following six prudential outcomes that FRFIs should achieve in order to support effective culture risk management and oversight:

• Leadership: Leaders at all levels should consistently promote and reinforce the desired culture.
• Compensation, People Management & Incentives: FRFIs should acquire, develop, retain, compensate, and incentivize executives, material risk-takers and all other employees to promote and reinforce the desired culture, effective culture risk management, and achieve sound financial and non-financial outcomes.
• Accountability & Ownership: Individuals should have a clear understanding of their roles and responsibilities, have capacity and autonomy to fulfill them, take ownership of their decisions and actions, and be held accountable for them.
• Risk Mindsets & Behaviours: Risk mindsets and behaviours within FRFIs should align with and support the structures in place to ensure financial and non-financial risks are effectively managed.
• Group Dynamics & Decision-Making: The work environment should enable individuals to feel safe to speak up, openly communicate and work together to make sound decisions and achieve financial and non-financial outcomes.
• Resilience: Individuals should be vigilant towards known and unknown threats, notice and effectively respond to problems and opportunities, and continuously learn, improve, and adapt to changing conditions.

These outcomes will serve as the foundation of future guidance and other related expectations related to culture risk management.

For more detail regarding the Letter and the consultation, please refer to our article here. 

     b. The Canadian Insurance Services Regulatory Organizations publishes Principles of Conduct for Insurance Intermediaries

On April 6, 2022, the Canadian Insurance Services Regulatory Organizations (“CISRO”) published the Principles of Conduct for Insurance Intermediaries (“Principles”) to help ensure the fair treatment of customers in the life & health and P&C insurance sectors. CISRO notes that the Principles are intended to supplement the Conduct of Insurance Business and Fair Treatment of Customers guidance (“FTC Guidance”) and further CISRO's Strategic Plan 2019-2022, which includes the “development of national practice standards for intermediaries to facilitate a cooperative approach to the regulatory oversight of intermediaries.”

The following is a brief summary of the Principles:

1. Compliance / Outcomes: Intermediaries must comply with all applicable laws, regulations, rules and regulatory codes in the jurisdictions to which they are subject.
2. Customers’ Interests: Intermediaries are expected to place customers’ interests ahead of their own, including when developing, marketing, recommending, distributing and servicing products.
3. Conflicts of Interest: Intermediaries are expected to identify, disclose and manage any actual or potential conflicts of interest and avoid entering into or pursuing agreements for which conflicts of interest cannot be managed, or if they interfere with the fair treatment of customers.
4. Advice: When providing advice to or for a customer, intermediaries are expected to seek appropriate information from the customer in order to understand and identify their unique needs so that the advice is suitable for the needs of the customer.
5. Disclosure: Intermediaries are expected to provide customers with objective, appropriate, relevant, timely and accurate information and explanations so that they can make informed decisions, including disclosing all necessary parties such as the insurer.
6. Product and Service Promotion: Intermediaries are expected to ensure that products and services are promoted in a clear and fair manner and are not misleading. Product promotions are expected to disclose all necessary and appropriate information.
7. Claims, Complaints Handling, and Dispute Resolution: Intermediaries are expected to handle or cooperate in the handling of claims, complaints and disputes in a timely and fair manner.
8. Protection of Personal and Confidential Information: Intermediaries are expected to take necessary and appropriate measures to protect and manage personal and confidential information, including complying with all applicable privacy legislation.
9. Competence: Intermediaries are expected to maintain an appropriate level of professional knowledge, and should stay current through continuing education to ensure the fair treatment of customers. Intermediaries are expected to not misrepresent their level of competence or conduct business beyond their level of professional knowledge and experience, and their duties must match their training/education.
10. Oversight: Intermediaries with contractual or regulatory oversight obligations are also responsible for the conduct of any employee or third party involved in the marketing, distribution or servicing of an insurance product. Intermediaries are expected to have tools at their disposal such as policies and procedures, training and control mechanisms to ensure the fair treatment of customers is achieved.

