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OSFI’s Strategic Plan focuses on cultivating the readiness and resilience of federally regulated financial institutions (FRFIs) and federally regulated pension plans (FRPPs) to financial risks and non-financial risks that could potentially adversely affect their financial condition. In light of the Strategic Plan, OSFI recently published a list of the guidance that it anticipates releasing in the near term. Below is a summary of all of the guidance that OSFI intends to release which relates to insurance companies.

Risk Management Guidance

Industry Letter on Climate-related Risks
• Summarizes feedback received on OSFI’s Climate-related Risks Discussion Paper issued in Q1 2021 and setting out OSFI’s proposal for future climate related risk initiatives.
• Timeframe: Q3 2021

Industry Letter on Technology Risk
• Summarize feedback received on OFSI’s Technology Risk Discussion Paper issued in Q3 2020 and sets out future guidance initiatives
• Timeframe: Q2 2021 (Released on May 10, 2021)

Industry Letter on Operational Resilience
• Seeks views on integrating new Basel Committee on Banking Supervision Principles for Sound Management of Operational Risk and Principles of Operational Resilience into OSFI’s guidance
• Timeframe: Q3 2021

Final Guideline B-2 on Property and Casualty Large Exposure
• Establish OSFI’s expectations with respect to large exposures of property and casualty insurance companies
• Timeframe: Q4 2021

Final Guideline B-2 on Insurance Practices and Procedures
• Establish OSFI’s expectations related to reinsurance practices
• Timeframe: Q4 2021

Develop Guideline on Technology/Cyber Risk
• Develop OSFI’s expectations for technology and cyber risk management
• Timeframe: Q4 2021

Draft Revised Guideline B-10 on Third Party Risk
• Develop OSFI’s expectations for third party risk
• Timeframe: Q1 2022

Industry Letter on Advanced Analytics and Model Risk
• Develop OSFI’s expectations for advanced analytics and model risk
• Timeframe: Q1 2022

Consultative Document on Culture and Reputation Risk
• Develop OSFI’s expectations for culture and reputation risk
• Timeframe: Q1 2022

Capital and Accounting Guidance

Discussion paper on the Assurance of Capital, Leverage and Liquidity Returns
• Develop OSFI’s expectations on assurance of Deposit-Taking Institutions and insurance capital, leverage and liquidity returns
• Timeframe: Q2 2021 (Released on April 13, 2021)

Draft Guidelines on Assurance of Capital, Leverage and Liquidity Returns
• Develop OSFI’s expectations on assurance of Deposit-Taking Institutions and insurance capital, leverage and liquidity returns
• Timeframe: Q4 2021

Final Guideline on Assurance of Capital, Leverage and Liquidity Returns
• Develop OSFI’s expectations on assurance of Deposit-Taking Institutions and insurance capital, leverage and liquidity returns
• Timeframe: Q1 2022

Other

Semi-Annual IFRS 17 Progress Reporting
• Insurers reporting to OSFI on IFRS 17 implementation progress
• Timeframe: Q1 2021

Final IFRS 17 Regulatory Returns
• Regulatory Returns reflecting impact of adopting IFRS 17
• Timeframe: Q2 2021 (Released on April 30, 2021)

Draft LICAT, MCT, MICAT Guidelines for IFRS 17
• Cover updates to the capital frameworks for insurers triggered by IFRS 17
• Timeframe: Q2 2021

Semi-Annual IFRS 17 Progress Reporting
• Insurers reporting to OSFI on IFRS 17 implementation progress
• Timeframe: Q3 2021

Consultation on Draft Methodology for Determining Capital Requirements for Segregated Fund Guarantee (SFG) Risk
• QIS 5 and public consultation of the draft Chapter 7 of LICAT (i.e. the draft standard approach) and SFG-related regulatory returns
• Timeframe: Q3 2021

The timelines listed above are reflective of the current OSFI strategic plans as of May 6, 2021. Plans may be subject to change or amended here.

On September 15, 2020, the Office of the Superintendent of Financial Institutions (“OSFI”) published a discussion paper, Developing financial sector resilience in a digital world. The paper examined the risks arising from increased technological advancement and digitalization, in light of its potential effect on Canada’s financial sector. OSFI invited feedback regarding a variety of technology-related risk areas, with an emphasis on cyber security, advanced analytics, and the technology third party ecosystem. A diverse range of stakeholders including federally regulated financial institutions (“FRFIs”), industry associations, technology companies and consulting firms submitted their feedback. OSFI provided a brief summary of responses by stakeholders and plans to release draft guidance in the future. The full text of OSFI’s results summary publication can be found here.

