The Pitch
On Wednesday, 27 October Finance Minister Travis introduced Bill 76 the Captive Insurance Companies Act. The accompanying press release noted the Bill would be “an alternative to the traditional insurance market to help relieve cost and availability pressures on Alberta businesses.” A captive insurance company could be owned by “industrial, commercial or financial entity that can offer services when traditional insurers are unable to provide necessary coverage.” The release went on to note that “challenges with global insurance supply” are making it difficult for commercial entities to find adequate insurance at reasonable prices.” The creation of a captive insurer would allow a company to insure its own risks or members of an association or industry group. These entities would have to be “physically located in Alberta to ensure the province sees all the economic benefits of the new activity.”
Toews’ briefing stated:
“Our goal is to help Alberta businesses insure their risks. Tight insurance supply globally is making it difficult for commercial entities in Alberta to find adequate insurance at a reasonable price. Enabling captive insurance is an important step to attract businesses and insurance capacity to the province. This will help increase options for insurance business, while helping sustain economic activity and jobs.”
As usual the press release was accompanied by glowing support from the requesters of such legislation including the Alberta Forest Products Association, the Motor Dealers Association of Alberta. Montemurro Industries and IRGM GLOBAL Risk Management Consultants Limited. IRGM is a Montreal-based consulting practice with a “global network of accredited risk management, environmental, legal, tax, compensation planning, benefits, pensions and insurance affiliates in over 120 countries.” Presumably the company will set up an office in Calgary. Montemurro is run by Jason Montemurro a former investment banker, auditor, chartered financial analyst, tax lawyer, and Principal with The Targeted Strategies Group in Calgary.
The release also boasted Alberta’s reputation as a low-tax jurisdiction, “reputable and responsive regulatory environment,(emphasis added)” and highly skilled and diversified financial services sector.
When tabling 76, Toews expanded on the group of sectors which would benefit from the legislative initiative including energy, agriculture, and manufacturing,” Enabling captives is expected to “grow Alberta’s insurance sector and position the province for economic growth and diversity,” he said. In other words, this was part of the economic recovery plan.
At second reading of Bill 76, the Captive Insurance Companies Act. Toews explained the legislation was modelled after British Columbia’s adding that captive insurers operate out of Delaware, Vermont, Bermuda, and Barbados traditionally very corporate- and tax-friendly jurisdictions. The legislation will require detailed regulations expected to come in the spring of 2022 which is quick given the complexity of insurance regulation and supervision. The Bill contains the normal requirements one would expect in a corporate statute including incorporation, principal place of business, licensing, audit, actuarial review, investment rules, capital requirements, reinsurance, directors, offences and penalties, and powers of the insurance regulators.
The Legislation
Captive insurers will come in in four or more forms- 1) pure captive insurance company, 2) an association captive insurance company, 3) a sophisticated insured captive insurance company or 4) another type of captive insurance company authorized by the regulations. Regulations are expected to elaborate “sound financial and corporate governance principles.”
According to a note to clients from Torys LLP the insurance captives typically “are subject to lower capital requirements and prudential supervision than an authorized insurer.”
In the case of British Columbia there are about 30 captives but it is difficult to find the numbers on the B.C. Financial Services Agency website. According to a 2013 report by the Canadian Council of Regulators there were 23 captives operating primarily in the health, auto, transportation and forestry sectors. Many of the names cloak who their parent companies are.
Abacam Risk Management Ltd Baycrest Captive Insurance Company Ltd
BC Veterinary Captive Insurance Company BCF Captive Insurance Company Ltd
BCHPA captive Insurance Company Ltd BMC Financial Inc.
Canadian Blood Services Captive Inc Co. Ltd CRNBC Captive Insurance Corp.
CUPP Services Ltd Elgin Captive Insurance Company Inc.
GLBH Captive Insurance Company Ltd Golden Eagle Assurance Limited
Great Pacific Financial Services Ltd Hulbert Group Captive Insurance Inc.
Hyundai Auto Canada Captive Insurance Inc. LSBC Captive Insurance Company Ltd
Macdon Financial Inc. Monashee Captive Insurance Company Ltd.
Pengins International Corp RCA Indemnity Corporation
Transportation Property and Casualty Insurance Inc. West Fraser Captive Inc.
Westcoast Indemnity Company Limited
There is a B.C. Captive Insurers Association but it has no website. The minimum capital for a captive insurer is only $200,000 in British Columbia which is extremely low for any self-insurance operation.
Why Now?
While the Minister of Finance emphasized the economic development facets of this undertaking, he did confirm that many sectors of the Alberta business community were facing difficult challenges in obtaining insurance. Insurance is fundamental for a well functioning economy. Insurance protects companies from catastrophic events such as fires, floods, and lawsuits over environmental contamination. Lenders, landlords and regulators require insurance so they can be assured that catastrophic events do not bankrupt a company and leave cleanup to lenders or governments- those with the deepest pockets.
What then is the urgency to put this is place and what is the experience of captive insurance in British Columbia and other jurisdictions? My theory is that more and more oil and gas companies with large environmental liabilities are finding it difficult to find insurance as suggested by Minister Toews. For banks worried about assuming these liabilities should a borrower default, insurance is a critical piece to allow them to continue to lend money or for regulators to allow oil companies to remain licensed. Now with oil and natural gas prices at six-year highs banks may be less concerned with a borrowers’ capacity to repay loans. Still banks would want the insurance and if insurers are not willing too provide cover for environmental liabilities, a legislated solution needed to be found.
The oil and gas industry did get a breather in the past month when Sonya Savage, Alberta’s Energy Minister made the remarkable claim that Alberta’s plan to clean up wells with spending of $422 million next year will do the trick. How much of the $422 million is actually federal and provincial government money or borrowed money is not clear. Meanwhile a golden opportunity to demand greater security and greater work to rehabilitate wells will be foregone by share buybacks, special dividends and dividend increases, It is distressing to think that shareholders will be rewarded while municipal taxes are unpaid and enhanced financial security for oil and gas and oilsands liabilities are given short shrift.
So along comes captive insurers, a novel way to allow companies to self insure potentially billions of liabilities with their captive insurer which will “rigorously regulated.” This might satisfy banks and other financial players but one wonders why now?