Canada: 2023 Year In Review In Insurance

As anticipated in our 2022 Year in Review, there were several developments in the regulation of the insurance sector in Canada in 2023. 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 2023 and will highlight issues that insurers and other industry participants should watch for in 2024.

1. REGULATORY CHANGES

Federal Regulators

On January 18, 2023, the Office of the Superintendent of Financial Institutions Canada ("OSFI") published the final updated Guideline E-16 – Participating Account Management and Disclosure to Participating Policyholders and Adjustable Policyholders ("Guideline E-16"). The updated Guideline E-16 is intended to provide additional clarification of OSFI's expectations to aid insurers in their interpretation of the Insurance Companies Act ("ICA") and the Policyholders Disclosure Regulations (the "Regulations"), and provide additional guidance on the disclosure requirements of the Regulations to promote greater transparency and consistency of policyholder disclosures.

The updated Guideline E-16 was effective immediately after being published, while the deadline for implementing the changes was set for December 31, 2023.

OSFI's new supervisory framework for federally regulated financial institutions ("FRFIs"), including insurers, will become effective in April 2024 and is part of the Blueprint transformation program, the first comprehensive update to the supervisory framework in almost 25 years.

The supervisory framework, which guides OSFI's oversight of FRFIs, is aimed at protecting policyholders and others from loss. The new framework will apply to FRFIs and recognizes the specific nature of these regulated industries.

While OSFI's view is that the current framework has worked well, changes in the risk environment require an update to:

• better capture the impact of macro-centric risks on the risk profile of FRFIs and pension plans;
• build flexibility to accommodate new business models and new risks, including non-financial risks; and
• further leverage data and advanced analytics to promote more risk-based supervision.

In order to address risks that could jeopardize the public's confidence in the soundness of the Canadian financial system, OSFI has designed the new framework to efficiently respond to the most serious risks and provide greater transparency to FRFIs through disclosure of:

• a new tier rating based on size, complexity, and potential for contagion;
• a rating reflecting viability risk according to an expanded 8-point scale; and
• for larger institutions, inclusion of ratings of business risk, financial resilience, operational resilience and risk governance.

The intervention stage ratings will continue using the existing scale, serving as an "anchor" since the new framework is not expected to lead to changes in intervention ratings at transition. Nonetheless, OSFI expects that FRFIs will find that their ratings shift more often than previously, because the new framework will likely be more responsive to changes in risk.

While OSFI did not conduct public consultation about changes to the framework, the development process included studying approaches used by prudential regulators in peer jurisdictions and engaging with other federal government organizations that support the Canadian financial system's strength and stability.

In the spirit of continuous improvement, OSFI will conduct a post-implementation review of the new framework and holistic reviews at least once every five years.

More information will be published about the new framework in early 2024 and webinars will be held for FRFIs and pension plan stakeholders to describe the new framework in more detail. You may learn more about the new framework here.

On March 7, 2023, OSFI issued its first prudential climate-related framework - Guideline B-15: Climate Risk Management ("Guideline B-15"). The guideline sets out OSFI's expectations on climate-related risk management and disclosure by FRFIs such as banks and federally regulated insurers. Guideline B-15 applies to all FRFIs except foreign bank branches. The guideline, which followed a public consultation that generated over 4,300 submissions, will be effective at fiscal year-end 2024 for the six largest Canadian chartered banks and four largest insurers and at fiscal year-end 2025 for all other in-scope FRFIs.

For more detail on Guideline B-15, please refer to our article here.

On October 13, 2020, OSFI issued a draft Integrity and Security Guideline, and on January 31, 2024, further to recent changes enacted through Bill C-47, the Budget Implementation Act, OSFI issued its final Integrity and Security Guideline to require FRFIs such as insurers to "have and adhere to adequate policies and procedures to protect themselves from threats to their integrity and security, including foreign interference", effective on issuance.

Specifically, the guideline deals with "Integrity" as it relates to good character, culture, governance, and compliance; and "Security" as it relates to operations, premises, people, technology assets, data and information, and third-party arrangements. Expectations under the guideline "are to be applied on a proportional basis" based on a FRFI's ownership structure; strategy and risk profile; and scope, nature, and location of operations. OSFI will also have the authority to examine each FRFI's integrity and security policies and procedures to assess whether they are adequate, and will report on its examinations to the Minister of Finance Canada.

