Capital requirements of life insurance companies : Where do we stand ?

February 1, 2014

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AT THE INTERNATIONAL LEVEL
On December 16, 2013, the International Association of Insurance Supervisors (the “IAIS”), which groups the regulators of 140 countries, including Canada, published a consultation document proposing to the international community a series of regulatory capital safeguard requirements applicable to global systemically important insurers¹. Earlier in 2013, the IAIS had established some criteria to allow the Financial Stability Board, an economic group related to the G20, to identify these global systemically important insurers which may, in the event of bankruptcy, disrupt the international financial system due to their size, complexity, global scale and degree of interdependence with other financial institutions or the exclusive nature of the services they provide.

Having for mission to promote effective supervision of the global insurance industry and contribute to its financial stability, the IAIS has undertaken the first step of its project which should lead to the adoption, by G20 countries, of a first set of international capital requirements for global systemically important insurers deemed to be “too big to fail”.

It had indeed become necessary to implement such regulatory framework given the absence of consistent international capital requirements for global systemically important insurers, the inadequacy of the requirements applicable to banking institutions in the Basel agreements having regard to the specificity of insurance companies and, as the 2008 financial crisis remin-ded us, the importance of ensuring better resiliency of these important insurance institutions in the event of possible economic disruptions.

Following the consultations currently conducted by the IAIS, it is anticipated that the conclusion of this first step will consist in the final adoption of these first international requirements by the G20 in November 2014 at the next G20 summit in Brisbane, Australia.

The IAIS anticipates completing the second step of its project on or about late 2015 by adopting a series of additional requirements with higher loss-absorbing capacity targets for all global systemically important insurers.

The final step of the project will consist in the adoption by the G20 of a risk-based international capital standard applicable to global systemically important insurers, called “risk-based group-wide global insurance capital standards” or “ICS”. These ICS standards will be applicable to globally active insurance companies, which particularly includes the global systemically important insurers. The work respecting the ICS standards is due to be completed by the end of 2016.

The IAIS anticipates that the full implementation of its global regulatory framework for insurance companies should begin in 2019, after two years of field testing and adjustment of its standards, to be carried out in 2017 and 2019.

Lastly, it should be noted that on July 18, 2013, the Financial Stability Board published a first list of global systemically important insurers. No Canadian insurance company was included among the nine identified companies². However, this list will be updated annually beginning in November 2014.

IN CANADA
In Canada, the Office of the Superintendent of Financial Institutions (“OSFI”) participates in the initiatives of the IAIS for promoting the harmonization between these initiatives and its own framework of regulatory capital applicable to federal life insurance companies, which is currently provided for in some OSFI guidelines³.

In September 2012, the OSFI published its Life Insurance Regulatory Framework, a document stating the priorities of the OSFI as to the regulation of federally chartered life insurance companies⁴ and particularly announcing an in-depth review of the capital adequacy requirements for these insurers. In a press release issued on November 12, 2013, the OSFI was reviewing the first year following the coming into force of this regulatory framework.

The new proposed regulatory framework provides for the adoption of a new guideline respecting the regulatory capital requirements, which will, among other things, (i) incorporate new risks not explicitly covered by the current framework; (ii) accommodate smaller companies, as well as larger, more complex companies; (iii) link risk measures to the quality of capital available to absorb losses; and (iv) take into account the interaction between risks (diversification/concentration).

Although it was originally anticipated that the consultation of industry members would be completed in 2014 with the progressive implementation of the changes being made between 2014 and 2016, the OSFI stated in its press release dated November 12, 2013 that the deadline for completing the new capital framework was postponed to 2016 and it was therefore anticipated that it would come into force in 2018.

The OSFI intends to continue its work on its new regulatory capital framework and publish in 2016, for public consultation purposes, a provisional version of its new guideline. The period between 2016 and 2018 will be used to conduct parallel tests prior to the complete implementation of this new guideline anticipated for 2018.

At the same time, the OSFI announced in December 2013 the adoption of revisions of its MCCSR guideline. The revisions take into account the change of accounting standards, provide clarifications to users and take into account the recent A-4 and E-19 guidelines on the implementation of internal risk and capital assessment systems by life insurance companies. The revisions of the MCCSR guideline came into force on January 1, 2014.

