GUIDE FOR INITIAL LICENCE APPLICATION BY AN INSURER NOT INCORPORATED IN QUÉBEC

GUIDE FOR INITIAL LICENCE APPLICATION BY AN INSURER NOT INCORPORATED IN QUÉBEC March 2008

This document is produced by the Superintendent, Solvency Autorité des marchés financiers. On-line version (pdf) ISBN: 978-2-550-53051-0 Autorité des marchés financiers

Table of Contents Page 1. Introduction 1 2. Regulatory Provisions 1 3. Application Assessment Criteria 2 4. Required Documents and Information 3 5. Fees Payable 8 6. Application Processing Times 8 Autorité des marchés financiers

1. Introduction The Autorité des marchés financiers (the "AMF") is the body mandated to administer the Act respecting insurance (R.S.Q. c. A-32) (the "Insurance Act"), which governs insurance companies and associations that operate in Québec. Only the legal persons authorized for such purpose under the Act and holding licences issued by the AMF may pursue activities as insurers in Québec (s. 201). As part of the oversight process, AMF Right to Practice Control ("RPC") assesses licence applications to determine compliance based on documents and information required under the Insurance Act and the Regulation respecting the application of the Act respecting insurance, R.S.Q. c. A-32, r.1 (the "Insurance Regulation") as set out in this guide. Where the application is determined to be compliant, RPC analyzes the application and submits its recommendations to the Superintendent, Solvency for approval of the licence application. The licence, to which conditions and restrictions may be applied as necessary, is signed by the AMF President and CEO. This guide is for legal persons not incorporated in Québec that seek to conduct insurance activities in Québec. Intended to assist the applicant, this guide details the assessment criteria as well as the information and documentation required in connection with an insurance licence application. This guide is provided for information only. The information it contains should not be construed as legal advice or a recommendation of the AMF on the application of any relevant laws and regulations to a given situation. For advice on a specific situation, applicants are urged to consult a lawyer or notary. 2. Regulatory Provisions 1 Depending on the applicant's business proposal, various regulatory provisions may apply. The regulatory provisions related to licence applications are contained primarily in Chapter I, Title IV of the Insurance Act (ss. 201 to 222) and in Chapter IV of the Insurance Regulation (ss. 31 to 34). Insurers seeking to conduct distribution activities are required to comply with the provisions of the Act respecting the distribution of financial products and services, R.S.Q. c. D-9.2. Moreover, specific requirements are imposed on insurers who wish to transact automobile insurance business in Québec. It is also important to note that legal persons wishing to conduct business in Québec must be duly registered with Québec's Registraire des entreprises (Enterprise Registrar) in accordance with the Act respecting the legal publicity of sole proprietorships, partnerships and legal persons, R.S.Q. c. P-45, and its Regulation. 1 The expression "regulatory provisions" refers to legislative and regulatory requirements. Autorité des marchés financiers Page 1

Moreover, the AMF urges insurers to contact Assuris (insurance of persons) or PACCIC, the Property and Casualty Insurance Compensation Corporation, as the case may be, early in the application process to ascertain conditions of membership. The AMF may not issue a licence until the insurer has provided an undertaking confirming its forthcoming membership in either of these organizations, other than under an applicable exception pursuant to the Insurance Regulation (ss. 31.1 and 31.2). 3. Application Assessment Criteria Initial licence applications are assessed on the basis of the following criteria: 3.1 Knowledge of institution The AMF ensures that it has a clear picture of the applicant by examining its ownership structure, management structure and activities as well as any ties and agreements it may have with other members of its group or third parties. The AMF ensures that any establishments that form part of the group are subject to effective supervision. 3.2 Context of application The AMF considers the applicant's reasons for filing an application, its target markets and any external factors that could impact its ability to attain its objectives, as well as the relevance of the proposal to Québec's financial system. 3.3 Reputation of applicant The AMF determines the integrity and honesty of the principal shareholders, be they natural or legal persons, and of each member of the board of directors and senior management. 3.4 Compliance with laws and regulations The AMF ensures that the applicant will comply with the Insurance Act and the Insurance Regulation, the laws and regulations in its home jurisdiction, as well as all other applicable laws, regulations and standards. 3.5 Financial position The AMF analyzes whether the nature and level of the applicant's financial resources are sufficient to ensure sustained operations. The AMF also determines whether the applicant can access additional equity capital at a reasonable cost. Accordingly, it verifies that the applicant will, immediately upon beginning operations, have sufficient equity capital to support its activities and satisfy current standards in its home jurisdiction and in Canada. It analyzes the applicant's income according to source and type of revenue, to ascertain stability. The AMF also ensures the reasonableness of forecasts to determine whether the applicant will be able to maintain adequate cash flows and equity capital. Autorité des marchés financiers Page 2