FRFIs are now required to notify OSFI of reports to law enforcement or the Canadian Security Intelligence Service. By July 31, 2024, FRFIs will be required to submit a comprehensive action plan for OSFI's review, on new and expanded expectations, which includes interim deliverables to achieve compliance. By January 31, 2025 FRFIs will be required to observe all new or expanded expectations except those on background checks. By July 31, 2025, FRFIs will be required to observe OSFI's new expectations on background checks.

OSFI's Guideline B-3 Sound Reinsurance Practices and Procedures, applicable to all federally regulated insurers, and OSFI's Guideline B-2 Property and Casualty Large Insurance Exposures and Investment Concentration, applicable to federally regulated P&C insurers only, were both finalized in February 2022 and will become effective January 1, 2025.

Guideline B-3 sets out OSFI's expectations for all federally regulated insurers to have effective reinsurance practices and procedures in place. Guideline B-2 requires federally regulated P&C insurers to establish a comprehensive gross underwriting limit policy and sets out OSFI's expectations related to large insurance exposures, i.e. losses a P&C insurer could suffer from a single large insurance exposure and the sudden failure of an individual unregistered insurance counterparty.

Under Guideline B-2, at no time should any P&C insurer's net retention, plus its largest net counterparty unregistered reinsurance exposure due to the occurrence of a maximum loss on a single insurance exposure, (a) exceed 100% of a such P&C insurer's total capital available where any entity in such P&C insurer's control chain is a widely held company and/or a regulated financial institution, or 25% of total capital available otherwise; or (b) exceed 100% of net assets available of a Canadian branch of a P&C insurer. Guideline B-2 also sets out OSFI's expectations related to investment concentration for federally regulated P&C insurers.

On April 20, 2023, the Canadian Securities Administrators ("CSA") and the Canadian Council of Insurance Regulators ("CCIR") published changes to enhance total cost reporting ("TCR") disclosure for investment funds and individual segregated fund contracts ("Segregated Fund Contracts") to improve the transparency of total fees and costs to holders of such funds. The TCR enhancements for the insurance sector are contained in the Individual Variable Insurance Contract Ongoing Disclosure Guidance which will apply to all insurers offering Segregated Fund Contracts to their policy holders.

The CCIR expects that each member jurisdiction will adopt the framework by local guidance or regulation. For example, on November 2, 2023, the Québec Autorité des marchés financiers ("AMF") published for comment its draft Regulation Respecting Information To Be Provided To Holders Of Individual Variable Insurance Contracts Relating To Segregated Funds. The TCR enhancements and various local regulations, guidance or regulations in each jurisdiction are expected to take effect on January 1, 2026 (subject to ministerial approval in each jurisdiction) and clients can expect to receive their first enhanced annual reports for the year ending December 31, 2026.

• OSFI's Guideline B-10 - Third-Party Risk Management came into effect on April 2023.
• In July 2023, OSFI published its draft guideline on Regulatory Capital Treatment of Crypto-Asset Exposures (Insurance).
• In August 2023, OSFI published revised Guideline E-15 Appointed Actuary: Legal Requirements, Qualifications and Peer Review.
• In September 2023, OSFI published Parental Stand-Alone (Solo) Capital Framework for Federally Regulated Life Insurers, which became effective on January 1, 2024.

The 2023 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, the Insurance Companies Act, and the Trust and Loan Companies Act to incorporate the principles of the diversity disclosure requirements included in the Canada Business Corporations Act.
• Amend the Bank Act, the Insurance Companies Act, the Trust and Loan Companies Act and the Office of the Superintendent of Financial Institutions Act to "modernize the federal financial framework" to address developing risks to this sector.
• Work with the insurance industry to protect Canadians from costs related to disaster recovery and to make insurance affordable, and the federal government's intention to launch, with provinces and territories, a new approach to address gaps in natural disaster protection and to help Canadians access affordable insurance.
• Provide $31.7M over three years to Public Safety Canada and the Canada Mortgage and Housing Corporation to work with the Department of Finance to set up a low-cost flood insurance program, aimed at protecting those at high risk of flooding and without access to adequate insurance. This would include both reinsurance through a federal Crown corporation and a separate insurance subsidy program for private insurance; and
• Have the Department of Finance and Public Safety Canada engage with industry on solutions to earthquake insurance and other insurance market challenges that relate to climate.