A brief summary of the responses by the stakeholders includes the following:

Operational Risk & Resilience

Within the larger sphere of non-financial risk and operational risk management, technology risks are effectively managed when included in a firm’s enterprise risk management program. Effective operational risk management (“ORM”) leads to operational resilience, and technology is fundamental for such operations. However, while existing ORM approaches are appropriate, there are still opportunities to bolster practices.

Technology and Cyber Security

Emerging principles-based and technology-neutral perspectives in which definitions, concepts, and expectations comport with existing guidance and accepted international standards is most suitable for technology risk management. However, there is room to improve OSFI’s existing guidance. In general, emerging risks can be effectively managed within the larger sphere of technology risk and management. This requires quantum readiness through collective action by government, industry, and academia, and OSFI needs to continue engaging in these efforts.

Advanced Analytics

OSFI’s proposed principles of soundness, explainability and accountability are suitable for addressing emerging model risks, including those posed by artificial intelligence (“AI”) and machine learning (“ML”). However, there are areas where OSFI should deliberate modification to bolster its principles. Moreover, human review and oversight of AI and ML models is important. In any event, “[a]ny new model of risk guidance should remain risk- and principles-based, technology agnostic, and aligned with other jurisdictions and existing industry standards.”

Third Party Risk

Technology-related Risk
Technology-related third party arrangements should be deliberated as part of OSFI’s planned review of Guideline B-10 rather than as separate guidance. Likewise, any cloud risk management provisions could be integrated into Guideline B-10 rather than as a separate guidance. However, certain expectations regarding technology-related third party arrangements should be replaced with more outcome-based principles.

Proposed Principles
There was a split in the feedback regarding the additional principles as many respondents suggested changes to the descriptions or proposed additional principles, while other respondents believed that the proposed principles sufficiently depict current and emerging risks.

FinTech Arrangements
OSFI should consider FinTech arrangements like other third party arrangements because of the consistency between the inherent risks posed by these firms and other third party providers. However, OSFI should wait until the regulations pursuant to FRFI statutes on FinTech networking are completed to avoid overlap.

Data

Existing regulations offer adequate coverage on data risk guidance for FRFIs, so OSFI need not create additional data risk guidance. However, OSFI should consider the Basel Risk Data Aggregation and Risk Reporting (“RDARR”) principles as a foundation for any additional expectations that could pertain to all FRFIs, outside of systemically important banks.

Key aspects of data risk include quality, security and privacy, and data risk intersects with other risk areas including cyber security and models. Material data risks can occur from utilizing poor quality data, data misuse, outages or breaches – all of which cause operational disruption or reputational damage and financial loss.

Watch for any further updates on OSFI’s website, which can be accessed here.

The March 30, 2020 decision in MDS Inc. v. Factory Mutual MDS vs. Factory mutual Company, 2020 ONSC 1924 (Ontario Superior Court of Justice) (“MDS”)  provides an interesting analysis of a number of provisions in an all-risk property insurance policy.

Of particular interest is the analysis by Madame Justice Wilson of the term “resulting physical damage” in the business interruption section of the policy and her conclusion that, as used in this particular all-risk property insurance policy and in the context of the factual matrix of the case, resulting physical damage included the impairment of function or use of tangible property, even in the absence of actual physical damage to property.

A number of commentators have identified the possibility that this conclusion could allow insureds to recover their business interruption losses under property insurance policies due to Covid-19 on the basis that, although the virus has not caused actual physical damage to their property, it has impaired the function or use of their property.  We understand that this issue is already being litigated in the United States.

The facts of the MDS case were that heavy water used to cool a nuclear reactor began leaking through a hole caused by corrosion that Wilson J. found, on the evidence, to have been unexpected and unanticipated (i.e. fortuitous).  This resulted in a 15-month shutdown of the reactor for safety reasons while the source of the leak was located and repaired.  Wilson J. stressed this was a unique and important fact because, unless the reactor had been shut down by the nuclear regulator, there was a risk that the leak could have led to a nuclear meltdown.

The all-risk property insurance policy in question covered, among other things, business interruption losses directly resulting from physical loss or damage and included contingent business interruption coverage that protected the insured for its actual loss sustained and extra expense incurred directly resulting from physical loss or damage of the type insured to property of the type insured at the locations of various suppliers important to the insured, including the supplier that operated the nuclear reactor.

However, all coverage under the policy in question (both direct damage and business interruption coverage) was subject to the following exclusion:

“This Policy excludes the following, but if physical damage not excluded by the Policy results, then only that resulting damage is insured…

3) deterioration, depletion, rust, corrosion or erosion, wear and tear, inherent vice or latent defect.”

Wilson J. concluded that the exclusion with respect to “corrosion” did not exclude fortuitous or unanticipated corrosion.  As noted above, she found as a fact that the corrosion in question was fortuitous and, therefore, that the above exclusion did not apply to deny the insured coverage.

