Withdrawing a Branch - A New Option 


October 2007 - (International Law Office)

International Law Office
A number of Canadian branches of foreign insurance companies are and have been in run-off. New amendments proposed for the Canadian Insurance Companies Act (ICA), allows an important new approach to these insurers to withdraw their branches and thereby avoid the continuing administrative costs of Canadian regulatory compliance. 

The ICA, administered by the Office of Superintendent of Financial Institutions (OSFI), governs foreign insurers that insure or insured risks in Canada. Until such time as the branch can show to the satisfaction of OSFI that it has no net or gross Canadian risks, OSFI will not permit it to withdraw except in exceptional circumstances. Even though OSFI will waive certain periodic filing requirements, for branches in run-off, it cannot waive statutory requirements. These include the requirement of a Chief Agent, an appointed actuary, an auditor and the filing of an annual return and actuarial report. The costs to comply can amount to between $100,000 to $250,000 per year. For branches that have long tail liabilities, this can amount to very significant amounts over time. And because these are fixed costs, as the branch liabilities taper off, they become an even more burdensome relative cost. In the case of one life branch that we were recently involved with, it was estimated to be $10 Million. These administrative costs, are additional to the capital the branch must put in trust – normally 115% of liabilities and deposits based on the classes of insurance the branch is qualified for. 

A common way of shedding the branch liabilities is to transfer them to another Canadian insurer (Canadian company or branch), usually by means of an assumption reinsurance agreement followed by withdrawal. However, if the assuming company required liability protection in the form of reinsurance from the foreign company, the branch could not be withdrawn, because for foreign companies having a Canadian branch, OSFI required that all Canadian risks be reflected in the branch's books, a Catch-22 for the foreign company. One solution was to have another insurer in the foreign company's group (with no presence). Not all foreign companies have this flexibility. 

The ICA is reviewed every five years and the most recent review include amendments and a new OSFI approach that gives additional options to foreign companies wishing to withdraw their Canadian branches that are in run-off. In essence, as reflected in the Advisory issued by OSFI in its final form in September 2007, sets out OSFI's current view as to what constitutes "in Canada insuring risks", which is the statutory test for determining whether or not qualification under the ICA is required. The test focuses on where the constituent insurance activities are carried out and not where the risk is located. This coupled with the proposed elimination of "Canadian policy" and "" from the ICAhas opened up a new avenue for foreign companies wishing to withdraw their branch. 

The procedure can be summarized in three steps: (1) assumption reinsurance; (2) reinsurance (up to 100%); and (3) branch withdrawal. Steps (1) and (2) can occur simultaneously. Step (3) will normally require the completion of a year end so that OSFI can be satisfied that the liabilities of the branch are zero. The key is that as long as the foreign company does not "in Canada insure risks" after Step (1), the reinsurance (Step (2)) will not need to be reflected on the books of the branch. For foreign companies with branches in run-off, this is not a difficult or onerous hurdle to meet. While the amendments to the ICA respecting foreign companies are not expected to come into force until January 1, 2009, we have already obtained a ruling from OSFI to this effect. 

The availability of Step (2) should make it considerably easier for branches to find a willing Canadian entity (branch or company) for Step (1). Even if the reinsurance in Step (2) is coupled with putting assets on deposit to enable the acquirer to obtain credit for the reinsurance, this is not more onerous than the amount that the branch must presently put in trust. There are Canadian insurance companies that have formed to acquire run-off business. This way these administrative fixed costs can be spread over a number of run-offs. 

There may be additional benefits to branch withdrawal. Over the course of lengthy run-off, the regulatory requirements may become more onerous. As mentioned, the ICAis reviewed every five years. There have been three such reviews since its introduction in 1992. Not all have reduced the regulatory burden on foreign company branches. Additionally, the provincial/territorial governments regulate the relationship between an insurer and its insured. For a branch with run-off business across Canada, this means that 13 additional jurisdictions may impose additional burdens by future legislative changes. Finally, the presence of a Canadian branch may restrict and/or make more difficult and expensive the reorganization of the foreign company, for example, by using a solvent scheme. 

We now have first hand experience on how recent Canadian legislative and regulatory changes can assist companies with Canadian branches to withdraw from Canada perhaps decades earlier than they might otherwise have been able to.