Vol. 140, No. 36 — September 9, 2006

Regulations Amending the Assets (Foreign Companies) Regulations

Statutory authority

Insurance Companies Act

Sponsoring agency

Office of the Superintendent of Financial Institutions

REGULATORY IMPACT ANALYSIS STATEMENT

(This statement is not part of the Regulations.)

Description

Section 609 of the Insurance Companies Act provides that foreign companies (life and property and casualty) are required to maintain assets in Canada the total value of which shall be determined in accordance with the regulations. The Assets (Foreign Companies) Regulations address the maintenance of assets in Canada by branches of foreign life companies in Canada. The Assets (Foreign Companies) Regulations prescribe that the total value of assets maintained in Canada will be determined based on the greater of the value determined in accordance with generally accepted accounting principles (book value) or the value determined on the basis of the market value of those assets.

The Standards of Practice for the Valuation of Policy Liabilities of Life Insurers established by the Canadian Institute of Actuaries (CIA) require life insurers to adopt the Canadian Asset Liability Method (CALM) for valuations. The Canadian Institute of Chartered Accountants also adopted this method in its accounting standards. Under CALM, actuarial liabilities are determined based on the book value of assets that support them.

To ensure a consistent approach to valuing insurance liabilities in Canada and the assets that support those liabilities, the proposed Regulations Amending the Assets (Foreign Companies) Regulations (the Regulations) would revise the Assets (Foreign Companies) Regulations by adopting an asset valuation determined in accordance with generally accepted accounting principles only. A consistent approach to the valuation of assets and liabilities optimizes policyholder protection.

In order to align with financial reporting and, more specifically, the implementation of new accounting standards that will introduce a new measurement base for insurers' financial assets, the Regulations would come into force on January 1, 2007.

Alternatives

Amendments to the Assets (Foreign Companies) Regulations are needed to change the valuation of vested assets. The Office of the Superintendent of Financial Institutions (OSFI) considered alternative approaches for valuing vested assets. The valuation methods considered were as follows:

1. Maintaining the current approach (i.e. the greater of the value determined in accordance with generally accepted accounting principles and market value);

2. Using market value only; or

3. Using valuation determined in accordance with generally accepted accounting principles only.

After careful consideration of the alternatives, OSFI concluded that option 3 is the only valuation approach that is consistent with the valuation approach for actuarial liabilities. Valuing assets and liabilities using consistent conventions optimizes policyholder protection; no other valuation method could achieve this objective.

Benefits and costs

The proposed Regulations Amending the Assets (Foreign Companies) Regulations would ensure a consistent valuation of actuarial liabilities in Canada and assets in Canada. This would improve OSFI's ability to monitor the adequacy of assets maintained in Canada by foreign insurers and to ensure that foreign companies maintain an adequate margin of assets to protect policyholders in Canada.

The proposed change in valuation would not create any additional expense for institutions.

Consultation

In December 2001, OSFI sent a Proposal for comments to the Canadian Life and Health Insurance Association (CLHIA), the CIA and the Canadian Life and Health Insurance Compensation Corporation (formerly known as CompCorp). The Proposal outlined OSFI's intention to change the asset valuation basis for assets in Canada to a valuation determined in accordance with generally accepted accounting principles only and to incorporate this change into the Assets (Foreign Companies) Regulations.

The CIA and CompCorp supported OSFI's initiative to amend the Assets (Foreign Companies) Regulations. However, the CIA proposed that the difference between market values and values determined in accordance with generally accepted accounting principles on assets not backing liabilities be recognized. This issue is being addressed through revisions to OSFI's Minimum Continuing Capital and Surplus Requirements for Life Insurance Companies (MCCSR) Guideline, which are expected to be in place by the end of 2006.

The CLHIA did not object to the rationale for the change in valuation but proposed changes to the Test of the Adequacy of Assets in Canada and Margin Requirements (TAAM) which is set out in the MCCSR Guideline. Pursuant to section 608 of the Insurance Companies Act, foreign life insurers are required to maintain an adequate margin of assets in Canada over liabilities in Canada. OSFI measures the adequacy of the margin through the TAAM.

