Licensed Insurance, Part XIII

A standing-room-only crowd attended the “Changes to Part XIII of the Insurance Companies Act” seminar on Oct. 2 at the National Insurance Conference of Canada in Ottawa.

Standing-room-only crowds at insurance conferences are rare; when they occur, it’s usually because there is some kind of industry-wide confusion that requires clarification.

In this instance, a vast majority of (re)insurers attending the seminar were hoping to gain some insight into how Canada’s solvency regulator intended to enact its proposed changes to Part XIII of the Insurance Companies Act.

The fact that they didn’t know already suggests there has been a serious failure of communication between the Ontario Superintendent of Financial Institutions (OSFI) and the insurance industry it oversees.

OSFI’s stated purpose for the amendments was to bring Part XIII of the Insurance Companies Act in line with Canada’s Wind-up and Restructuring Act.

Essentially, OSFI’s concern is about reserving, although a layman currently doesn’t stand a chance of knowing how this might ultimately affect him or her — and alas, (re)insurers aren’t having much luck figuring out how it will affect them either.

As near as anyone can tell, OSFI is attempting to answer the question: What happens if the Canadian branch of an international (re)insurer were to fail? If international policyholders were able to bring claims against the reinsurer’s insolvent Canadian branch, would this dilute the pool of money reserved to reimburse Canadian policyholders?

To fix this, if this is indeed the right way to express the problem (whatever the problem is), OSFI is proposing to figure out where the business of insuring is being done, so that (re)insurers and regulators will know for which policyholders they have to reserve.

Alas, something weird happened between the plan and the execution. For one thing, this was very a much a case of the regulator having a solution that was in search of a problem. It remains unclear just what exactly OSFI wants to resolve. Is this a real problem, based on a real event, or is the concern merely theoretical?

Also, based on the confusion within the industry that now surrounds OSFI’s amendments to Part XIII (a confusion that has caused OSFI to delay implementation until 2010), OSFI clearly hasn’t done a very good job of articulating to the industry — much less the public — how its proposed changes will fix whatever the problem is (if there in fact is one).

Instead, OSFI has now developed a multiple-part test to determine where the business of insuring is done. Each part of the test seems very arbitrary and uncertain in its application — to the point where the regulator has actually suggested to (re)insurers that they seek a legal opinion as to whether their business models would be considered by OSFI to be selling licensed or unlicensed insurance.

If OSFI’s test for determining whether an insurer is licensed or not is so complicated in its application that companies need to seek a legal opinion to figure out, then chances are it’s not the right kind of test to be applied. OSFI’s proposed four-part test should be much more straightforward not only in its design, but in its application.

At this point, OSFI would be well-advised to go back to the drawing board on this one. OSFI needs to be much clearer than it has been thus far in the description of its purpose (i. e. to protect the public), the way in which the amendments to Part XIII will achieve that purpose and how these changes will affect the industry.

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This is very much a case of the regulator having a solution that was in search of a problem.