On January 18, 2023, the Office of the Superintendent of Financial Institutions Canada (OSFI) issued the revised Guideline E-16: Participating Account Management and Disclosure to Participating Policyholders and Adjustable Policyholders (Guideline E-16). Guideline E-16 sets out OSFI’s expectations regarding the implementation of the requirements found in the Insurance Companies Act (ICA) and the Policyholders Disclosure Regulations (Regulations) on the subject of participating and adjustable life insurance policies. Participating policies enable the policyholder to participate in the profits of a Canadian life insurance company (a Company and collectively, Companies). The guideline first became effective in November 2011 and provided direction to the Companies on how best to comply with the revised requirements under the ICA and Regulations.
Prior to revising Guideline E-16, OSFI carried out a comparative study of the Companies’ respective practices relating to participating accounts. The findings from the supervisory reviews indicated that Companies have varying interpretations of several areas of Guideline E-16 and the Regulations. As a result, OSFI decided to update Guideline E-16 to address these issues identified. Following the update, OSFI sought feedback on the updated Guideline E-16, on a confidential basis, through a 90-day public consultation which ran until September 28, 2022. Key comments received during the consultation were grouped into three broad categories: (1) wording changes proposed for several areas; (2) consistency of terminology used; and (3) clarity of additional disclosure requirements.
OSFI advised that the updates to Guideline E-16 are intended to provide the following:
- additional clarification of OSFI’s expectations, to aid Companies in their interpretation of the ICA and the Regulations, and to facilitate greater consistency of practices by Companies in satisfying the requirements of the ICA and the Regulations; and
- additional guidance on the disclosure requirements of the Regulations, to promote greater transparency and consistency of policyholder disclosures.
During its consultation, OSFI indicated that while Guideline E-16 was updated based on aspects pertaining to participating policies, there were no changes specific to adjustable policies. In addition, OSFI noted that no fundamental changes were required as it relates to IFRS 17, but IFRS 4 legacy wording was updated where required. The updated Guideline E-16 is effective immediately, and the deadline for implementing the changes is December 31, 2023.
Changes to Guideline E-16
The following is a summary of some of the key changes to Guideline E-16.
I. Requirements and opinions for the appointed actuary
Guideline E-16 provides additional clarity on the general principles for deciding on fairness for policy dividends. In particular, Guideline E-16 provides that all experience factors and other contributory factors (e.g., contribution to surplus) to dividend determination should be taken into consideration when deciding on fairness of policy dividends. In addition, Guideline E-16 notes that post-issue changes to dividend experience factors (if any) should be justified and not be disadvantageous to participating policyholders.
Guideline E-16 also notes that contributory amounts, including the contribution to surplus (if applicable) should be similarly defined for all policies within each dividend class or cohort to promote fairness to participating policyholders.
II. Policyholder disclosure regulation requirements
Guideline E-16 provides additional guidance with respect to the characteristics for participating accounts and adjustable products in connection with disclosures made pursuant to the Regulations. Specifically, Guideline E-16 provides that the description of items in public disclosures should be consistent. As an example, if contributions to participating account surplus are disclosed through both the policy for determining dividends and the policy with respect to management of the participating accounts, the description in both policies should be consistent. Also, the disclosure should be up to date such that policyholders are able to relate the information to current actions by the Company, including actions on policy dividends.
Guideline E-16 also notes that technical terminologies used should be clearly defined and explained.
III. Comments in connection with subsections of Regulations
Guideline E-16 provides additional clarity on OSFI’s comments for select subsections of the Regulations dealing with participating accounts. OSFI expects that Companies read these comments in conjunction with the disclosure requirements of the Regulations when developing their respective participating policyholder disclosures. Of particular note are substantive clarifying comments that are set out with respect to sections 2(a)(i) and (ii), 2(b), 2(e), 3(a) and 4(b) – (d), inclusive, of the Regulations. Furthermore, Guideline E-16 sets out each subjection of the Regulations in addition to the commentary so that Companies can easily follow the disclosure requirements.
Guideline E-16 also provides commentary for the following additional Regulations:
- 3(e) – a description of the Company’s approach in respect of managing and using the surplus, if any, in the participating account;
- 3(f) – the principal factors that might cause the board of directors of the Company to change the policy; and
- 3(h) – the measures taken by the Company to ensure fairness to participating policyholders whose policies form part of a closed block.
The revised Guideline E-16 satisfies another guidance priority in OSFI’s Annual Risk Outlook for 2022-2023. As indicated by OSFI, the key goal for Guideline E-16 was to provide more clarity and certainty to Companies with participating account business. Following the comparative study, OSFI updated Guideline E-16 to (1) improve the wording in several areas, (2) provide consistency of the terminologies used and (3) clarify the additional disclosure requirements. During the consultation period, Guideline E-16 received positive comments, an encouraging sign that the updated Guideline E-16 provides greater clarity regarding how the requirements of the ICA and Regulations should be interpreted and OSFI’s expectations as to how these requirements should be implemented. As a result, it is hoped that Guideline E-16 will help facilitate more consistent practices across the industry and reduce the varying interpretations of Guideline E-16, the ICA, and the Regulations.
Please do not hesitate to contact any member of the Insurance group should you have any questions.