In its 2008 Financial System Stability Assessment Update, the International Monetary Fund (IMF) commended Canada's "highly effective and nearly unified" regulatory and supervisory framework. The integrated supervisory authority - the Office of the Superintendent of Financial Institutions - is under the authority of the Minister of Finance, and is responsible for the supervision and regulation of federal financial institutions, including insurance companies, banks, trust and loan companies, cooperative credit associations, fraternal benefit societies, and private pension plans. Regulation of the insurance industry is shared between the federal and provincial governments, and is mainly contained under the Insurance Companies Act of 1991. According to the IMF's 2000 Report on the Observance of Standards and Codes, which assessed Canada's observance of the Insurance Supervisory Principles (ISPs) promulgated by the International Association of Insurance Supervisors (IAIS), Canada fully complied with most of the IAIS prudential regulation principles and broadly observed the remainder. However, the ISPs were consequently superseded by the new and more stringent Insurance Core Principles (ICPs), and there is insufficient information publicly available regarding Canada's compliance with the ICPs as revised by the IAIS in 2003.

General Overview

In October 1999, the International Monetary Fund (IMF) conducted a Financial Sector Assessment Program (FSAP) in Canada, including the assessment of the country's observance of the Insurance Supervisory Principles (ISPs) issued by the International Association of Insurance Supervisors (IAIS). The findings of the IMF's 1999 FSAP were reported in the 2000 Report on the Observance of Standards and Codes (ROSC). The IMF concluded that Canada fully complied with most of the IAIS prudential regulation principles, and broadly observed the remainder. However, the ISPs were consequently superseded by the new and more stringent Insurance Core Principles (ICPs), and there is insufficient information publicly available regarding Canada's compliance with the ICPs as revised by the IAIS in 2003.

According to the IMF's 2008 Financial System Stability Assessment (FSSA) Update based on a 2007 FSAP review, "Canada has established a highly effective and nearly unified regulatory and supervisory framework" (p. 27). As noted on the Department of Finance's (DoF) website, regulation of the insurance industry is shared between the federal and provincial governments. The legal framework for insurance supervision is mainly comprised of the Insurance Companies Act of 1991. In 2006, the government of Canada launched a Financial Institutions Legislation Review which made a number of legislative and regulatory proposals. These proposals included enhancing consumer protection, improving disclosure to consumers, increasing legislative and regulatory efficiency, and adapting the regulatory framework to new developments in the markets. The government was expected to draft legislation to implement the policy proposals. The Office of the Superintendent of Financial Institutions (Bureau du Surintendant des Institutions Financières Canada, or OSFI) was established in 1987 by the OSFI Act, and is responsible for the supervision and regulation of federal financial institutions, including insurance companies, banks, trust and loan companies, cooperative credit associations, fraternal benefit societies and private pension plans. Under the OSFI Act, the OSFI is under the authority of the Minister of Finance (MoF). The OSFI is a member of the IAIS.

As stated in the IMF's 2008 FSSA Update, "the insurance industry is stable, profitable, and well-capitalized" (p. 12). At the end of 2006, the three largest life and health insurers accounted for 84 percent of total assets in the insurance sector. Life insurance accounted for about 9 percent of total financial assets, or 24% of GDP. As of September 15, 2007, per the same report, there were 308 insurance companies in Canada.

The Principles

ICP 1 Conditions for effective insurance supervision

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According to the IMF's 2008 FSSA Update, "Canada has established a highly effective and nearly unified regulatory and supervisory framework" (p. 27). Nevertheless, the available sources do not directly address Canada's compliance with this principle as revised by the IAIS in 2003.

ICP 2 Supervisory objectives

II

The responsibilities and objectives of the OSFI are stipulated in the 1985 OSFI Act, and include protecting consumers, such as insurance policy holders, depositors, and pension plan members, from undue loss, as noted in the IMF's 2008 FSSA Update. To fulfill its mandate, per the same report, the OSFI conducted supervision on a consolidated basis, a risk-based approach, and a policy of early intervention. Nevertheless, the available sources do not directly address Canada's compliance with this principle as revised by the IAIS in 2003.

