Canada Gazette, Part I, Volume 156, Number 25: Regulations Amending Certain Regulations Made Under the Insurance Companies Act

June 18, 2022

Statutory authority
Insurance Companies Act

Sponsoring department
Department of Finance

REGULATORY IMPACT ANALYSIS STATEMENT

(This statement is not part of the Regulations.)

Issues

The Insurance Companies Act (ICA) authorizes federally regulated mutual property and casualty (P&C) insurance companies to apply to the Minister of Finance to demutualize. Demutualization is the process through which a mutual company, which is governed by its mutual policyholders, is converted into a share company that is governed by its shareholders. Demutualization allows the converted company to access equity markets in order to raise additional capital to support growth and enhance its competitive position.

The rules governing the process to demutualize a P&C insurance company are established in two distinct sets of regulations (the Regulations) that are tailored to each of the two types of mutual P&C insurance companies:

  • Mutual Property and Casualty Insurance Company with Non-mutual Policyholders Conversion Regulations
  • Mutual Property and Casualty Insurance Company Having Only Mutual Policyholders Conversion Regulations

The Regulations require a converted company to remain widely heldfootnote 1 for two years after demutualization (the takeover protection period). This protection is intended to give the converted company time to adjust to its new corporate structure and strengthen its competitive position, and to limit opportunities for consolidation in the industry. The current takeover protection period may not provide sufficient time for a converted company to fully leverage its access to capital markets, identify potential acquisition targets, negotiate the terms of a sale, satisfy all applicable regulatory requirements, and fully integrate the new business.

As an exception to the takeover protection, the Regulations allow a converted company to be wholly owned by another company incorporated under the ICA (an ICA holdco) during the first two years after demutualization. Under an ICA holdco structure, the Regulations require the ICA holdco, rather than the converted company, to remain widely held for the duration of the takeover protection period. The Regulations do not currently prohibit, nor explicitly permit, such an ICA holdco from making an application under the ICA to discontinue from the ICA and apply for continuance as a corporation under the Canada Business Corporations Act (CBCA). The Department of Finance would however recommend against approving such an application under current Regulations since, as explained below, a CBCA holdco structure would reduce the enforceability of the takeover protection.

This feature of the demutualization regime prevents demutualized companies from adopting a corporate structure that is available to all other federally regulated insurance companies. A corporate structure with a company incorporated under the CBCA as the ultimate parent allows the group to raise more capital through the issuance of debt and undertake a wider range of commercial activities compared to a structure with a company incorporated under the ICA as a parent.

The proposed regulatory amendments would (1) create a path to enable the ICA holdco of a converted company to apply for continuance under the CBCA during the takeover protection period; and (2) increase from two to four years the duration of the protection period during which a demutualized company is required to remain widely held.

Background

Enforcement of the takeover protection under a CBCA holdco structure

The ICA establishes the process whereby a company incorporated under the ICA (ICA company) can obtain the approval from the Minister of Finance to apply to the Director of Corporations Canada for a certificate of continuance as a CBCA corporation. After having obtained both of these approvals, the ICA company is discontinued from the ICA and continued under the CBCA. At this moment, the ICA company ceases to be subject to the ICA and becomes instead subject to the CBCA as if it had been incorporated under this Act.

The ICA provides that the Minister of Finance can only give approval to an ICA company to apply for continuance under the CBCA if certain conditions are met. Those include the ICA company having published a notice of its intention to apply for the approval of the Minister of Finance in the Canada Gazette; the ICA company having discharged, or provided for the discharge of, all its policy liabilities; and, the ICA company having been authorized by a special resolution of its shareholders to apply for the approval of the Minister of Finance.

The Regulations allow a converted company to adopt an ICA holdco structure during the takeover protection period but they currently contain no provision pertaining to the process that would apply to an ICA holdco that would seek to discontinue from the ICA and be continued under the CBCA during the takeover protection period.

The continuance of the ICA holdco under the CBCA would reduce the enforceability of the takeover protection. This enforcement concern stems from the fact that the Regulations operationalize the takeover protection through restrictions on ownership approvals by the Minister of Finance. More specifically, the Regulations prohibit the Minister of Finance from approving an ownership application [see ICA 407(1)] if the proposed acquisition would result in the converted company having a major shareholder. The Regulations provide that this prohibition on ownership approvals by the Minister of Finance is only in effect during the takeover protection period.

The ICA provides that a person needs to obtain an ownership approval from the Minister of Finance in order to acquire a significant interest (10% or more of any class of shares) in an ICA company. A different approval threshold however applies to a person that acquires shares of a CBCA holdco that itself owns 100 percent of the shares of an ICA company. In this case, the ICA only requires the person to obtain an ownership approval from the Minister of Finance if the acquisition of shares would result in the person acquiring control (in fact or in law) of the CBCA holdco (and therefore of the ICA company as well).