However, in case another court disagreed with this conclusion, she considered the alternative that the corrosion exclusion applied and asked whether the coverage add-back in the above exclusion for “resulting property damage” would, nevertheless, afford coverage to the insured.

It was accepted by the parties that the heavy water did not cause actual tangible damage to the reactor. The insurer argued that in the circumstances the presence of the leaking heavy water was not resulting physical damage.  The insured argued that it was resulting physical damage because the character of the reactor was changed in an important way by the heavy water, requiring the shutdown and rendering the entire reactor unusable.

Wilson J. agreed with the plaintiff.  She concluded that the policy, considered as a whole, and the objective reasonable expectations of the parties as to the meaning of physical damage, viewed from a common-sense perspective, supported the view that the leak of heavy water would constitute resulting physical damage because it rendered the reactor inoperable until the safety concerns and protocol imposed by the nuclear regulator had been met.

She stated that:

“This interpretation is in accordance with the purpose of all-risk property insurance which is to provide broad coverage. To interpret physical damage as suggested by the Insurer would deprive the Insured of a significant aspect of the coverage for which they contracted, leading to an unfair result contrary to the commercial purpose of broad all-risk coverage.”

The phrase “directly resulting from physical loss or damage” is used to describe coverage under the policy in question for both business interruption losses incurred as a result of physical damage to property at the insured’s own locations and contingent business interruption losses incurred as a result of physical loss or damage to property at specified suppliers’ locations.  Accordingly, the decision in MDS appears to apply to business interruption coverage generally and not just to contingent business interruption coverage.

The MDS decision may also support the broader proposition that “physical damage”, whether used in the business interruption insuring clause or the direct damage insuring clause of a property insurance policy, includes the impairment of function or use of tangible property, even in the absence of actual physical damage to such property.

In the MDS case, the only exclusions that could have applied were the corrosion, idle period and nuclear exclusions, all of which Wilson J. concluded did not apply.  In the case of Covid-19, other exclusions or conditions in property insurance policies might apply.  For example, some property insurance policies explicitly exclude coverage for any cost due to contamination resulting from the presence of a virus or impose sub-limits with respect to the length of business interruption coverage in cases where the government has ordered that the insured’s property not be used.  Some of these exclusions explicitly provide that they apply to exclude business interruption losses.

The decision of the Ontario Superior Court of Justice in MDS is a decision of first instance.  Accordingly, it may be appealed.  In addition, its broader applicability may be limited by its special facts.

However, as long as the MDS case remains the law in Ontario, insureds in Ontario (and in other provinces and territories in Canada, as their courts may apply this case) whose businesses have been affected by Covid-19 would be wise to review their policies with their insurance and legal advisors.

Effective as of January 1, 2020, Saskatchewan’s new Insurance Act has come into force. The new Insurance Act was enacted by the Government of Saskatchewan on May 2015 and replaces prior legislation which was first enacted in 1913.

The new legislation is now available on the Publications Saskatchewan website, or you can access The Insurance Act and the Insurance Regulations through this post. Some of the highlights of this new legislation include:

• new market conduct standards;
• new licensing and supervision requirements for insurance distributors, such as new licensing categories for MGAs and third-party administrators; and
• expansion of the restricted insurance agent licensing regime related to the sale of insurance in conjunction with the sale of certain other products and services.

The new legislation will bring Saskatchewan’s insurance legislation into closer alignment with the regulatory regimes of the other western provinces British Columbia, Alberta and Manitoba.

In order to assist insurers and other industry stakeholders with the transition to the new legislation, the Financial and Consumer Affairs Authority of Saskatchewan (the “Regulator”) is developing guidelines and interpretation bulletins to communicate the Regulator’s expectations. The Regulator has developed the following guidelines and interpretation bulletins to date:

• Guideline No.: G1/2019 – Records to be Kept in Saskatchewan or approved location (revised); and
• Bulletin No.: B1/2019 – Notice of Dispute Resolution Process.

