January 12, 2022 by Philip Porado
Alberta could become Canada’s answer to Barbados, with the passage of a new law allowing captive insurance companies in the province.
Bill 76, which received royal assent, will make Alberta the second Canadian province where captive insurance companies can domicile. British Columbia has hosted them for the past 25 years.
Alberta is seeking options to diversify its economy and strengthen its financial services sector, according to Nancy Carroll, a McCarthy Tétrault partner who heads the law firm’s national insurance and reinsurance practice.
“They’ve been through a tough time with oil prices, the pandemic and a hard insurance market,” she told Canadian Underwriter. “They are providing options for businesses that may be having a tough time obtaining insurance.”
The new act also creates competition, says Braedy Walker, vice president and national captive practice leader at HUB International Canada. “Right now, if you want to have a captive insurance company, you go to the islands, you go to the U.S. – and in Canada, it’s British Columbia.”
Comments made during legislative assembly readings of Bill 76 note Alberta’s oil and gas companies, which have struggled with insurance coverage, will be a major beneficiary.
“Some very large employers, including oil and gas companies, are having a really hard time getting insurance in Alberta right now for large-scale projects,” said Sarah Hoffman, a legislative assembly member from Edmonton-Glenora. “Of course, we want to ensure that large projects that employ many, many people have the ability to move forward in a safe way where workers and communities and the environment are all protected.”
Supporting longstanding provincial industries struggling with a lack of coverage because of the hard market was an initial motivator for the act, reports Patrick Ferguson, senior vice president Marsh Captive Solutions.
“They see a need for insurance for certain sectors in Alberta – energy, oil and gas. Capacity has been an issue,” he told Canadian Underwriter.
But Alberta’s also thinking bigger: It’s looking to offer Canadian companies that, for whatever reasons, may not want to domicile in B.C. an option to keep their captives in-country. Ferguson said this can help with optics at a time when the Pandora Papers have raised public concerns about how companies use offshore enterprises.
While oil companies will benefit, Walker noted that, like most Fortune 500 companies, they’re likely already using captives. The Alberta domicile option would simply create access to additional supply and make markets more efficient.
“They could use that to insure either just their Alberta risk or all their risk if they so choose,” he told Canadian Underwriter.
The act requires captive insurance companies to physically locate in Alberta and the resulting regulations will spell out base capital, licensing, record keeping, and investing requirements. The act’s in-force date will be determined after the regulations are written.
Carroll said the local captive option could be used by other industries, including forestry and agriculture. She added that service providers and other businesses in the province that are linked to insurance will benefit from the Alberta domicile.
Walker and Ferguson noted domiciling captives in Alberta will let businesses avoid paying taxes on unlicensed premium that’s applied to insurers that aren’t licensed in a province where they’re doing business.
“Canada…has in some cases very punitive premium taxes for unlicensed business,” Ferguson said. “And Alberta tends to be the worst, where the unlicensed premium tax can be up to 50% of the premium; on a licensed basis, it might be more like 4% to 6%.”
In that context, he added, “getting rid of thus unlicensed premium tax is a big deal for organizations with large Alberta risk.”
Feature image by iStock.com/Diane Labombarbe