Table 1 – Ownership approval requirements under ICA and CBCA holdco structures
Corporate Structure

ICA holdco

ICA subsidiary

ICA holdco

ICA subsidiary

CBCA holdco

ICA subsidiary

CBCA holdco

ICA subsidiary

Proposed Acquisition in the Holdco Non-controlling significant interest in the ICA holdco Controlling significant interest in the ICA holdco Non-controlling significant interest in the CBCA holdco Controlling significant interest in the CBCA holdco
Ownership Approval by the Minister of Finance Required YES YES NO YES

Table 1 describes the ownership approval requirements that would apply under the ICA to a person that acquires shares in a holdco that has an ICA company as a wholly owned subsidiary. Under an ICA holdco structure, the acquisition of a controlling or non-controlling significant interest in the holdco triggers a requirement for an ownership approval by the Minister of Finance. Under a CBCA holdco structure, however, the acquisition of shares in the holdco only triggers a requirement for an ownership approval by the Minister of Finance if the acquisition is above the level of control.

Because of the above ownership rules, and the fact that the Regulations operationalize the takeover protection through ownership approvals by the Minister of Finance, a CBCA holdco structure would make the takeover protection unenforceable over a certain range of ownership of the holdco (i.e. between 20 per cent and the level of control in fact or in law).

Objective

The objective of the proposal is to expand the range of corporate structures available to demutualized P&C companies after demutualization, and to promote competition within the P&C industry.

Description

The proposal would amend the Regulations by creating a new requirement that would apply to an ICA holdco that is making an application to the Minister of Finance for discontinuance from the ICA and towards continuance under the CBCA. Such an ICA holdco would be required to include in its incorporating instrument, for the duration of the protection period, a provision that restricts the issue, transfer or ownership of its shares (the share restrictions) to prevent it from having a major shareholder (which would cause it to no longer be widely held).

The proposed amendments would allow such an ICA holdco to amend its incorporating instrument in order to remove the share restrictions but only in cases where the Minister of Finance is of the opinion that the converted company is, or is about to be, in financial difficulty and that a proposed acquisition would facilitate an improvement in its financial condition.

As well, the proposal would increase the duration of the protection period from two to four years.

Finally, the proposal would correct a discrepancy between the English and French versions of the Mutual Property and Casualty Insurance Company with Non-mutual Policyholders Conversion Regulations.

The proposed amendments would come into force on the day on which they are registered.

Regulatory development

Consultation

The Department of Finance (the Department) consulted on the proposal with the Canadian Association of Mutual Insurance Companies (CAMIC), the Insurance Brokers Association of Canada, the Co-operators Group Limited, the Economical Mutual Insurance Company, and the Intact Financial Corporation. Stakeholders were given approximately one month to provide their view in writing on the proposed regulatory amendments.

All stakeholders supported the proposal to create a path to enable the ICA holdco of a converted company to seek Ministerial approval to discontinue from the ICA and apply for continuance as a corporation under the CBCA, while the takeover protection period is in effect. Stakeholders agreed that the proposed amendments would effectively maintain the takeover protection on the holdco even after discontinuance from the ICA.

There also was general agreement that a longer takeover protection period would allow the converted company to emerge as a stronger independent competitor but some risks were identified. Some stakeholders argued that a longer protection period could allow an underperforming management to remain in place and, by delaying the possibility of takeover, could depress the value of company shares. One stakeholder argued that the current duration of the takeover protection period was the result of extensive consultations when the Regulations were developed, and that nothing had changed to justify a longer period.

The Department does not agree with the view that the change would necessarily entrench an underperforming management. Like all companies, the managers and Board of Directors of the converted company would be accountable to shareholders through various mechanisms (e.g. annual elections by shareholders, public annual reports, and audited financial statements). The converted company would, moreover, remain subject to oversight by OSFI, including with respect to corporate governance.

The Department does not expect a longer protection period to negatively impact shareholders’ right to receive fair value for their shares. The stocks of large banks and large federally regulated insurance companies that are subject to the widely held requirement are generally not considered to be traded at a discount.

Finally, while the initial Regulations were the subject of extensive consultations, those were almost exclusively focused on the multi-year process leading to demutualization and the division of demutualization benefits between policyholders. The small number of provisions in the Regulations relating to the post-demutualization process, including those pertaining to the takeover protection, were not subject to the same level of analysis and consultations, and the Department clearly indicated at the time, including in the RIAS, that some aspects of the framework could be subject to future refinement and improvements.

Modern treaty obligations and Indigenous engagement and consultation

No impacts have been identified in respect of the Government’s obligations in relation to Indigenous rights protected by section 35 of the Constitution Act, 1982, or its modern treaty obligations.

