January 2020 Newsletter: Regulation of Insurance Contracts

Some of you may have picked up on this notice from the law firm Norton Rose Fulbright back in November of 2019: https://www.nortonrosefulbright.com/en-ca/knowledge/publications/33cf038b/prohibition-on-gifts-of-life-insurance-policies-to-charities-in-british-columbia-by-bc-residents. While I haven’t seen the source document, it refers to correspondence by the BC Financial Services Authority (BCFSA) concerning charitable donations of life insurance and trafficking provisions in the Insurance Act.

By way of reference, the BC Insurance Act, which is substantively similar to the Insurance Act in most other provinces in this regard (New Brunswick, Saskatchewan, Nova Scotia, and Quebec are exceptional, though Saskatchewan is due to add trafficking prohibitions in 2020) reads:

Trafficking

152 Any person, other than an insurer or its authorized agent, who advertises, or holds himself or herself out, as a purchaser of life insurance policies or of benefits under them, or who traffics or trades in life insurance policies for the purpose of procuring the sale, surrender, transfer, assignment, pledge or hypothecation of them to himself or herself or any person, commits an offence against this Act. In this instance, BCFSA’s note was directed at a charity that had a notice on its web page that it could potentially provide charitable contribution receipts in exchange for donations of in-force life insurance policies. This has been a standard practice at charities in many provinces. I know at least one actuary who helps to facilitate these transactions.

Some life insurance agents may be familiar with trafficking provisions, as a few insurers have sent communication to their agents in the past year or so indicating that insurers viewed participating in life or viatical settlements as trafficking that might put an agent in violation of their contract. Insurers threatened to revoke license sponsorships for agents who participated in these arrangements.

The Conference for Advanced Life Underwriting (CALU) released a practice note in 2019 discussing concerns around trafficking of life insurance policies. That note clarified that insurance regulators do not regard transactions of life insurance policies between corporations and their employees and shareholders as trafficking.

That same practice note makes the point that trafficking provisions were introduced into Provincial Insurance Acts in the mid-1930s, mostly as a response to twisting (the needless replacing of an in-force policy) and rebating (paying client to buy insurance).

What I find of interest here is that an insurance regulator is taking steps to enforce its Insurance Act. In my experience, since the introduction of the 1981 (failed) measures in the Income Tax Act and the 1982 (successful) measures, most concerns about insurance structures have arisen not from Insurance Acts, but from the Income Tax Act. In effect, the Income Tax Act (mostly via Regulations 300-310) has become the de facto legislation that impacts how insurance contracts are structured in this country, at least as it concerns life insurance.

I would argue that this effectively renders the Federal Department of Finance as the primary regulator of insurance contracts, despite the fact that provinces were given authority over insurance regulation in the late 1910s and through the 1920s. Whether or not we agree with this implementation of trafficking rules in BC, I like to see an insurance regulator paying attention to what is happening with insurance policies. Maybe if insurance regulators had paid more attention over the years, we could rely on Provincial Insurance Acts to tell us how insurance policies can operate, rather than relying on the Federal Income Tax Act.

Reference:

http://www.bclaws.ca/civix/document/id/complete/statreg/12001_08/