For more detail on the 2023 federal budget, please refer to our article here.

Provincial Regulators

As we noted last year, 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.

Effective June 1, 2023, the Minister of Finance approved an amendment to the UDAP Rule by eliminating new sales of segregated fund contracts that charge deferred sales charges ("DSCs") to customers who withdraw their investments early. Accordingly, as of June 1, 2023, life insurers and agents are banned from issuing and selling new individual segregated fund contracts that impose DSCs on customers. Furthermore, the Financial Services Regulatory Authority of Ontario ("FSRA") called for the public to provide feedback on further proposed amendments to the UDAP Rule, which addresses concerns about DSCs for customers who already own individual segregated fund contracts with DSCs.

Consultation on the updated proposed amendment closed on June 30, 2023 and FSRA submitted its proposal to the Minister of Finance on January 8, 2024 for approval. The amendment will take effect 15 days after the Minister approves it or, if not approved, rejected or returned by the Minister to FSRA for further consideration, then it will take effect 75 days after it was delivered (which would be March 23, 2024).

The proposed amendment to the UDAP Rule may be found here.

On November 8, 2023, FSRA released its final Information Technology Risk Management Guidance for regulated sectors including insurance intermediaries and insurance companies. The guidance includes best practices for FSRA-regulated sectors and individuals to effectively manage threats to IT systems, infrastructures and data. The guidance also outlines a process which will require regulated entities and individuals to notify FSRA in the event of an IT risk incident. The guidance is effective April 1, 2024 and may be found here.

On February 1, 2023, the Financial and Consumer Services Commission of New Brunswick ("FCNB") issued final versions of two new rules: Rule INS-001 – Insurance Intermediaries Licensing and Obligations and Rule INS-002 – Insurance Fees which resulted in repealing various existing insurance regulations under the Insurance Act (New Brunswick) and overhauling the licensing requirements for agents, agencies, adjusters, adjusting firms, and managing general agents to act as licenced intermediaries. The Rules also introduce a new licensing framework for restricted insurance representatives involving the incidental sale of insurance products.

The ICBC is in the process of developing a new restricted licensing framework to regulate the incidental sale of insurance products. This follows the BC Ministry of Finance introducing the Financial Institutions Amendment Act, 2019 (Bill 37) and a related consultation done by the ICBC on restricted insurance licenses in 2022. You may follow here for updates on the ICBC's restricted licensing framework.

In 2023, the Yukon Professional Licensing and Regulatory Affairs department launched a new licensing framework for insurance agencies distributing insurance in Yukon. Previously, only individual agents were required to be licensed in the territory. Agencies may apply for licenses for 3 classes of insurance: life, accident and sickness; accident and sickness; and general. Further details on the licensing requirements for agencies may be found here.

2. REGULATORY TRENDS

Federal Regulators

On February 28, 2023, OSFI issued for consultation a draft Culture and Behaviour Risk Guideline. The guideline sets out key definitions and key outcomes and overarching principles in respect of culture risk that would apply to FRFIs. The guideline was developed following consultations in respect of OSFI's prior Culture Risk Management Letter and is to be read in conjunction with other OSFI guidelines, including the Corporate Governance Guideline, the Operational Risk Management Guideline and the Regulatory Compliance Management Guideline.

The Guideline states that it "is principles-based and outcomes-focused in recognition that every FRFI's culture is unique. OSFI expects FRFIs to design, govern and manage culture and behaviour in accordance with the FRFI's size, nature, scope, complexity of operations, strategy, and risk profile."

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

In October 2023, the Department of Finance Canada ("Finance Canada") launched financial sector legislative review consultations with respect to the federally regulated financial institutions statutes, including the Bank Act, the Insurance Companies Act, and the Trust and Loan Companies Act (collectively, the "FRFI Statutes"). The consultations were done in anticipation of the forthcoming sunset date for the FRFI Statutes, which was set as June 30, 2025 pursuant to the 2022 federal budget. For more detail on the consultations, please refer to our article here.

The purpose of the consultations was for Finance Canada to obtain industry feedback on how the FRFI Statutes should adapt to various factors such as access to financial services, technological trends, national security, fair competition, geopolitical trends and the safety and integrity of the Canadian financial system. While this formal consultation was concluded in December 2023, the Department also launched another more targeted consultation on Strengthening Competition in the Financial Sector.