Intermediaries are expected to conduct their business by following the applicable Principles, while also ensuring compliance with all applicable laws, regulations, rules, or regulatory codes within all jurisdictions where they carry on business.

     c. CCIR and CISRO release new guidance on incentive management under the fair treatment of customers

On November 30, 2022, the Canadian Council of Insurance Regulators (“CCIR”) and CISRO released new guidance on the management of incentive arrangements related to the sale and servicing of insurance products.

The guidance, called the Incentive Management Guidance (IMG), sets out CISRO/CCIR’s expectations for insurers and intermediaries to develop incentive arrangements which complement and align with the FTC Guidance released in September 2018.  In particular, the IMG discusses principles in the following areas:

1. Governance: Insurers and intermediaries are expected to have their governance and business culture place the fair treatment of customers at the center of decisions concerning the way incentive arrangements are designed and managed.
2. Design and management of incentive arrangements: Insurers and intermediaries are expected to design and implement incentive arrangements by incorporating criteria that ensures the fair treatment of customers.
3. Risks of negative outcomes to customers: Insurers and intermediaries are expected to regularly identify and assess the risks of unfair outcomes to customers that may arise for incentive arrangements, and adjust the incentive arrangements accordingly.
4. Controls: Insurers and intermediaries are expected to establish effective controls to identify unsuitable/inappropriate sales and other inappropriate practices resulting from incentive arrangements.

The following are some examples of incentive arrangements noted in the IMG that, without proper design, management and controls, may increase the risk of unfair outcomes to customers:

• Excessive incentives for cross-selling optional products compared to the incentive for selling only the primary product.
• Commissions linked mainly to the premium level or the investment amount.
• Ongoing commission amounts that underestimate the level of service expected.
• Incentive arrangements which can result in fees or penalties (e.g., exit fees) for the customer.
• Incentives paid to intermediaries who are not involved in the sale and servicing, either provided or expected.
• Performance criteria primarily aligned with quantitative objectives.
• Qualitative criteria that are ineffective or insufficient in aligning the interests of the insurer and intermediary with those of the customer.
• Sales contests, sales quotas, bonuses and non-monetary benefits that are based on sales of specific products over limited periods of time
• Contests, campaigns, promotions, loyalty or recognition programs that are designed to increase sales volumes or meet other quantitative targets to obtain bonuses, rewards (e.g., titles, gifts, goods, hospitality, trips) or privileges (e.g., access to services).
• Incentives paid in advance of the service expected or the achievement of performance targets.
• Agreements with intermediaries (e.g., distribution, contingent, financial support, access to IT platforms/software, profit-sharing programs, call centres), which may allow insurers to influence the decisions, operations and practices of intermediaries and restrict access to markets. For example, insurers could impose a minimum volume or a deadline for complying with a volume, include a bonus or a share in the profits based on contract experience or productivity-based loyalty programs that may affect the independence of advice given by intermediaries or incentivize them to place all, or a majority, of their new business with a particular insurer.

CCIR and CISRO also note that insurers and intermediaries must obtain reasonable assurance that the actions taken by persons and entities acting on their behalf in the sale and service of insurance products meet their incentive management expectations and contribute to achieving the fair treatment of customers.

Similar to the FTC Guidance, the IMG is principles-based and therefore insurers and intermediaries have discretion to devise strategies, policies and controls in support of fair customer outcomes based on the nature, size and complexity of their business activities.

      d. OSFI Publishes First Interim Framework for Cryptoassets held by FRFIs

On August 18, 2022, OSFI issued an advisory (the “Advisory”) setting out its interim approach to cryptoassets held by FRFIs, including federally-regulated life insurance companies and fraternals, and federally-regulated P&C companies.

The Advisory outlines OSFI’s expectations with respect to prudential treatment of cryptoasset exposures, including guidance on how FRFIs should approach the capital and liquidity treatment of cryptoasset holdings and consultation questions that will inform future guidance. The Advisory categorizes cryptoassets into two groups with different levels of prudential treatment: Group 1 cryptoassets, which include tokenized traditional cryptoassets and stablecoins that must meet certain conditions, and Group 2 cryptoassets, which are a residual category that captures all cryptoassets not in Group 1 (i.e., they fail to meet the required conditions) and would include most cryptocurrencies, including bitcoin.

