Snowbirds who buy insurance policies from foreign manufacturers with no Canadian ties will soon find that Canadian regulators cannot protect those clients’ assets if the insurer declares bankruptcy.

Provincial insurance regulators, in co-operation with the Office of the Superintendent of Financial Institutions, are ironing out changes to various provincial and federal regulations that govern insurance companies and policies owned by Canadians.

The law has been unclear and regulators want no ambiguity, says Grant Swanson, executive director of licensing and market conduct at the Financial Services Commission of Ontario, one of six provincial jurisdictions at the table. “The last thing you want to have is a dispute about the entitlements of the assets of the insolvent insurance company,” he says.

The upshot is that OSFI has no control over the assets of foreign insurance manufacturers that don’t do business in Canada. And in the event of a liquidation by such an insurer, regulators can’t protect the assets of Canadians who have bought the insurer’s products abroad.

Although it seems obvious, the regulations haven’t been clear about this issue in the past. Regulation tended to concentrate on issues surrounding the location of risk rather than the location of the sale.

The changes, which will come into effect in January 2010, will affect insurance companies and Canadian businesses with cross-border policies. They will also affect some advisors’ clients.

“The impact will be for people who arrange some sort of insurance outside the country,” Swanson says. “For example, it will affect somebody who is a snowbird — who has property in Florida and in Canada — and decides that he or she wants to place all of his or her insurance with the insurance broker in Florida, as opposed to having one broker here in Canada and one in Florida.”

The example applies to any foreign jurisdiction, not just the U.S. OSFI regulates foreign insurers only to the extent that they do business in Canada.

OSFI requires foreign insurers to maintain certain capital reserves in the event of bankruptcy. The regulator says Canadians who do business with insurers here can expect that there will be enough money to satisfy all eligible claimants, including policyholders — but only if the company has a presence in Canada.

“If the transaction occurred in Canada, with some physical presence of the insurer, then the regime protects you,” says Jason Lamontagne, a senior communications advisor with OSFI. “In other words, if you ‘walked into the store’ in Canada, you are protected, but if you ‘walked into the store’ abroad, you are not protected.”

The changes to provincial regulations relate to an amendment made to the federal Insurance Companies Act that was passed in March 2007. The amendment clarified that the act applied only to foreign insurers with business in Canada, as opposed to foreign insurers covering risks situated in Canada.

Increased global trade and technology have made the amendment necessary, says Lamontagne. Forty years ago, there were few or no instances of foreign insurers selling policies to Canadians. But today, business can be done easily via the Internet or using inexpensive or free long-distance telephone lines.

“Now that a risk situated in Canada can easily be insured from abroad, ‘location of risk’ no longer equates to ‘location of business’,” says Lamontagne. “OSFI has no control over Canadians who transact around the world, by purchasing insurance over the Internet or phone. The risk may be situated in Canada, but OSFI cannot enforce its regime in other jurisdictions and cannot guarantee that it will hold assets from all these insurers as collateral for their liability to the Canadian consumer.”

Although the federal law was changed two years ago, the provinces have until the beginning of next year to harmonize their laws with the changes. OSFI has postponed the new regulatory regime to give the provinces time to check their own statutes to identify where changes are needed. OSFI has also joined the Canadian Council of Insurance Regulators’ committee, led by Danielle Boulet of the Autorité des marchés financiers in Quebec, to help work out the kinks.

“The provinces are looking at their own legislation and practices,” says Swanson, “because if your law is based on location of risk rather than where the business was done, you’ll have an inconsistency and you’ll need to work out the nature of the inconsistency.”

@page_break@The main challenges the provinces face in harmonizing their rules is that even though their aim is ultimately to protect consumers, their mandates differ from that of OSFI. While OSFI regulates by focusing on the insurers with its prudential mandate, the provinces concentrate on market conduct.

As Lamontagne explains: “OSFI has the same issue as the federal government, with respect to its ability to enforce its statutes extra-territorially.”

Ultimately, foreign insurers will have to keep track of their policies in two ways, says OSFI: location of insurance activity, for OSFI; and location of risk, for the provinces.

As early as possible this year, provinces are to decide how they want foreign insurers to report their liabilities to them. The provinces may wish for these insurers to keep reporting on a basis of location of risk, Lamontagne says, because this basis is a better fit for the sales tax on premiums.

As for consumers, the organization that represents Canadians who winter in the U.S. and other destinations has yet to determine the extent to which the regulatory change will affect its 70,000 members.

Michael Mackenzie, research and communications officer with the Toronto-based Canadian Snowbird Association, says the association will look into the consequences of the new rules.

The majority of the CSA’s members own, rent or lease property in the U.S., according to Mackenzie, who suggests many members may be affected: “I have yet to hear from one who isn’t insured locally where they spend the winter.”

Meanwhile, Swanson says, Canadians who buy life or property and casualty insurance abroad should check with the federal and state regulators — or even consumer groups in the jurisdiction in which the policies were bought — about guarantees on the insurance assets. IE