ICP 3 Supervisory authority

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The OSFI was established in 1987 by the OSFI Act, and is responsible for the supervision and regulation of federal financial institutions, including insurance companies, banks, trust and loan companies, cooperative credit associations, fraternal benefit societies and private pension plans. Under the OSFI Act, the OSFI is under the authority of the MoF. According to the OSFI's 2006-2007 Annual Report, the OSFI "is solely responsible for exercising the authorities under the financial legislation and is required to report to the MoF from time to time on the administration of the financial institutions legislation" (p. 17). Despite the information provided above, the available sources do not directly address Canada's compliance with this principle as revised by the IAIS in 2003.

ICP 4 Supervisory process

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There is insufficient information publicly available addressing Canada's compliance with this principle as revised in 2003 by the IAIS.

ICP 5 Supervisory cooperation and information sharing

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According to the IMF's 2000 ROSC, Canada was rated as "broadly compliant" with the 1997 ISP on Cooperation due to the OSFI's lack of formal relationships with foreign insurance supervisors. The IMF report recommended giving the OSFI "full access to relevant information regarding fraudulent or other criminal activity affecting the institutions for which it is responsible." Per the same report, Canada was rated as "fully compliant" with the 1997 ISP on Confidentiality. However, the ISPs were consequently superseded by the new and more stringent ICPs, and there is insufficient information publicly available regarding Canada's compliance with this principle as revised by the IAIS in 2003.

ICP 6 Licensing

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According to the IMF's 2000 ROSC, Canada was rated as "broadly compliant" with the 1997 ISP on Licensing due to the OSFI's lack of power to grant new licenses. The IMF report noted that while the MoF had the authority to license insurance companies, in practice, this was done upon recommendation of the OSFI. However, the ISPs were consequently superseded by the new and more stringent ICPs, and there is insufficient information publicly available regarding Canada's compliance with this principle as revised by the IAIS in 2003.

ICP 7 Suitability of persons

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There is insufficient information publicly available addressing Canada's compliance with this principle as revised in 2003 by the IAIS.

ICP 8 Changes in control and portfolio transfers

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In its 2000 ROSC, the IMF rated Canada as "fully compliant" with the 1997 ISP on Changes in control. The IMF report noted that the approval of the MoF was required in order "to acquire control of a company or acquire or increase a significant interest in a class of shares." On the other hand, the OSFI has legal powers to approve the acquisition of up to 10 percent of non-voting shares and increases in capital. However, the ISPs were consequently superseded by the new and more stringent ICPs, and there is insufficient information publicly available regarding Canada's compliance with this principle as revised by the IAIS in 2003.

ICP 9 Corporate governance

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In its 2000 ROSC, the IMF rated Canada as "fully compliant" with the 1997 ISP on Corporate governance. The IMF report noted that the Insurance Companies Act comprised "a large and comprehensive section on the roles and responsibilities of Directors and Officers." However, the OSFI did not have primary responsibility for setting corporate governance standards. The ISPs were consequently superseded by the new and more stringent ICPs, and there is insufficient information publicly available regarding Canada's compliance with this principle as revised by the IAIS in 2003.

ICP 10 Internal control

II

In its 2000 ROSC, the IMF rated Canada as "fully compliant" with the 1997 ISP on Internal control. The IMF report noted that the OSFI had issued a detailed guideline on internal controls for life insurers, and had periodic meetings with the auditing profession. However, the ISPs were consequently superseded by the new and more stringent ICPs, and there is insufficient information publicly available regarding Canada's compliance with this principle as revised by the IAIS in 2003.

ICP 11 Market analysis

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There is insufficient information publicly available addressing Canada's compliance with this principle as revised in 2003 by the IAIS.