Under the Advisory, all FRFIs will be mandated to notify OSFI in writing if they exceed certain limits to Group 2 cryptoassets exposures:

• Total gross positions across all Group 2 cryptoasset exposures exceeding 1% of Tier 1 capital (for deposit taking institutions (“DTIs”) and life insurers) or capital available (for P&C and mortgage insurers).
• Total net short positions across all Group 2 cryptoasset exposures exceeding 0.1% of Tier 1 capital (for DTIs and life insurers) or capital available (for P&C and mortgage insurers).

As part of the consultation, OSFI is also seeking input on whether it would be appropriate to incorporate the calculation of an exposure amount under the current exposure method for derivatives referencing cryptoassets by insurance companies, which are currently required to deduct the full notional amount of any derivative referencing cryptoassets, and whether the deduction should apply to derivatives referencing a portfolio with only partial cryptoasset exposure.

OSFI is encouraging early adoption of the guidance, with the interim approach officially effective at the beginning of a FRFI’s Q2 2023 reporting period.

For more detail on the Advisory, please refer to our article here.

     e. Innovation Office of FSRA releases Final Innovation Framework

As anticipated in our 2021 Year in Review, the Innovation Office of the FSRA, the regulator of insurance companies, credit unions, caisse populaires and loan and trust companies in the province of Ontario, released its Final Innovation Framework on January 24, 2022 following public consultation in 2021. The Innovation Framework describes how the FSRA will identify, manage, and deliver opportunities to enable innovation in regulated sectors. The FSRA also concurrently released the first “test and learn environment” (“TLE”) on January 24, 2022, available for use by the automobile insurance sector. TLEs are a set of virtual environments that allow interested market participants to test out their innovative products, services, and business models using data-driven and evidence-based approaches.

3. OTHER DEVELOPMENTS THAT WE ARE WATCHING IN 2023

• OSFI: In its Departmental Plan for 2022-2023, OSFI noted that it is advancing the development of a new approach for determining capital requirements for segregated fund guarantee risk for life insurers, which will become effective January 2025. OSFI is also reviewing the Minimum Qualifying Rate for Uninsured Mortgages and will publicly disclose the results of these reviews and any changes.
• Ontario: In October 2022, FSRA release its statements of priorities for 2023-2024 which, among other things, sets out FSRA’s priorities in the insurance sector, including the following:
  • The FSRA Innovation Office will leverage the data and knowledge gained from the pilot TLE in 2022 to expand the scope of its TLE model by including more initiatives across regulated sectors in the upcoming years.
  • In 2023, FSRA plans to deliver the first components of a new regulatory system and portals to significantly improve licensing and registration processes for the mortgage brokering and insurance sectors and health providers. The solution will be launched in phases for all sectors, with implementation targeted by 2024-2025.
  • FSRA also plans on executing a strategy for reforming the regulation of auto insurance rates and underwriting.
  • FSRA is going to continue to monitor and supervise the P&C sector to ensure the fair treatment of customers and will develop a market conduct framework for P&C insurance to address key areas for supervision, including insurance distribution.
  • For the life and health insurance sector, FSRA plans to (1) publish for consultation proposed changes to the framework for agencies with a contractual responsibility to screen, train and/or monitor individuals under their supervision who sell life and health insurance products, (2) implement a FSRA rule which will ban deferred sales charges for new segregated fund contracts and (3) work with regulators across Canada to enhance standards related to segregated funds.
•    British Columbia: The British Columbia Financial Services Authority’s (“BCFSA”) 2022/2023 regulatory roadmap sets out its regulatory guidance priorities for the next three fiscal years.
  • The roadmap notes that the BCFSA plans on publishing an Insurance Company Code of Market Conduct in Q3 of this year. The BCFSA will rely on the principles in the CCIR’s FTC Guidance in developing the Code.
  • The BCFSA also plans to revisit its guidance and expectations for the reporting of information security incidents by insurers beginning in Q3 of this year.

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