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Canadian Life and Health Insurance Compensation Corporation Submission in Response to Finance Canada's 2006 Review of Financial Sector Legislation:
May 30, 2005
Director, Financial Institutions Division
Financial Sector Policy Branch
Department of Finance
20th Floor, East Tower
140 O'Connor Street
Dear Mr. Salembier
Subject: The 2006 Review of Financial Sector Legislation
With respect the 2006 Review of Financial Sector Legislation, CompCorp would like to raise two issues for consideration.
The first issue seeks a streamlined process for dealing with life insurance companies in severe financial difficulty. CompCorp believes the Court Administration process described in the attachment will be more effective for reducing loss and disruption to policyholders.
The Court Administration process would require changes to the Insurance Companies Act to provide powers to the Court to carry out a sale of the insurance business through powers of an Administration Order.
Resolving this issue would be consistent with the objectives of the 2006 Review of Financial Sector Legislation because;
- Having a more certain process to deal with problem companies would increase legislative and regulatory efficiency, and
- The interests of consumers would be enhanced through a faster and more transparent process.
The second issue seeks changes to give the same priority as other policyholder benefits, to benefits arising from segregated fund guarantees. This change is consistent with the objective of the review to ensure consumer rights are adequately protected.
Including these changes, in this review, would provide CompCorp with alternatives to more effectively deal with problems which could arise.
CompCorp is a not for profit corporation, funded by the life and health insurance industry to protect Canadian policyholders against loss of benefits due to the financial failure of a member company. All life insurance companies licensed to write insurance policies in Canada are required to become a member of CompCorp by the regulators authorizing them to sell to the public.
CompCorp's mission is to mitigate the impact on Canadian policyholders of the financial failure of life and health insurance companies. We work in partnership with regulators on any necessary interventions, seeking to minimize long-term costs and preserve consumer perceptions of industry strength.
ComCorp would be pleased to provide the Department of Finance with further information about these issues at any time, and hereby permits the Department to post these documents on its website
Original signed by
Gordon M. Dunning
Court Administration For Life Insurance Companies
The Insurance Companies Act should be amended so that a seriously troubled life insurance Company, after the Superintendent of Financial Institutions has taken control, can be placed under court administration to facilitate the rapid transfer of policyholder obligations to a more stable company.
This would provide a much higher likelihood of policyholders receiving their promised benefits in full, without delay, by providing a simple, rapid and cost effective process. It would facilitate the provision of CompCorp support or guarantees to the purchaser if this was necessary. It would meet the unique needs of life insurance policyholders for continuity of benefits. Currently there is a tendency for healthy people to cancel their policies during the period of uncertainty and purchase new policies from another company; uninsurable policyholders must remain with the troubled company. This makes the business remaining in the troubled company less attractive to potential purchasers therefore less valuable and possibly unsaleable.
The new provisions would not detract from OSFI's current powers and the change would strengthen its mandate for early intervention. It would avoid the inherent delays, uncertainty and cost of the current system of placing seriously troubled companies directly under the Winding-up and Restructuring Act.
- The current process and criteria for the Superintendent to take control of a life insurance company under section 679(1) would be unchanged.
- The current section referring to the Superintendent asking the Attorney-General to apply for a Winding-up Order (section 684.1) would be replaced with a section of the Insurance Companies Act referring to the Superintendent asking the Attorney-General to apply for an administration order under a new section of the Act.
- Consequently, any life insurance companies which, in the opinion of the Superintendent, require court protection would be placed under administration.
- The application for an administration order brought before the court would ask the court to appoint an administrator with the powers of the shareholders, board and management.
- The administration order would stay proceedings and enforcement of contracts against the company during the period of administration.
- This administrator would be a person qualified as a Trustee in Bankruptcy.
- The administrator would be charged with the responsibility to transfer all the policyholder obligations to one or more life insurance companies, utilizing a fair and equitable sales process without the approval of shareholders, policyholders, creditors or other stakeholders.
- The administrator would transfer the assets of the company necessary to effect the transfer of the policyholder obligations to the successful bidders for the business, without the need to consider whether the residual assets would be sufficient to meet the residual obligations of the company.
- Contracts of reinsurance ceded would be transferred with the related policyholder obligations unless to do so would be prejudicial to policyholders.
- Once the transfer of the policies has been effected, the administrator would bring before the court a report on his assessment of whether the remaining assets were sufficient to meet the remaining obligations of the company.
- If the assets of the company are deemed not to be sufficient to ensure the payment of all remaining obligations of the company, the administrator would be instructed by the court to seek a Winding-up Order and to liquidate the residual assets and liabilities of the company under the provisions of the Winding-Up and Restructuring Act.
- If they were sufficient, the administrator would be instructed by the court to continue the company under the Canada Business Corporations Act and then return the control of the company to its shareholders, board and management.
- The shareholders would have the right of representation in court on all issues.
- Creditors of the company would have the right of representation in court on all issues.
- The compensation association would have the right of representation in court on all issues.
- In order to protect the interests of policyholders the compensation association would be required to represent the interests of all policyholders. No transfer of policyholders could be approved by the court without the consent of the compensation association. In providing such consent, the compensation association would be required to act in the best interests of policyholders as a whole, and its consent could not be unreasonably withheld.