Instrument choice

Non-regulatory options have not been considered because the Insurance Companies Act requires that the rules governing the ownership of the shares of a converted company, including rules to limit the circumstances in which the Minister of Finance may approve an owernship application, be prescribed by regulations.

Regulatory analysis

Benefits

The proposal would enable a converted company to adopt a CBCA holdco structure during the takeover protection period which would allow the holdco to raise more capital through the issuance of debt and undertake a wider range of commercial activities compared to what it could under an ICA holdco structure. This would allow the converted company to compete more effectively with its competitors that are organized under a CBCA holdco structure while at the same time providing safeguards to ensure that the CBCA holdco would remain widely held for the duration of the takeover protection period.

The proposal would also give the converted company more time after demutualization to adjust to its new corporate structure and strengthen its competitive position and would increase the likelihood that it can remain an independent source of competition once the protection ends. Increased competition in the P&C industry would ultimately benefit consumers through better service, more diverse insurance products, and lower prices.

Costs

The proposal would create a path to enable the ICA holdco of a converted company to seek approval from the Minister of Finance to discontinue from the ICA and apply for a certificate of continuance under the CBCA.

An ICA holdco that would decide to apply for discontinuance from the ICA and continuance under the CBCA would need to follow the existing process under the ICA and file an application to the Minister of Finance.

The regulations would require such an ICA holdco to amend its articles of incorporation to include a provision that restricts the issue, transfer or ownership of its shares so as to ensure that it remains widely held for the duration of the takeover protection period. The process to amend the articles of incorporation is set out in the ICA and would involve a small administrative cost, including to obtain a special resolution from shareholders and apply for approval by the Minister of Finance.

Small business lens

Analysis under the small business lens concluded that the proposal will not impact Canadian small businesses.

The proposed regulatory amendments would apply to the ICA holdco of any demutualized P&C insurance company that applies to the Minister of Finance to discontinue from the ICA. The proposed regulatory amendments would result in a small increase in compliance cost for such an ICA holdco as it would be required to amend its incorporating instrument to add restrictions on the issue, transfer or ownership of its shares.

In principle, the proposal could therefore have compliance cost impacts on small mutual P&C insurance companies. In practice, however, and given the large administrative costs associated with the existing multi-year process to demutualize a mutual P&C insurance company, the Department considers it highly unlikely that a small mutual P&C insurance company would decide to pursue demutualization and be impacted by the small incremental compliance cost.

One-for-one rule

The one-for-one rule does not apply as there is no incremental change in administrative burden on businesses and no regulatory titles are repealed or introduced.

Under existing rules, an ICA holdco is not prohibited from applying to the Minister of Finance to seek approval to be discontinued from the ICA and to apply for a certificate of continuance under the CBCA. The proposed regulatory amendments would not modify this existing application process but would clarify the compliance requirements associated with this process, namely that such an ICA holdco is required to have share restrictions in its incorporating instruments at the moment when it files a discontinuance application with the Minister of Finance.

The proposed regulatory amendments would make no modifications to existing administrative requirements and, since it does not broaden the number of potential applicants, would cause no incremental increase in administrative burden.

Regulatory cooperation and alignment

The proposal would only apply to mutual P&C insurance companies incorporated under the ICA. Mutual P&C insurance companies that are incorporated under a provincial statute are subject to province-specific regulatory regimes. Some of the provincial regulatory regimes provide a framework through which a mutual insurance company can demutualize (e.g. Alberta, Manitoba, Nova Scotia) while others don’t (e.g. British Columbia, Saskatchewan, Ontario, Quebec, New Brunswick, Prince Edward Island).

Canada’s international trade agreement obligations focus on ensuring non-discriminatory treatment between Canadian and foreign financial institutions. This policy framework applies equally to Canadian-controlled insurance companies as well as foreign insurance company subsidiaries, and as such, is in accordance with Canada’s international trade agreement obligations.

Financial institutions are generally subject to the regulatory regime of the jurisdiction in which they are incorporated. Federally regulated P&C insurance companies are subject to the ICA and its regulations, but their foreign subsidiaries (if any) are subject to the regulatory regimes of the foreign jurisdictions in which they operate. Similarly, foreign P&C insurance companies are regulated in their home jurisdictions, but their Canadian subsidiaries are subject to the same regulatory regime as Canadian P&C insurance companies. As such, the regulatory proposal would have no impact on the ability of a Canadian company to operate in a foreign jurisdiction or of a foreign company to operate in Canada.

