OSFI provides guidance to monoline insurers

April 2, 2008
Financing for a number of Canadian PPP transactions have made use of financial guarantees from foreign monoline insurers.  However, the federal Insurance Companies Act (ICA) does not permit a foreign entity to "insure in Canada a risk", unless it is authorized to do so by order of the Superintendent of Financial Institutions.  This is not an appealing means of entry into the Canadian financial guarantee business because a foreign entity that has obtained this type of order is subject to the onerous regulatory requirements of Part XIII of the ICA, which covers matters such as asset adequacy, reporting and record-keeping.  As a result, the distinction between insuring in Canada a risk, which is prohibited without an order and insuring a risk in Canada, which is not prohibited, has been used by foreign monolines to avoid the requirement of obtaining an order.  However, until recently, there has been little direct guidance as to the meaning of insuring in Canada a risk.

The Office of the Superintendent of Financial Institutions (OSFI), however, has now provided some clarity to those foreign monolines that may wish to insure Canadian projects in the future.In September 2007, OSFI issued an advisory that provides guidance on how it will determine whether a foreign entity is insuring in Canada a risk. OSFI subsequently issued a ruling in which it applied the criteria from the advisory to foreign insurers who were proposing to provide financial guarantee insurance for the financing of infrastructure projects in Canada.  OSFI concluded that the business models proposed by the foreign insurers did not constitute insuring in Canada a risk, and consequently those insurers could provide financial guarantee insurance without obtaining an order. 

Of course, it remains to be seen how monoline insurers will weather the current financial markets situation, and whether they will remain involved in project finance transactions or retreat to their traditional markets.

The Advisory
The Ruling

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