ICP 12 Reporting to supervisors and off-site monitoring

II

In its 2000 ROSC, the IMF rated Canada as "fully compliant" with the 1997 ISP on Financial reporting. Life insurers were required to file statutory reports, including quarterly financial returns, and the OSFI relied on the work of external auditors to review the fairness of financial statements and accounts. Per the same report, while Canada was one of the world leaders in this domain, its "smoothed asset values" approach was inconsistent with other countries' "mark to market" approach. The IMF report recommended including profits on a mark to market basis as a note to insurer accounts. However, the ISPs were consequently superseded by the new and more stringent ICPs, and there is insufficient information publicly available regarding Canada's compliance with this principle as revised by the IAIS in 2003.

ICP 13 On-site inspection

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In its 2000 ROSC, the IMF rated Canada as "fully compliant" with the 1997 ISP on On-site inspection and access to information. The IMF report noted that the OSFI had the authority to "examine and inquire into the business and affairs of any insurer operating in Canada to ensure compliance with the [Insurance Companies] Act and that the insurer is in sound financial condition." Furthermore, the OSFI was required to report directly to the MoF following on-site inspections. However, the ISPs were consequently superseded by the new and more stringent ICPs, and there is insufficient information publicly available regarding Canada's compliance with this principle as revised by the IAIS in 2003.

ICP 14 Preventive and corrective measures

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There is insufficient information publicly available addressing Canada's compliance with this principle as revised in 2003 by the IAIS.

ICP 15 Enforcement or sanctions

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In its 2000 ROSC, the IMF rated Canada as "fully compliant" with the 1997 ISP on Sanctions. Per the same report, the OSFI had "extensive powers to impose temporary cease and desist instructions and to require remedial action if unsafe or unsound practices were in use or were contemplated by an insurer." The IMF report recommended introducing administrative penalties, under the government's 1999 Policy Paper on Reforming Canada's Financial Services Sector. However, the ISPs were consequently superseded by the new and more stringent ICPs, and there is insufficient information publicly available regarding Canada's compliance with this principle as revised by the IAIS in 2003.

ICP 16 Winding-up & exit from the market

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There is insufficient information publicly available addressing Canada's compliance with this principle as revised in 2003 by the IAIS.

ICP 17 Group-wide supervision

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There is insufficient information publicly available addressing Canada's compliance with this principle as revised in 2003 by the IAIS.

ICP 18 Risk assessment and management

II

The IMF's 2008 FSSA Update stated that, in order to fulfill its mandate, the OSFI conducts supervision on a risk-based approach. As noted in its 2006-2007 Annual Report, "OSFI uses a modern, risk-based supervisory framework to identify and intervene on a timely basis when a financial institution's practices are imprudent or unsafe" (p. 37). Furthermore, the OSFI has established detailed guidance to assist supervisors in applying a risk-based framework. Nevertheless, the available sources do not directly address Canada's compliance with this principle as revised by the IAIS in 2003.

ICP 19 Insurance activity

II

In its 2000 ROSC, the IMF rated Canada as "fully compliant" with the 1997 ISP on Reinsurance. The IMF report noted that domestic reinsurers were under the same regulatory regime as direct insurers. Furthermore, the OSFI reviewed the activities of reinsurance companies during on-site inspections, and insurers were responsible for the security of their own reinsurers. However, the ISPs were consequently superseded by the new and more stringent ICPs, and there is insufficient information publicly available regarding Canada's compliance with this principle as revised by the IAIS in 2003.

ICP 20 Liabilities

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In its 2000 ROSC, the IMF rated Canada as "fully compliant" with the 1997 ISP on Liabilities. The IMF report recommended establishing a mechanism to "ensure greater consistency, across the insurance industry, of actuarial assumptions for the setting of fair value policy liabilities." However, the ISPs were consequently superseded by the new and more stringent ICPs, and there is insufficient information publicly available regarding Canada's compliance with this principle as revised by the IAIS in 2003.