- If there are insufficient assets to effect the transfer of the policyholders for full value to one or more other life insurance companies company, and the compensation corporation is unwilling or unable to make good the shortfall, the company will be placed under the Winding-Up & Restructuring Act. At the discretion of the court, the administrator would be eligible to be appointed as Liquidator.
Advantages of the Scheme
100% Policyholder Recovery
The proposed scheme will increase the likelihood that policyholders will receive 100% recovery of their benefits.
It provides for the rapid sale of business, which avoids anti-selection. (The tendency of healthy people to cancel their policies during the period of uncertainty and purchase new policies from another company; uninsurable policyholders must remain with the troubled company.)
The rapid sale process also preserves the maximum amount of embedded value and goodwill in the business. This is the amount of money which a company is willing to pay for the in-force business, customer contact, and potential future profits.
No Delay in Policyholders Receiving Benefits
For most life insurance products, notably disability benefits and annuities to retirees, it is essential that policyholders not suffer disruption or delay in receiving their promised benefits. This is highly desirable for all other benefits.
Retirement and disability annuity payments usually form a key component for paying the policyholders' day-to-day living expenses. Any disruptions to these payments could cause a severe financial hardship to those policyholders.
Death benefits are designed to provide support to the deceased dependents and it is essential that the payments arrive quickly to defray the immediate expenses of the beneficiaries, as well as their long-term security.
It is often not as critical to provide prompt payment of accumulation benefits, which are often not immediately needed by the policyholder. However, a prolonged delay, even in these products, is clearly unacceptable.
Reducing Policyholder Uncertainty and Concern
A prolonged liquidation, where policyholders do not have access to their funds or where their payments are being made by a liquidator, produces an understandably high level of concern amongst the policyholders. The proposed scheme, with its more rapid transfer of the policyholders to new carriers, reduces this concern by pennitting immediate announcement of the intention to sell the business to a new carrier, and, secondly, by effecting that transfer with minimum delay.
Through the previous three insolvencies CompCorp, working with the Liquidator, has been remarkably successful in maintaning policyholder benefits: however in many cases policyholders had to wait several years before having the peace of mind of being transferred to a solvent company.
CompCorp Submission -Court Administration for Life Insurance Companies
Working in the three liquidations, CompCorp has been successful in ensuring that all critical payments have been made to policyholders. However, the continuation of such payment in a liquidation environment is unusual and may, without statutory protection, be challenged by creditors in the future.
Facilitating CompCorp Support
CompCorp, the compensation association for the life insurance industry, is currently empowered to intervene to protect policyholders before a formal winding-up is undertaken. The advantage of doing this is to provide seamless transition for policyholders and a lower cost to our members. However, it is difficult for CompCorp to make a commitment to a troubled company without an open and public bidding process for the business. The new scheme provides for this without the overbearing complexity of a full liquidation. The administration scheme would allow for a fair, open, and quick bidding process on the business. If the block of business required CompCorp support, either by way of funds or the guaranteeing of some particularly onerous obligations attached to the business, CompCorp would have the opportunity and the unfettered ability to do this.
Differentiation from Other Financial Institutions
We understand that the current scheme of utilizing the Winding-up & Restructuring Act meets the needs of deposit-taking institutions and property and casualty insurers. We are therefore recommending no changes to those procedures.
The failure of a life insurance company is unique in that the need for a quick sale of business is imperative. We understand that delays in the resolution of insured deposit instruments or certain claims under property and casualty insurance are not deemed critical or unduly prejudicial to consumers. Moreover neither deposit taking institutions or properly and casualty insurers are subject to the sever consequences of anti-selection
However, for life and health policyholders, the delay in receipt of benefit payments upon which an individual's immediate well-being is dependent, is critical and may not be able to be rectified by subsequent cash compensation.
The Need To Change The Priority Of Segregated Fund Guarantee Benefits In The Winding Up And Restructuring Act (WURA)
Under Paragraph 161 (2) (b) of WURA the claims of policyholders under the maturity guarantee in a segregated fund policy are given the same priority as the claims of ordinary creditors. While this may have been seen as appropriate and inconsequential in the early 90's, the situation today requires that these policy benefits be given the same priority as all other policy benefits.
These provisions were inserted into the WURA in 1992 on the rationale that the guarantee was merely an" accessory to the principal". In 1992, individual segregated fund policies could be seen as nothing more than mutual funds with a thin veneer of insurance protection added to qualify them as insurance, rather than securities, under provincial law. The guarantees generally promised the return of 75% of the original deposit ten or more years later, expense charges for the guarantees were minimal or non-existent, and no liabilities or capital were being held in respect of the guarantees.
In the second half of the 90s, however, 100% guarantees became quite common and reset provisions enabled policyholders to establish new guarantees at market highs. Subsequent market declines focused attention on the extent to which these guarantees could be "in the money". Companies began to increase their charges for this insurance benefit to reflect a better understanding of the risk being covered. Sophisticated standards for valuing the policy liabilities for guarantee benefits were developed. Capital requirements for the guarantees were added to the MCCSR.
Perhaps the best indicator of the need to revisit this question is the fact that policy liabilities for segregated fund guarantee benefits in Canada amounted to $650 million at the end of 2004; in addition the related capital requirements totaled $830 million.
Clearly, maturity guarantees in individual segregated fund policies are a policy benefit and a policy benefit of some considerable value. For this reason CompCorp believes that paragraph 161 (2) (b) should be deleted from WURA.