Finance dept. addresses quake concerns

THE FEDERAL Finance Department says it is considering how to guard against the financial threats of a severe earthquake.

In its second consultation paper in as many years, the department offered no hint as to what safe-guards it might introduce, but said it would continue to discuss with provinces, territories and stakeholders the risks of what it calls a “low-probability, high-impact” earthquake.

The paper acknowledged concerns raised by the Property and Casualty Insurance Compensation Corp. and the Canadian Council of Insurance Regulators that catastrophic quake claims exceeding $30bn could overwhelm the p&c industry and bankrupt some insurers.

“In addition, the (Financial Consumer Agency of Canada) intends to improve consumer education products related to catastrophic risk and insurance to develop consumer awareness of insurance products and consumer rights and responsibilities, and will seek out opportunities to collaborate with provincial and territorial governments.”

The threat of earthquake was just one aspect of insurance addressed in the paper, which was released last month as a follow-up to a consultation paper issued in August 2016 in preparation for the review of financial legislation (including the Bank Act) due by March 29, 2019.

According to the most recent consultation paper, stakeholders expressed general satisfaction with Canada’s financial framework and its regulators.

“The foundational elements of the framework continue to be supported by stakeholders, including strong and clear mandates for federal financial sector regulatory agencies and a principles-based approach to regulation, a size- based ownership regime for financial institutions, and a separation between banking and insurance activities,” the paper said.

At the same time, many stakeholders stressed the rapid innovations sweeping the sector, led by financial technology providers or fintechs.

“Many comments made clear that Canadians benefit through greater access, choice, and com-petition from the presence of new market entrants and a framework that encourages innovation in financial services.

“At the same time, a number of stakeholders emphasized the need for the framework to do more to serve the interests of Canadians.

“They called for the framework to provide a high level of consumer protection in the context of a rapidly changing landscape of financial products and services.”

The paper’s authors said easing collaboration between fintechs and federally regulated financial institutions “encourages the cross- pollination of ideas” and helps these institutions to be more responsive to the financial needs of Canadians.

The paper hinted that the federal government is considering loosening regulations governing three-party structured settlement agreements. Such an agreement is a negotiated insurance arrangement whereby a third party (the assignee insurer) assumes the responsibility of a p&c insurer or marine insurer (the original insurer) to make a series of payments to a claimant.

At present this arrangement can be interpreted as the assignee insurer issuing an annuity, something prohibited by the Insurance Companies Act for federally regulated p&c and marine insurers.

“The department is seeking views on whether to allow p&c insurers and marine insurers to assume the periodic payment obligations associated with three-party structured settlement agreements. This potential change would provide greater regulatory consistency and would facilitate the reinsurance of three-party structured settlement agreements.”

The paper also floats the idea of eliminating an exemption originally intended to address nuclear insurance capacity shortages within Canada by allowing the insurance of nuclear risks located in Canada from abroad by foreign insurers.

“Since then, the regime has been modernized to regulate only foreign insurers that carry on business (i.e., insure risks) in Canada and allow foreign insurers to insure risks located in Canada,” the paper noted.

“This makes the specific exemption for nuclear insurance unnecessary.”

The federal government’s acknowledgement that severe earthquake is an issue is a big step forward, PACICC ceo Paul Kovacs said.

He said the latest paper on the financial legislation framework heeded the insurance industry’s advice that a catastrophic earthquake could have a devastating effect.