IN QUEBEC
Lastly, it is to be noted that on December 18, 2013, the Autorité des marchés financiers (“AMF”) announced the adoption of modifications to its Capital adequacy requirements guideline applicable to insurers holding a permit to operate in the insurance of persons industry in Quebec⁵.

The changes made on this occasion remain minor. They mainly constitute measures for harmonizing Quebec regulations with the standards of the OSFI or the OECD, adapting the accounting language and clarifications made in response to questions raised by industry members.

The most obvious change is certainly the one concerning the treatment of the risks specific to the damage insurance subsidiaries held by insurance of persons companies. The AMF explains that the changes made to this effect will now take into account some risks which were not previously considered.

The changes to this AMF guideline came into force on January 1, 2014. However, the modifications pertaining to the treatment of damage insurance subsidiaries will only come into effect on January 1, 2015.

CONCLUSION
The recent initiatives of the various regulating bodies of the insurance industry, both at the national and international level, demonstrate the growing concern about the issue of creditworthiness and proper capitalization of these financial institutions.

As international standards respecting capital were up until now mainly applicable to the banking industry, the international community has recognized the systemic importance of insurance companies and the need to provide that industry with global standards specifically adapted to their operating model. At the Canadian and Quebec level, the OSFI seems to closely monitor these developments and the AMF demonstrated that it was continuing its harmonization efforts.

The 2008 crisis and particularly the case of AIG certainly confirmed the fundamental need for ensuring the strength of life insurance companies in order to increase the capacity of the financial system to absorb the shocks caused by financial and economic tensions and proportionally reduce the risk of repercussions on the real economy.

The challenge now facing the financial and regulatory communities is certainly the speed at which the standards developed may become obsolete in view of the speed at which financial markets evolve. Regulatory authorities must ensure that the adaptation of their normative schemes follows the pace of the development of financial operations which are increasingly complex and sophisticated. It is therefore expected that the prudential regulatory scheme will be called upon to constantly adjust. Insurance companies will have no choice but to keep ahead of developments.
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¹ Basic Capital Requirements (BCR) for Global Systemically Important Insurers (G-SIIs): Proposal.
² In alphabetical order: Allianz SE; American International Group, Inc.; Assicurazioni Generali S.p.A.; Aviva plc; Axa S.A; MetLife, Inc.; Ping An Insurance (Group) Company of China, Ltd.; Prudential Financial, Inc.; Prudential plc.
³ Minimum Continuing Capital and Surplus Requirements (MCCSR), Guideline A-4: Regulatory Capital and Internal Capital Targets and Guideline E-19: Own Risk and Solvency Assessment (ORSA).
⁴ Although the provinces have jurisdiction to regulate issues respecting the capital adequacy of insurance companies operating in their respective territories, many of them have decided, for convenience purposes, to delegate this role to the OSFI. Therefore, the capital requirements of the OSFI apply not only to federally chartered insurance companies, but also to those chartered by a province having an agreement with the OSFI to this effect. For its part, Quebec has chosen to regulate itself the operation of insurance company operating in its territory.
⁵ However, in practice, insurance of persons companies, whether federally chartered or incorporated under a provincial law, which submit to the regulatory capital requirements of the OSFI, are deemed to also satisfy the AMF requirements in this respect.

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July 21, 2023

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Given that exclusions and limitations constitute information that is necessary for a client to make an informed decision, the AMF urges firms to pay attention to these and to select them based on a proper analysis.9 Suspension of transactions The AMF has clarified how to apply the criteria under section 14 of the RADM, more specifically paragraph 3 of this section, which provides that a firm must suspend a transaction initiated through a digital space when no representative can immediately intervene with a client who asks to deal with a representative and there is a risk that the client will not be able to make an informed decision. The AMF specifies that it is up to the firm to assess and manage its risk. 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A representative’s contact information does not have to appear on external documents and websites at all times. It is important to note that under section 9 of the RADM, a document that is to be “provided” or “presented” to a client cannot be located on an external website. Explanations, s. 8. Explanations, s. 8, para. 1. Explanations, s. 9. For example, a client declaring they have no children yet selecting insurance for their children constitutes a contradiction. Explanations, s. 14.

