The Ontario government is proposing legislative changes that would prevent what it characterizes as “exploitative” transactions that involve investors depositing large sums of money into side accounts of universal life insurance policies.

Ontario’s proposed amendments to the provincial Insurance Act were announced in the government’s 2020 budget, released Nov. 5. Four other provinces have enacted similar changes over the last two years.

The transactions targeted by Ontario’s proposed legislative changes currently feature at the heart of a legal dispute between a hedge fund manager and the Manufacturers Life Insurance Company. Two other actions were brought by hedge fund managers against BMO Life Assurance Company and Industrial Alliance Insurance and Financial Services Inc., respectively.

In the proceedings, which were heard together in Saskatchewan, the investor sought to deposit significant amounts of money into the side accounts of certain legacy universal life products that featured guaranteed rates of return well above current interest rates.

The insurers argued that the policies, which dated back to the 1990s, were never intended to be used as investment vehicles unconnected from their insurance purposes, and that allowing for unlimited deposits into the side accounts could raise liquidity risks for the firms.

In March 2019, the Court of Queen’s Bench of Saskatchewan ruled in favour of the insurers. The decision is currently under appeal.

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In October 2018, ahead of that court’s decision, the Saskatchewan government introduced legislative changes to limit the amount of premiums an insurer could receive or accept for deposit in certain life insurance policies and associated side accounts.

Since then, Alberta, Nova Scotia and New Brunswick have enacted similar legislative changes.

In its budget documents, the Ontario government noted that “protecting financial services, especially for seniors, is particularly important at this time.”

“The [Ontario] government is protecting families by proposing legislative amendments to ensure that this sector is not vulnerable to exploitative behaviour by individuals and companies using life insurance policies with side accounts for investment purposes,” it added.

In an October 2018 release, the Canadian Life and Health Insurance Association (CLHIA) commended Saskatchewan for making its legislative changes, saying they “address[ed] any public confusion that life insurance policies could be used as deposit or securities contracts.”

CLHIA, which acted as an intervenor during the court decision but was denied that status on appeal, indicated in the same release that it planned to request other provincial and territorial governments take comparable steps to avoid any public uncertainty in other jurisdictions.