On October 16, 2023, OSFI published the results and next steps of its initial public consultation on Guideline B-20: Residential Mortgage Underwriting Practices and Procedures, focused on debt serviceability measures.

Overall, while the majority of stakeholders in the consultation agreed that risks to lenders arising from high household indebtedness are critical, they generally did not support additional debt serviceability measures. Many stakeholders suggested alternative measures or revisions to OSFI's proposals in its consultation, with a key concern being the disproportionate impact that new, industry-wide measures could have on smaller institutions with unique business models.

While OSFI acknowledges that the Minimum Qualifying Rate has helped managed risks related to debt serviceability in the current high interest environment, OSFI believes that additional measures are needed to mitigate the underlying vulnerability of a buildup in highly indebted borrowers. Accordingly, OSFI intends to pursue a more targeted supervisory approach that takes into account the size, nature, complexity, and risk profile of each FRFI, balancing sound risk management against the need for FRFIs to compete effectively and take reasonable risks.

You may review the initial consultation on Guideline B-20 and OSFI's summary response to the consultation feedback here.

On October 31, 2023, OSFI published for consultation a draft revised Guideline E-21: Operational Resilience and Operational Risk Management, setting out OSFI's regulatory expectations for FRFIs to enhance their operational resilience and management of operational risks. Guideline E-21 is applicable to all FRFIs, including insurance companies and Canadian branches of foreign insurance companies, and notes that OSFI's expectations for operational resilience and managing operational risks are principles-based and intended to be applied on a proportionate basis to an FRFI's size, nature, scope, complexity of operations, strategy, risk profile, and interconnectedness to the financial system. The consultation period for the guideline runs until February 5, 2024.

Provincial Regulators

In August 2023, FSRA published proposed guidance regarding how and when it issues public warning notices to notify consumers and the general public about unlicensed activity, or other improper dealings with respect to FSRA-regulated products and services, and the basis for such warnings. The proposed guidance applies to all sectors regulated by FSRA, such as property and casualty insurance.

Public warning notices alert consumers to potential misconduct through unlicensed activity and rule-breakers in the financial services markets and are intended to protect consumers from harm and promote public confidence in Ontario's financial services. The guidance provides that FSRA may issue a public warning notice if it discovers one or more of the following factors:

• There is a clear indication of an improper dealing with respect to a FSRA-regulated product or service or an individual or entity engaged in unlicensed activity.
• There is a risk of continuing consumer harm.
• The individual or entity has been unresponsive to FSRA's written attempts requesting they immediately cease conducting unlicensed activity.

The guidance further provides that, depending on the scope and nature of harm to the consumer, FSRA may proceed with a more robust media strategy to raise public awareness, share information with other applicable regulators and consider formal enforcement action. All public warning notices will be perpetually available on the regulator's website.

You may learn more about the proposed guidance here.

On November 21, 2023, FSRA released proposed guidance on the suitability requirements to hold a life insurance agent license in Ontario. The guidance applies to insurance agencies, insurance agents, MGAs and insurance companies. While MGAs are technically not a regulated category under FSRA, FSRA asserts in the proposed guidance that it has broad authority to determine matters that are relevant to whether an agent, including an MGA, is suitable to be licensed. The proposed guidance also outlines additional requirements regarding the adequacy of an MGA's control and compliance functions as well as insurers' supervision of MGAs.

The consultation period for the proposed guidance will close on February 9, 2024. Please see here to submit and review comments, questions and responses on the proposed guidance.