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July 7, 2022

Amendments to the Charter of the French Language: Impacts on the Insurance Sector

Bill 96 – An Act respecting French, the official and common language of Québec (the “Act”) - was adopted on May 12, 2022 and assented to on June 1, 2022, its effective date. Certain provisions are already in force; for other provisions, a transitional period ranging from several months to three years will apply. This document provides an overview of the modifications included in the reform of the Charter of the French Language (the “Charter”) that will have an impact on various aspects relevant to insurance sector stakeholders doing business in Québec. Forming the centrepiece of the announced changes, the reform of the Charter includes strengthened oversight mechanisms governing the use of French as the language of commerce and business, as well as linguistic rights in the areas of employment and communications with agents of the State. Overseeing the language of commerce and business The reform of Section 55 of the Charter stipulates that contracts of adhesion and related documents must be drawn up in French. However, effective June 1, 2023, a French-language version of these contracts and documents must be provided to participants First Alinea of this amended section reads as follows: 55. Contracts pre-determined by one party and the related documents, must be drawn up in French. The parties to such a contract may be bound only by its version in a language other than French if, after its French version has been remitted to the adhering party, such is their express wish. The documents related to the contract may then be drawn up exclusively in that other language.1 Therefore, contractual clauses in which the parties simply indicate that they agree to be bound by a contract drawn up in a language other than French are no longer sufficient. The Civil Code of Québec stipulates that “A contract of adhesion is a contract in which the essential stipulations were imposed or drawn up by one of the parties, on his behalf or upon his instructions, and were not negotiable.”2 To qualify a contract, the importance of the negotiated terms and conditions and their connection with the contract must be analyzed. It is generally recognized that if the essential stipulations are not negotiable, the contract is a contract of adhesion, even though some less important terms and conditions may have been negotiated by the parties. This amendment codifies the interpretation adopted by the Office québecois de la langue française (“OQLF”) and the courts,3 particularly given that negotiated contracts were not covered by this provision. To remove any doubt concerning this interpretation, Bill 96 was amended so as not to extend the scope of this requirement to include contracts containing “printed standard clauses”. The insurance contract Since their essential stipulations are typically drawn up by the insurer, insurance contracts and their endorsements are contracts of adhesion, as a general rule. Therefore, the French-language version of all related documents — notices, letters, insurance product summaries — must be provided to clients before they can decide whether they will be bound by a version drawn up in another language. During the parliamentary debates, Minister Jolin-Barette commented that Section 55 of the Charter only referred to consumers and that contracts between two companies could be drawn up in the language of their choice if that was the express wish of both parties. The term “consumer”, however, is not defined in the Charter. Ambiguity remains as to whether the Minister’s comment only referred to contracts containing standard clauses or whether contracts of adhesion were included. We will have to wait for the publication of the interpretation bulletins and the annotated edition of the act to determine whether Section 55 of the Charter applies to commercial insurance policies. In the meantime, we are of the opinion that if Québec lawmakers had wanted to exclude commercial contracts of adhesion, they would have expressly done so by means of an amendment. Insurance contracts in effect before June 1, 2023 will not have to be translated, nor will insurance contracts renewed without modifications since under those circumstances, the contract would not be regarded as a new contract.4 However, if an existing insurance contract is renewed with significant modifications, it will be regarded as a new contract and the French-language version thereof must be provided to clients so they may validly express their wish to be bound by a contract drawn up in a language other than French. Given that in most cases, insurance contracts are sent out to policyholders by regular mail or email, effective June 1, 2023, insurers, agents or brokers, as applicable, will have to send both the French-language and English-language versions of the contract in the same mailing or simply send the French-language version thereof. It is important to note that the Act provides for an exception to the requirement to provide the French-language version if: The insurance policy has no equivalent in French in Québec; and The insurance policy is originates from outside Québec or is not widely available in Québec.5 [unofficial translation] In all likelihood, this exception will only apply to highly specialized insurance products and will be interpreted restrictively given the Act’s primary objective. Unlike insurance contracts and related documents, invoices, receipts, discharge notices and other similar documents may be sent out in English if the French-language version remains available on terms that are at least as favourable.6 Services and marketing in French The Act introduces the Charter’s new Section 50.2, which states that businesses must respect