Clients looking for property and casualty coverage have options other than insurers licensed to write coverage in Canada. But brokers and managing general agents say there are hazards and tax implications when placing with an unlicensed or non-admitted insurer.
And the hard market’s making it more common for brokers to try this approach.
“Insurance companies are not eager to provide their capacity,” said Adam Bunz, Calgary-based global leader of the western region for BFL Canada Risk and Insurance. “It has been more difficult for certain industries to find coverage.”
That’s led to some additional placements to insurers not licensed in Canada, Bunz added. “The oil and gas industry in Alberta, especially oil sands-related risks, have been working through unlicensed insurance markets for decades.”
Some use unlicensed markets because no Canadian market will consider them.
“The typical reason for placing with an unlicensed market is the client has run out of options. If you use up all the available capacity in the marketplace you would look for insurers outside of the Canadian market and try to use their capacity,” Bunz said.
Canadian managing general agents see similar trends.
“With the hard market, brokers have become pretty desperate, and clients have become pretty desperate in trying to find enough capacity for whatever the line of business is,” said Gary Hirst, CEO of CHES Special Risk. “The poor old insured really has to be pretty desperate to go to a non-admitted market.”
Typically, non-admitted carriers are based in Australia, the U.S., U.K. or Bermuda, “so they might all be properly regulated back in their home country,” he said.
But unlike foreign insurers with a licensed Canadian branch office, non-admitted insurers do not have a license from either federal or provincial regulators in Canada.
Moreover, the client would not have protection from the Property and Casualty Insurance Compensation Corporation fund, warned Brenda Rose, executive vice president and partner at Firstbrook Cassie & Anderson.
Rules for placing non-admitted or unlicensed insurance vary by province and territory. As a general rule, clients insured by a carrier that is not licensed in Canada must pay a 10% federal excise tax.
Canada Revenue Agency allows exemption applications when “a certain class of insurance [is] not available in Canada.” To get the exemption, the client must provide documentation showing five insurers licensed to write business in Canada declined coverage.
The client can either have the insurer sign a federal government tax form or send a letter explaining why coverage was declined. A letter from the broker is not sufficient, unless it’s an MGA.
“None of that gives the client any regulatory protection,” warns Rose. It simply meets the tax requirements.
To protect itself, a brokerage could have the client sign a letter before purchase, affirming it understands the insurer is unregulated, there is no recourse, and acknowledging the broker can’t comment on the carrier’s ability to pay out on a claim, suggests Hirst.
Some clients may be considering unlicensed markets because no Canadian market is willing to consider them, observes Bunz.
“Canada does not have a huge market in the grand scheme of things. So, if you look at the economics of an insurance company that is based in Europe, insuring risks all over the world, it might not make sense for them to put a bunch of capacity into Canada for a low, low premium, if they could use that same capacity and get a better return in another country,” he says.
This article is excerpted from one that appeared in the February-March issue of Canadian Underwriter.