Canadian insurance regulatory responses to the Covid-19 pandemic

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Stuart Carruthers
Stikeman Elliott, Toronto
scarruthers@stikeman.com

Andrew Cunningham
Stikeman Elliott, Toronto
acunningham@stikeman.com

Since early March 2020, Canada’s federal and provincial insurance regulators have implemented a series of significant initiatives in response to the Covid-19 pandemic, and have also been making appropriate operational adjustments. These developments are summarised below.

Most Canadian insurers are prudentially regulated by a federal regulator, the Office of the Superintendent of Financial Institutions (OSFI). A few, mainly smaller, insurers are instead, prudentially regulated by provincial authorities. The provinces also regulate market conduct of insurers, and license and regulate insurance intermediaries.

Federal

On 13 March 2020, the OSFI unveiled its pandemic response measures for federally-regulated financial institutions, including policy changes designed to increase the lending capacity of major banks. In the insurance sector, OSFI’s initial response was to pause its existing policy development activities, which included a reinsurance practices review, a study of climate change risk, and work on the implementation of IFRS 17 (the accounting standard for insurance contracts), among others. This allowed the OSFI to focus more exclusively on developing pandemic response measures which were announced throughout the spring of 2020.

These measures included flexible filing deadlines for insurers facing pandemic-related operational capacity challenges and the suspension of IFRS 17 semi-annual progress reports. Of particular importance were the following temporary measures that are primarily intended to facilitate premium and mortgage payment deferrals:

• the OSFI indicated an ‘expectation’ that mortgage insurers will not deem a mortgage loan negligent or in arrears solely because a deposit-taking institution has approved a mortgage payment deferral, provided that the borrower is complying with the terms of such deferral;
• mortgage loans (and other loans and leases) for which a life insurer has granted a payment deferral will continue to be ‘performing assets’ for OSFI’s Life Insurance Capital Adequacy Test (LICAT) purposes for the duration of such deferral (maximum of six months);
• pandemic-related insurance premium payment deferrals will be deemed not to elevate the credit risk factors for the corresponding receivables under the LICAT, or the OSFI’s Minimum Capital Test (MCT) (for P&C insurers) and Mortgage Insurer Capital Adequacy Test (MICAT) guidelines (maximum of six months); and
• interest rate risk under the LICAT will be ‘smoothed’ through the use of a rolling average of the requirements for the six most recent quarters (in effect until 31 December 2023 or later).

Decisions regarding granting deferrals remain entirely in the hands of insurers. However, OSFI is not providing guidelines that would substitute for insurers’ own due diligence in such situations.

The OSFI has also requested that insurers halt any increases in dividends, share buy-backs or senior executive compensation, and throughout the pandemic. The OSFI and certain provincial regulators have required additional frequent reporting by insurers regarding their Covid-19 exposures.

In the spring and early summer, the OSFI held remote sessions with sector representatives with respect to both the life and property and casualty (P&C) insurance sectors. In September, the OSFI Assistant Superintendent addressed the issue of how Canadian prudential policy will respond to the Covid-19 crisis. Regulatory levers introduced in the wake of the 2008 Global Financial Crisis will undoubtedly assist in this response, including ‘extraordinary actions for extraordinary times’, such as the ‘smoothing’ of interest rate risk. As the first wave of the pandemic receded, the OSFI resumed its policy work on a number of fronts, including the implications of IFRS 17 for capital adequacy reporting and actuarial standards. The OSFI also plans to resume the consultation process relating to reinsurance practices and, finally, to continue to monitor underwriting practices in the residential mortgage market.

FINTRAC, Canada’s national financial data tracking agency, has also announced accommodations with respect to pandemic-related reporting delays, as well as the use of identification documents that certain provinces have deemed temporarily valid beyond their stated expiration dates.

Provincial

As noted above, Canada’s provinces and territories prudentially regulate a small number of insurers, and also license and regulate insurance agents and brokers. Since March 2020, many provincial financial services regulators and self-regulatory bodies have announced or taken steps in response to the Covid-19 pandemic, including, in certain provinces:

• easing of capital adequacy requirements for provincially regulated life and P&C insurers:
• relaxation of licensing registration deadlines;
• delay or cancellation of insurance broker examinations;
• compulsory online submission of fee payments, annual filings and other documentation;
• requirements to update business continuity plans;
• requirements to postpone annual general meetings or hold them online;
• postponement of discipline and complaints processes; and
• reinforcing the continuing applicability of client service standards even in the absence of face-to-face meetings.

An umbrella group of certain provincial/territorial regulators, the Canadian Council of Insurance Regulators, has been meeting frequently with sector associations to discuss the impact of Covid-19 on the insurance sector and potential additional regulatory responses.

Insurers offered auto insurance premium rebates in several provinces, and, in Ontario in particular, the regulator, the Financial Services Regulatory Authority (FSRA), worked with carriers to ensure that auto insurance consumers received premium relief that reflected sharply lower car use due to lockdowns, business and school closures and working-from-home policies. In October, the FSRA reported that cumulative eligibility for such premium relief had reached nearly CAD 1bn (approximately USD 0.75bn). The FSRA is proceeding with insurance-specific initiatives, such as its technical advisory committees for the mortgage brokering and life and health sectors. In its Proposed 2021-2022 Statement of Priorities, released on 13 October 2020, the FSRA also noted that Covid-19 has ‘accelerated industry progress in digitizing the distribution of insurance products’.

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