3. OTHER DEVELOPMENTS THAT WE ARE WATCHING IN 2024

• Artificial Intelligence: In 2023, artificial intelligence emerged as a crucial global topic, and Canadian regulators have demonstrated awareness of these technologies while remaining vigilant of their potential risks. On December 20, 2023, OSFI and the Financial Consumer Agency of Canada ("FCAC") jointly released a voluntary questionnaire for FRFIs to better understand their plans and strategies for, uses of, and challenges with adopting, artificial intelligence, machine learning and quantum computing to inform OSFI's policy and supervisory work. The deadline to complete the questionnaire through the Regulatory Returns System is February 19, 2024, following which OSFI will analyze the results and share current practices with participating institutions.
• Climate Risks:
  • On June 28, 2023, in partnership with the Bank of Canada and the Canada Deposit Insurance Corporation, OSFI published for consultation draft Climate Risk Returns. The purpose of the returns is to collect climate-related emissions and exposure data directly from FRFIs enabling OSFI to carry out evidence-based policy development, regulation, and prudential supervision as it pertains to climate risk management.
  • On October 16, 2023, OSFI published a draft methodology for a Standardized Climate Scenario Exercise ("SCSE"), the purpose of which is to increase FRFIs' understanding of their potential exposures to climate-related risks. It also aims to build FRFIs' capacity to conduct climate scenario analysis and risk assessments. OSFI plans to finalize the methodology and issue the SCSE in 2024, and will expect all FRFIs (except for Foreign Bank Branches) to submit a completed SCSE. For more detail on the SCSE, please refer to our article here.
  • On November 30, 2023, the AMF published for public comment its draft Climate Risk Management Guideline. The AMF is the most recent among a growing number of Canadian prudential financial regulators providing guidance on climate risks to financial institutions. The objective of the guideline is to bolster the resilience of Quebec financial institutions and the financial sector as a whole in the face of increasing climate risk and uncertainty. The guideline applies to authorized insurers, financial services cooperatives and credit unions, authorized trust companies and other authorized deposit institutions, regardless of size, nature, complexity or risk profile. These institutions are expected to consider climate-related risks in their risk management processes and product disclosure, including adopting forward-looking approaches to climate risk which are holistic, integrated and built on reliable empirical data and analyses. For more detail on the draft guideline, please refer to our article here.
• Cybersecurity: As cyber threats continue to pose a global risk to various sectors, including the insurance sector, cybersecurity is becoming increasingly important and a top priority for Canadian regulators. In addition to FSRA's IT Risk Management Guideline described above and OSFI's Guideline B-13 – Technology and Cyber Risk Management which became effective as of January 1, 2024, on September 2023, the Canadian Insurance Services Regulatory Organizations ("CISRO") published a Cybersecurity Readiness reference tool for insurance intermediaries to use in their efforts to prevent and respond to cybersecurity incidents.
• Regulation of MGAs: Following the implementation of the MGA licensing regime in Saskatchewan in 2021 and in New Brunswick in 2023, and FSRA's proposed guidance on the suitability requirements for MGAs to be licensed as life insurance agents as further described above, we will be watching how other jurisdictions approach the licensing and regulation of MGAs as life insurers continue to increasingly rely on MGAs for product distribution.
• OSFI 2023-24 Departmental Plan: In March 2023, OSFI released its Departmental Plan for 2023-2024, in which it noted that it will be guided by the following six priority initiatives which are also outlined in its 2022-25 Strategic Plan: Culture and enabler initiatives; Risk, strategy and governance; Strategic stakeholder and partner engagement; Policy innovation; Supervision renewal; and Data management and analytics. OSFI's priorities in the insurance sector included monitoring insurance capital tests and post implementation of International Financial Reporting Standard 17 – Insurance Contracts ("IFRS 17"), to ensure that they are functioning as intended. This includes monitoring and supporting the January 2023 transition of IFRS 17.
• FSRA Statement of Priorities for 2024-2025: In October 2023, FSRA released its statements of priorities for 2024-2025 which, among other things, sets out FSRA's priorities in the insurance sector, including the following:
  • Reforming the regulation of auto insurance rates and underwriting through a framework to more effectively review rates and underwriting rules, supervising insurer governance, improving transparency for consumers and issuing fairness guidance to better define reasonable and appropriate rates and underwriting rules.
  • Developing and implementing initiatives to reduce fraud and abuse in the auto insurance system, including the development of a new Fraud Reporting Service Rule and related guidance.
  • Developing and implementing a market conduct framework for property and casualty insurance to address areas such as supervision, insurance distribution and claims management.
  • Implementing the Risk Based Supervisory Framework for Ontario-Incorporated Insurance Companies and Reciprocals ("RBSF-I") which sets out practices for integrated market conduct and prudential supervision.
  • In the life and health insurance sector, strengthening the MGA regulatory framework by completing stakeholder consultation on a proposed MGA rule and supporting guidance.
  • Enhancing standards for the design, distribution and administration of segregated fund contracts, including by working with the CCIR and CISRO to create national guidance and developing a rule and (if necessary) guidance consistent with the CCIR and CISRO guidance to address gaps in consumer protection.

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