The Financial and Consumer Services Commission of New Brunswick recently published a Consultation Paper titled Incidental Selling of Insurance Restricted Insurance Licensing Regime. A complete copy of the Consultation Paper is available here.
In the Consultation Paper the Commission has indicated that it proposes to regulate the incidental selling of insurance through a restricted insurance licensing regime similar to regimes previously adopted in Alberta, Saskatchewan and Manitoba.
The Commission has proposed to define an “incidental seller of insurance” to mean:
“a person that, in the course of selling or providing goods or services to the person’s customers or clients, solicits, negotiates, sells or arranges insurance, or offers to sell, negotiate or arrange insurance, that relates to those goods or services.”
The types of businesses that would be eligible to obtain a restricted agent licence would be:
• A deposit-taking institution – a bank, credit union, caisse populaire, or loan or trust company;
• A sales finance company – a corporation, other than a financial institution, that provides consumer loans, or provides or arranges for credit;
• A transportation company that provides transportation service for goods;
• An automobile dealership, a watercraft dealership, a recreational vehicle dealership, a farm implement dealership or a construction equipment dealership;
• A mortgage brokerage licensed under the Mortgage Brokers Act;
• A customs brokerage;
• A freight forwarding business;
• A vehicle rental business (incl. construction equipment rentals);
• A portable electronics vendor – a business that sells or leases portable electronic devices or provides the devices in connection with a transaction between the business and a consumer;
• A business engaged by one of these businesses to solicit, negotiate, sell or arrange insurance on its behalf.
The Commission is proposing to allow restricted insurance licence holders and their employees to solicit, negotiate, sell or arrange the following classes or types of insurance:
• Cargo insurance;
• Creditor’s critical illness insurance
• Creditor’s disability insurance
• Creditor’s life insurance
• Creditor’s loss of employment insurance
• Creditor’s vehicle inventory insurance
• Export credit insurance
• Guaranteed asset protection insurance
• Mortgage insurance
• Portable electronics insurance
• Rented-vehicle accidental injury or death insurance
• Rented-vehicle contents insurance
• Rented-vehicle liability insurance
The Commission has indicted that it does not intend to include travel insurance, funeral insurance and equipment warranty insurance within the restricted insurance licensing regimes as some other provinces have done.
With respect to equipment warranty insurance, the Commission confirmed that it does not consider warranties or extended warranties to be insurance where the warranty is sold incidentally to the product and is sold by the “distributor” of the product or an affiliate of the distributor with a non-arm’s length relationship.
Among other requirements, each business that wishes to apply for a restricted insurance licence would be required to be sponsored by an insurer licensed in New Brunswick and to maintain errors and omissions insurance in minimum specified amounts.
The Commission has invited feedback on a number of questions posed in the Consultation Paper. The comment period for providing written submissions ends on January 31, 2020.

The Ontario government has announced that effective as of June 8, 2019, the new Financial Services Regulatory Authority of Ontario has assumed jurisdiction over those sectors previously regulated by the Financial Services Commission of Ontario (FSCO) and the Deposit Insurance Corporation of Ontario (DICO).

In making this announcement, Finance Minister Vic Fedeli said “The Financial Services Regulatory Authority (FSRA) of Ontario is a modern and innovative regulator with rule-making authority that promotes strong financial services and pensions sectors while protecting the public interest. Its mandate is to be open —open to new ideas, open to business, and open to consumer needs. FSRA has the flexibility to cut red tape, bring products to market quicker and be more responsive to the needs of businesses.” A full copy of the announcement is available here.

FSRA is in the process of reviewing existing regulatory publications which currently reside on the FSCO and DICO websites. A statement has been added to the FSCO webpage which says that “FSRA is actively reviewing all FSCO regulatory direction, including but not limited to forms, guidelines and FAQ. Until FSRA issues new regulatory direction, all existing regulatory direction remains in force.”

Watch for further updates coming on FSRA’s website, which can be accessed here.

May 15, 2019

The Quebec government today published a new regulation under an Act respecting the distribution of financial products and services (the “Distribution Act”), titled Regulation respecting Alternative Distribution Methods (the “Distribution Reg”). The Distribution Reg addresses issues related to (i) the sale of insurance over the internet without the intermediary of a natural person, and (ii) the offering of insurance products through distributors. With certain exceptions, the provisions of the Distribution Reg will come into effect on June 13, 2019.

With the publication of this new regulation, Quebec has taken the lead in setting clear expectations and standards for insurance intermediaries wanting to offer insurance products over the internet without the necessary involvement of a natural person. A copy of the Distribution Reg is available here.

With respect to internet insurance offerings, the Distribution Reg sets out a number of requirements that must be satisfied by firms wishing to sell insurance through a digital space, including disclosure and record keeping requirements. It also requires firms to ensure that the website clearly makes visible to applicants at all times during the process, the means by which the applicant can interact with a representative. When an applicant wishes to speak with a representative and one is not immediately available, the firm must suspend the transaction.

Firms that intend to offer products and services over the internet without the intermediary of a natural person are required to disclose without delay upon such offering, to the Autorite des marches financiers (the “AMF”):
(1) the name given to the digital space, where this name differs from the name of the firm;
(2) the names of the products and the classes to which they are related or the nature of the financial services offered on the digital space;
(3) the hyperlink or any other means to access the digital space; and
(4) the insurers whose products are offered on the firm’s digital space, if applicable.

Firms must notify the AMF of any change to such information within 30 days of such change.

The firm must also disclose annually to the AMF, the number of financial plans prepared, claims settled and insurance policies issued, the amount of premiums written through the digital space and the number of cases where clients have cancelled their insurance contracts in accordance with section 64 of the Insurers Act (Quebec).