The Regulations are part of the broader financial sector framework. The Department and partner agencies (the Office of the Superintendent of Financial Institutions, the Canada Deposit Insurance Corporation, the Financial Consumer Agency of Canada, and the Bank of Canada) continuously work to ensure this framework is aligned with the work of the international organizations, such as the Financial Action Task Force, the International Monetary Fund, and the Financial Stability Board. The Department has not identified any aspects of the regulatory proposal that would impede alignment of the federal financial framework or with the work of these international organizations.

Strategic environmental assessment

In accordance with the Cabinet Directive on the Environmental Assessment of Policy, Plan and Program Proposals, a preliminary scan concluded that a strategic environmental assessment is not required.

Gender-based analysis plus

No gender-based analysis plus (GBA+) impacts have been identified for this proposal.

Implementation, compliance and enforcement, and service standards

Implementation

The proposed amendments would be brought into force on the day on which they are registered. No further actions will be required to ensure effective and efficient implementation.

Compliance and enforcement

The Office of the Superintendent of Financial Institutions (OSFI) is the prudential regulator of federally regulated P&C insurance companies and administers the regulatory framework that applies to them, including the ICA and the Regulations.

OSFI administers all applications made under the ICA to obtain an approval by the Minister of Finance, including a potential application by the ICA holdco of a converted company to obtain approval to discontinue from the ICA and apply to continue under the CBCA. Upon the coming into force of the proposed amendments, OSFI would ensure that such an ICA holdco has the necessary share restrictions in its incorporating instruments before forwarding the application with its recommendation to the Minister of Finance for decision.

Contact

Manuel Dussault
Senior Director, Framework Policy
Financial Institutions Division, Financial Sector Policy Branch
Department of Finance Canada
90 Elgin Street, Ottawa (Ontario), K1A 0G5
613‑369‑3912
Email: Manuel.Dussault@fin.gc.ca

PROPOSED REGULATORY TEXT

Notice is given that the Governor General in Council, pursuant to subsection 237(2)footnote a of the Insurance Companies Actfootnote b, proposes to make the annexed Regulations Amending Certain Regulations Made Under the Insurance Companies Act.

Interested persons 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 Manuel Dussault, Senior Director, Framework Policy, Financial Institutions Division, Financial Sector Policy Branch, Finance Canada (email:fin.fsreg-regsf.fin@canada.ca; tel: 613‑369‑3912).

Ottawa, June 9, 2022

Wendy Nixon
Assistant Clerk of the Privy Council

Regulations Amending Certain Regulations made under the Insurance Companies Act

Mutual Property and Casualty Insurance Company Having Only Mutual Policyholders Conversion Regulations

1 (1) The portion of section 15 of the Mutual Property and Casualty Insurance Company Having Only Mutual Policyholders Conversion Regulations footnote 2 before paragraph (a) is replaced by the following:

Acquisition

15 (1) During a company’s first four years as a converted company, the Minister may only give an approval under subsection 407(1) of the Act in respect of the company if

(2) Section 15 of the Regulations is amended by adding the following after subsection (1):

Restriction

(2) A body corporate that holds all of the voting shares of a converted company and makes an application under paragraph 39(1)(b) of the Act must, for the duration of the four-year period, include in that body corporate’s incorporating instrument a provision that restricts the issue, transfer or ownership of that body corporate’s shares, of any class or series, so as to prevent that body corporate from having a major shareholder.

Removal of provision

(3) Despite subsection (2), the body corporate may amend its incorporating instrument to remove the provision included in it under that subsection, if the Minister has given an approval under paragraph (1)(b).

Mutual Property and Casualty Insurance Company with Non-mutual Policyholders Conversion Regulations

2 (1) The portion of section 25 of the Mutual Property and Casualty Insurance Company with Non-mutual Policyholders Conversion Regulations footnote 3 before paragraph (a) is replaced by the following:

Acquisition

25 (1) During a company’s first four years as a converted company, the Minister may only give an approval under subsection 407(1) of the Act in respect of the company if

(2) Paragraph 25(1)(b) of the French version of the Regulations is replaced by the following:

  • b) si le ministre estime que la société transformée éprouve ou est sur le point d’éprouver des difficultés financières et que l’acquisition projetée l’aiderait à améliorer sa situation financière.

(3) Section 25 of the Regulations is amended by adding the following after subsection (1):

Restriction

(2) A body corporate that holds all of the voting shares of a converted company and makes an application under paragraph 39(1)(b) of the Act must, for the duration of the four-year period, include in that body corporate’s incorporating instrument a provision that restricts the issue, transfer or ownership of that body corporate’s shares, of any class or series, so as to prevent that body corporate from having a major shareholder.

Removal of provision

(3) Despite subsection (2), the body corporate may amend its incorporating instrument to remove the provision included in it under that subsection, if the Minister has given an approval under paragraph (1)(b).

Coming into Force

3 These Regulations come into force on the day on which they are registered.