consumers’ fundamental linguistic right to be informed and served in French. The same section reiterates this requirement with respect to “a public other than consumers” to whom are offered goods and services and who must henceforth be informed and served in French by businesses. Unlike consumers, however, clients who are businesses do not enjoy a fundamental linguistic right protected by the Charter. As regards marketing, the addition of the words “regardless of the medium used” to Section 52 of the Charter confirms that marketing documents in “hard copy” format must be in French, as must websites. If a version is available to the public in a language other than French, the French-language version must be available on terms that are at least as favourable. This provision took effect on June 1, 2022. Chat-type platforms or those facilitating direct communications with the insurer should make it possible for members of the public to communicate with the insurer’s representatives in French at all times. Communications with insurance agents and brokers Effective June 1, 2022, insurers are required to communicate in French with insurance agents and brokers who express the desire to do so.7 In addition, all information documents sent to insurance agents and brokers regarding underwriting or claims must be in French if they so wish. As regards contractual agreements between insurers, insurance agents and brokers, the need to provide a French-language version depends on the nature of the contract, i.e. whether it can be qualified as a contract of adhesion. French in the workplace Effective June 1, 2022, all companies doing business in Québec must comply with the following requirements in the area of employment rights: Respect employees’ right to work in French8; Use French in all written communications sent to employees; Ensure that all offers of employment, promotion or transfer; individual employment contracts; employment application forms; and documents concerning employment conditions and training sent to employees are drawn up in French;9 Take all reasonable means to avoid requiring employees to have knowledge or a specific level of knowledge of a language other than French for employees to obtain employment or to maintain their position, including in particular: Assess the actual needs associated with the duties to be performed; Make sure that the language knowledge already required from other staff members was insufficient for the performance of those duties; Restrict as much as possible the number of positions involving duties whose performance requires knowledge of or a specific level of acknowledge of a language other than French.10 It should be noted that individuals whose employment contracts are currently drawn up in English have until June 1, 2023, to ask their employer to translate their contract. Effective June 1, 2025, businesses with 25 employees or more in Québec must meet additional francization requirements for their Québec employees to obtain a francization certificate, including: Registering with the OQLF; Submitting an analysis of the status of the French language within the business; Putting in place a francization program within three months following an OQLF request to that effect. The above requirements were already in effect for businesses with more than 50 employees in Québec. French as the language of the civil administration The Act includes various modifications with respect to French as the language of the civil administration. The Québec government will be required to make exemplary and exclusive use of French, with certain exceptions. Effective June 1, 2023, all agents of the State and provincial government bodies will be required to communicate in French with all persons, including business representatives. All documents exchanged with the civil authorities, as well as all contracts and permits, must be drawn up in French. Insurance sector stakeholders outside Québec should expect to receive more communications in French from the Autorité des marchés financiers (“AMF”) given that the AMF is a body of the “civil administration”. Penalties It should be noted that new powers will be granted to the OQLF enabling it to conduct investigations and impose administrative and disciplinary penalties. As regards infractions of the Charter’s provisions, the Act provides for fines ranging from $3,000 to $30,000 for businesses and from $700 to $7,000 for individuals. These fines are doubled for a second offence and tripled for further offences. In addition, if an infraction continues for more than one day, each day constitutes a separate infraction. If an infraction is committed by a corporate director or officer, the Act provides for fines ranging from $1,400 to $14,000. Questions of interpretation Various provisions have raised questions of interpretation that are still difficult to resolve at the time of writing. Interpretation bulletins and an annotated edition of the act will be published by the provincial government with a view to guiding businesses in the application of the Act; they will also help to clarify certain provisions that remain ambiguous for the time being. For further information on changes concerning trademarks, please consult a recent publication by our colleagues specializing in intellectual property. Sec. 55, Para. 1 of the Charter. Civil Code of Québec, CQLR ch. CCQ-1991, Sec. 1379, Para. 1. Westboro Mortgage Investment vs. 9080-9013 Québec inc., 2018 Superior Court of Québec 1. Leave to appeal dismissed 2019 Court of Appeal of Québec 1599. Didier LLUELLES, Droit des assurances terrestres, 6th ed., Montréal, Éditions Thémis, 2017, Para. 186. Sec. 21.5 and Sec. 55 of the Charter. Sec. 57 of the Charter. Sec. 50.2 of the Charter. Sec. 5 and Sec. 50.2 of the Charter. Sec. 41 of the Charter. Sec. 46 of the Charter.