ICP 21 Investments

II

In its 2000 ROSC, the IMF rated Canada as "fully compliant" with the 1997 ISP on Assets. Under the Insurance Companies Act, directors were required to "establish policies relating to investment and lending and policies that a reasonable and prudent person would apply with respect to a portfolio of investments and loans and the company must adhere to that policy." Furthermore, insurers were clearly limited on the type of subsidiaries in which they could hold a substantial interest. However, the ISPs were consequently superseded by new and more stringent ICPs, and there is insufficient information publicly available regarding Canada's compliance with this principle as revised by the IAIS in 2003.

ICP 22 Derivatives and similar commitments

II

In its 2000 ROSC, the IMF rated Canada as "fully compliant" with the 1997 ISP on Derivatives and off-balance sheet items. The IMF report recommended establishing by law "separate insurer board compliance or risk committees, which received regular risk management reports from management." However, the ISPs were consequently superseded by new and more stringent ICPs, and there is insufficient information publicly available regarding Canada's compliance with this principle as revised by the IAIS in 2003.

ICP 23 Capital adequacy and solvency

II

In its 2000 ROSC, the IMF rated Canada as "fully compliant" with the 1997 ISP on Capital adequacy and solvency. The IMF report noted that while best practices were in place for highly developed insurance markets, provincial regulators continued to use more traditional approaches to solvency testing. However, the ISPs were consequently superseded by new and more stringent ICPs, and there is insufficient information publicly available regarding Canada's compliance with this principle as revised by the IAIS in 2003.

ICP 24 Intermediaries

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The DoF website discloses that market conduct is regulated at the federal level, but adds that all insurers are subject to market conduct regulation by the province in which they carry out business. Nevertheless, the available sources do not directly address Canada's compliance with this principle as revised by the IAIS in 2003.

ICP 25 Consumer protection

II

The OSFI is responsible for the protection of consumers, including insurance policy holders, depositors, and pension plan members from undue loss, as noted in the IMF's 2008 FSSA Update. In 2006, the government of Canada launched a legislative review of the statutes of financial institutions. The legislative and regulatory proposals comprised enhancing consumer protection, and improving disclosure to consumers, and were expected to be implemented into legislation. Nevertheless, the available sources do not directly address Canada's compliance with this principle as revised by the IAIS in 2003.

ICP 26 Information, disclosure & transparency towards the market

II

In 2006, the government of Canada published its Financial Institutions Legislation Review with the aim of improving disclosure to consumers. The government was expected to draft legislation to implement the policy proposals. Nevertheless, the available sources do not directly address Canada's compliance with this principle as revised by the IAIS in 2003.

ICP 27 Fraud

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There is insufficient information publicly available addressing Canada's compliance with this principle as revised in 2003 by the IAIS.

ICP 28 Anti-money laundering/ Combating the Financing of Terrorism

II

In its 2000 ROSC, the IMF noted that the OSFI was "not automatically advised of findings regarding criminal activity affecting the insurance sector where the investigation was carried out by another government entity." In July 2005, according to the Institute of International Bankers' (IIB) 2007 Global Survey, the DoF published a Consultation Paper "Enhancing Canada's Anti-Money Laundering and Anti-Terrorist Financing Regime" with specific proposals to improve the anti-money laundering (AML) and combating the financing of terrorism (CFT) regime in Canada. In December 2006, per the same report, Bill C-25 was enacted, amending the 2000 Proceeds of Crime (Money Laundering) and Terrorist Financing Act, to comply with the new Financial Action Task Force (FATF) recommendations. Canada's financial intelligence unit - the Financial Transactions and Reports Analysis Centre of Canada - was created under the 2000 AML/CFT law. The IIB survey highlights that Bill C-25 will have to be complemented by new regulation to be fully effective. The FATF published a Third Mutual Evaluation on Canada's AML/CFT framework in February 2008. Nevertheless, the available sources do not directly address Canada's compliance with this principle as revised by the IAIS in 2003.