The changes proposed by the CLHIA relate to the type of assets that may be included in "Assets Available" under the TAAM requirements. Specifically, the industry proposed that assets held in foreign depositories and non-vested assets under the control of the chief agent be included in "Assets Available". The CLHIA submitted that such changes would result in similar approaches for foreign life branches as are afforded to Canadian life insurers. At that time, OSFI informed the industry that it was considering the proposals and that any change to the type of assets that may be included in "Assets Available" under the TAAM would be made through revisions to OSFI's MCCSR Guideline.

The proposed Regulations were published in the Canada Gazette, Part I, on October 11, 2003. OSFI received comments from the foreign branch members of the Committee on Capital Adequacy and Solvency of the CLHIA and two foreign companies. The industry did not object to the rationale for the change in valuation and to proceeding with the promulgation of the Regulations. However, they reiterated their prior request that their proposals for other changes to the TAAM regime in MCCSR should be made at the same time as the change in valuation of vested assets.

OSFI considered the proposed changes with respect to the issue of assets held in foreign depositories. OSFI obtained legal advice that concluded that there is significant uncertainty as to OSFI's ability to obtain timely and undisputed access to such assets. Based on that opinion and on past experience in dealing with such assets, OSFI has prudential concerns with the recognition of assets in foreign depositories. Discussions with the industry on this issue are continuing, with a view to find ways to alleviate OSFI's concerns. OSFI also has reservations about including in "Assets Available" non-vested assets under the control of the chief agent.

The industry also suggested that the coming into force date be aligned with the new accounting standards for financial instruments. The new accounting standards will introduce fair value measurement for some of the financial assets of insurers, such that the proposed change to the asset valuation method should have minimal impact. OSFI agreed with the industry that aligning the timing of the coming into force date with the new accounting standards for financial instruments would be appropriate. Implementing these changes simultaneously helps avoid volatility in the TAAM ratios that may result if changes were made under different timeframes.

Compliance and enforcement

The proposed changes would not have a material impact on OSFI's resources but would enhance OSFI's ability to ensure foreign life companies operating in Canada maintain sufficient assets in Canada to support policyholders in Canada.

Contact

Bernard Dupont, Director, Capital Division, Office of the Superintendent of Financial Institutions, 255 Albert Street, Ottawa, Ontario K1A 0H2, 613-990-7797 (telephone), 613-990-6901 (fax), Bernard.Dupont@osfi-bsif.gc.ca (email).

PROPOSED REGULATORY TEXT

Notice is hereby given that the Governor in Council, pursuant to section 610 (see footnote a) of the Insurance Companies Act, proposes to make the annexed Regulations Amending the Assets (Foreign Companies) Regulations.

Any interested person may make representations concerning the proposed Regulations within 30 days after the date of publication of this notice. All such representations must cite the Canada Gazette, Part I, and the date of publication of this notice, and be addressed to Nancy Sinclair, Senior Analyst, Capital Division, Office of the Superintendent of Financial Institutions Canada, 255 Albert Street, Ottawa, Ontario K1A 0H2 (telephone: 613-990-7286; fax: 613-991-6822; email: nancy.sinclair@osfi-bsif.gc.ca).

Ottawa, August 25, 2006

MARY O'NEILL
Assistant Clerk of the Privy Council

REGULATIONS AMENDING THE ASSETS (FOREIGN COMPANIES) REGULATIONS

AMENDMENT

1. The portion of section 3 of the Assets (Foreign Companies) Regulations (see footnote 1) before paragraph (a) is replaced by the following:

3. Subject to sections 6 and 7, every foreign life company shall, in relation to its insurance risks in Canada that fall within the classes of life insurance, accident and sickness insurance and loss of employment insurance, maintain assets in Canada the total value of which, when determined in accordance with the accounting principles referred to in subsection 331(4) of the Act, is at least equal to the aggregate of

COMING INTO FORCE

2. These Regulations come into force on January 1, 2007.

[36-1-o]

Footnote a

S.C. 2001, c. 9, s. 447

Footnote 1

SOR/2002-450

NOTICE:
The format of the electronic version of this issue of the Canada Gazette was modified in order to be compatible with hypertext language (HTML). Its content is very similar except for the footnotes, the symbols and the tables.

	Top of page
Maintained by the Canada Gazette Directorate	Important notices