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May 2, 2022

Complaint processing: New framework to come for financial institutions and financial intermediaries

Last September, the AMF published its draft Regulation respecting complaint processing and dispute resolution in the financial sector (the “Draft Regulation”). The consultation period for it ended on December 8, 2021. The AMF is currently reviewing the many comments it received. The Draft Regulation1 aims to harmonize and improve complaint processing in the financial sector by providing for new mechanisms to ensure prompt and efficient complaint processing, among other things. In the insurance industry, only firms and insurers are currently required to adopt and apply a complaint processing and dispute resolution policy. The Draft Regulation will make these obligations apply to independent partnerships and representatives. It also introduces new requirements and restrictions as well as monetary penalties for not including mandatory content in communications to a complainant, for example. Here are some of the Draft Regulation’s new provisions: Broadening of the definition of “complaint” to: Any dissatisfaction or reproach; That cannot be remedied immediately and for which a final response is expected; In respect of a service or product offered by a financial institution or financial intermediary; That is communicated by a person who is a member of the clientele of the institution or intermediary. The Draft Regulation does not contain a requirement that a complaint must be made in writing.2 It does make it mandatory for financial institutions and financial intermediaries to implement a complaint drafting assistance service.3 It also requires that a note be left in each record to indicate whether a complainant requested this service. Prohibition on the use of the term “ombudsman” in any representation or communication intended for the public to refer to the complaint process or to the persons assigned to its implementation.4 Specific requirements as concerns the mandatory content of a complaint processing policy, an acknowledgment of receipt and final response to a complainant, a complaint record and a complaints register. For each complaint received, the complaint record must include the following information: The complaint Whether the complainant requested the complaint drafting assistance service The complainant’s initial communication A copy of the acknowledgment of receipt sent to the complainant Any document or information used in analyzing the complaint, including any communication with the complainant A copy of the final response provided to the complainant New time limits: Within 10 days of receiving a complaint, the insurer must notify the complainant in writing that they must also file the complaint with any other financial institution, financial intermediary or credit assessment agent involved, and the insurer must provide the complainant with their contact information.5 The complainant must be given 20 days to assess and respond to an offer to resolve the complaint, with sufficient time for the complainant to seek advice for the purpose of making an informed decision.6 If the complainant accepts the offer, the insurer has 30 days to respond.7 Financial institutions and financial intermediaries have a strict 60-day time limit to provide the complainant with a final response.8 There is a new 15-day time limit to send the complaint record to the AMF.9 There is a streamlined process for complaints that are resolved within 10 days of being recorded in the complaints register: The final response serves as an acknowledgment of receipt and must contain the following information: The complaint record identification code The date on which the complaint was received by the insurer or insurance representative The name and contact information of the employee responsible for processing the complaint referred to in section 7 of the Draft Regulation or in the Sound Commercial Practices Guideline A summary of the complaint received The conclusion of the analysis, including reasons, and the outcome of the complaint A reference to the complainant’s right to have the complaint record examined by the AMF The signature of the complaints officer A statement to the effect that the complainant has accepted the offer to resolve the complaint New monetary administrative penalties The Draft Regulation also provides for monetary administrative penalties ranging from $1,000 to $5,000 for failure to comply with certain requirements and prohibitions of the Draft Regulation. For example, the following will be subject to a monetary administrative penalty of $5,000: Attaching a condition to an offer to prevent the complainant from fully exercising their rights. Using the term “ombudsman” or any other similar title in any representation or communication intended for the public to refer to the complaint process or the persons assigned to its implementation to suggest that such persons are not acting on behalf of the financial institution or financial intermediary. In the latter case, a monetary administrative penalty may be imposed even where no complaint is involved, because the prohibition covers “any representation or communication intended for the public.” Insurers and financial intermediaries should review their communications as soon as possible, and especially the summary of their complaint processing policy appearing on their website. It concerns all entities regulated by the AMF, but the bulletin more specifically addresses financial institutions and financial intermediaries in the insurance industry. As currently indicated on the AMF’s website. Draft Regulation, s. 11. Id., s. 26, para. 2. Id., s. 15. Id., s. 13. Id. Id., s. 12, para. 4. Id., s. 25.

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