3.6 Governance The AMF ensures that the applicant's directors, officers, auditor and actuary possess, individually and collectively, the appropriate competencies, experience and qualifications to administer the legal person in a manner that merits public confidence for the purpose of transacting the proposed classes of insurance. The AMF makes a determination about the proposed management structure in relation to the nature, scope and complexity of activities. The AMF ensures that the applicant follows sound and prudent management practices, in particular as regards investments and reinsurance that may be ceded. 3.7 Commercial practices To ensure adequate delivery of services to Québec consumers, the AMF determines the effectiveness and reputation of policyholder service, particularly with respect to settling claims, complaints and disputes. The AMF ensures that the applicant has adopted adequate policies governing personnel recruiting and training, conflicts of interest, and confidentiality, codes of ethics intended for directors, senior officers and employees, and a compliance program to monitor agents and representatives. 4. Required Documents and Information Insurers not incorporated in Québec who seek to operate in Québec must file the Application for Insurer's Licence prescribed by the Canadian Council of Insurance Regulators (CCIR), duly completed, sworn and submitted with the following documents: 4.1 Certified copy of articles or instrument of incorporation, including by-laws and amendments. 4.2 Copy of the certificate of registration, licence or other certificate from the home jurisdiction as well as any certificate of security deposited with the authorities of the place of its incorporation and, where federally registered, a copy of the Order to Commence and Carry on Business or Order to Insure in Canada Risks. 4.3 Attorney for service (Chief Agent or Chief Representative) in Canada (Appendix I CCIR Application for Insurer s Licence). 4.4 Proof of membership in a Canadian compensation plan (Assuris or PACCIC) or confirmation from such a plan that the insurer is exempt from membership. 4.5 Personal information return for each senior officer, director and significant shareholder (ownership of 10% or more of shares) of the insurer (Appendix III CCIR Application for Insurer s Licence). Autorité des marchés financiers Page 3

4.6 Business plan (Appendix II CCIR Application for Insurer s Licence) including, in particular, the following (s. 205 of the Insurance Act): NARRATIVE SECTION Applicant's comments on the reasons for the application, target markets and its intended operating niches as well as the relevance of the proposal to Québec's financial system. Detailed organization chart of the ownership structure (including percentages) of the applicant showing the parent company and all group entities, and identify: - the amount of the capital stock of the legal person, if any, the number of shares that constitute the legal person and their par value, where such is the case, the number of shares subscribed and the payments made on these shares; - the financial institutions within the group, indicating their home jurisdictions; - the commercial activities of the group members, as well as a list of the jurisdictions where they operate; - the ties and key outsourcing agreements between the applicant and group members or third parties. Detailed description of all services and products currently, or intended to be, marketed. Marketing and distribution methods. Examples of insurance policies, endorsements and pricing (in French). List of the firms, independent representatives and claims adjusters in Québec. Composition, mandates, roles and responsibilities of the board of directors and its committees (e.g., ethics, audit, and investment). Mechanism for the appointment of directors. Established procedures for reviewing and approving policies and practices related to core activities: product design and pricing risk, underwriting and liability risk, as well as operational, technological, legal, regulatory and strategic risks. Composition, mandates, roles and responsibilities of senior management and management committees. Organizational chart of senior management showing operational configuration and reporting lines. Name, address and telephone number of the designated actuary (must be a Fellow of the Canadian Institute of Actuaries specialized in the class in which the new insurer seeks to operate). Autorité des marchés financiers Page 4

Name, address and telephone number of the external auditor (must be a member of the Canadian Institute of Chartered Accountants). Description of policyholder service and the methods used to build a reputation: - complaints examination and claims processing policy; - dispute resolution policy regarding products or services received; - personnel recruiting and training policy; - conflict of interest and confidentiality policy; - rules of ethics intended for directors, senior officers and employees; - assignment of a compliance officer and details of compliance plan used to monitor agents and representatives; - sales personnel remuneration system, including incentives. Investment policy Agreements pertaining to reinsurance ceded and terms (identify reinsurers). FINANCIAL INFORMATION For shareholders: Audited financial statements and statutory statements for the past three years of the direct and beneficial parent companies. For applicants with existing operations: Audited financial statements and statutory statements for the past three years required to be filed with the authorities in their home jurisdictions. Interim financial statements for the quarter preceding the application. For newly incorporated applicants: audited opening balance sheet. EQUITY CAPITAL Level and composition of equity capital of the applicant or structure of capital stock. Evidence that the applicant's capitalization is adequate and satisfies current standards in its home jurisdiction and in Canada. Result and calculation details of: - Minimum Capital Test (MCT) for federal and extra-provincial damage insurers; Autorité des marchés financiers Page 5

- Branch Adequacy of Assets Test (BAAT) for foreign damage insurers; - Minimum Continuing Capital and Surplus Requirements (MCCSR) for federal and extra-provincial life and health insurers (insurance of persons); - Test of Adequacy of Assets in Canada and Margin Requirements (TAAM) for foreign life and health insurers (insurance of persons). FINANCIAL FORECASTS OR PROJECTIONS Five-year financial forecasts or projections including an income statement, a balance sheet and a statement of retained earnings, using the statutory form provided for annual disclosure (P&C-1 or LIFE-1; P&C-2 or LIFE-2). - Operating results should disclose Québec underwriting information by class of business. Statement from an accountant relying on "assurance and related services guideline AuG-16 compilation of a financial forecast or projection" published by the Canadian Institute of Chartered Accountants ("CICA") in February 1993 relating to financial forecasts or projections prepared in accordance with the standards set out in Section 4250 of the CICA Handbook. Opinion of an actuary on the reasonableness of the financial forecasts or projections, including each of the assumptions used. The actuary must examine in detail each aspect of the business plan with respect to the financial position and anticipated insurance contracts, and analyze the consequences that changes to key assumptions will have on income. Clear demonstration by the insurer that it will be able to maintain, throughout the forecast period, sufficient cash flow and equity capital to ensure sound and prudent management. 4.7 Specific Québec requirements For foreign insurers, a copy of the power of attorney nominating their respective chief agents in Canada (OSFI-25). The location in Québec where the legal person will have its head office or chief business office. If the applicant's head office is outside Québec, a certified power of attorney nominating the chief representative or attorney for service in Québec, duly completed in accordance with Appendix 1 (attached). Curriculum vitae (biographical notes) of the chief representative. If the person mandated by the applicant to act as representative in respect of its licence application with the AMF is not its chief representative in Québec, confirmation of the mandate by a person authorized for such purpose. Autorité des marchés financiers Page 6

Copy of the Declaration of Registration sent to the Québec Registraire des entreprises (Enterprise Registrar), stipulating in particular the insurer s name in French. Most recent inspection report issued by the authorities where the applicant was incorporated. In the case of a foreign insurer, also provide the most recent inspection report of the Office of the Superintendent of Financial Institutions Canada (if available). An undertaking made by the holding company directly controlling the legal person and by any holding company controlled by the legal person, enabling the AMF or the representative designated by the AMF to enter, at any reasonable time, the head office of the legal person and its other establishments situated outside Québec, for the purposes of the inspection of the legal person's internal affairs and activities. All documents and information enabling the AMF to ensure that holding company adheres to sound and prudent management practices. Confirmation by the authorities in the jurisdiction where the applicant was incorporated that it is solvent and complies with the laws and regulations in such jurisdiction. Insurers wishing to transact automobile insurance business in Québec must provide a copy of their rate manual as well as a summary plan for implementing the Automobile Statistical Plan ("ASP") and the Fichier central des sinistres automobiles ("FCSA" or Automobile Claims Database), which must, in particular, set out the primary phases for completing certification and systems production. Given that the AMF exercises the power under section 177 of the Automobile Insurance Act, all insurers licensed to underwrite automobile insurance in Québec are required to file statistical data and information according to the AMF s instructions regarding an insurer s automobile insurance experience in Québec as well as the automobile driving experience of the persons insured. Any insurer applying for authorization to underwrite automobile insurance in Québec must contact the Groupement des assureurs automobiles (GAA) in order to plan for implementing the ASP and FCSA systems. Lastly, the insurer must use the automobile insurance forms approved by the AMF pursuant to section 422 of the Insurance Act, available on the AMF website under the "Forms" tab. Autorité des marchés financiers Page 7

5. Fees Payable You will find at section 88 of the Regulation under the Act respecting insurance the fees for the issue of a first permit to an insurance company, a mutual insurance association or a professional order. Payment must be made by cheque or money order payable to Autorité des marchés financiers and dated the date of the application. Please note that these fees are not refundable. 6. Application Processing Times Examination of an initial licence application for an insurer not incorporated in Québec takes an average of three months, once it has been determined that the application is compliant. An application is deemed compliant when all the documents needed to study the application are received. Delays may occur if additional information is required. The AMF may also contact the agency responsible for overseeing the applicant to verify certain information. For additional information, please contact the AMF: Autorité des marchés financiers Direction du contrôle du droit d'exercice Place de la Cité, tour Cominar 2640, boulevard Laurier, bureau 400, Québec (Québec) G1V 5C1 Telephone: 418-525-0337, ext.: 4582 Toll-free: 1-877-525-0337, ext.: 4582 Fax: 418-528-9582 Autorité des marchés financiers Page 8