In October 2021, the provincial government of Alberta introduced Bill 76: The Captive Insurance Companies Act as an alternative to traditional third-party insurers to assist businesses and industries by lowering the costs and addressing the scarcity issues many are currently facing when it comes to insurance.
According to Minister of Finance Travis Toews, the move will also help sustain economic growth in the province by enabling businesses to find alternative means of insurance in a reduced market:
Our goal is to help Alberta businesses insure their risks. Tight insurance supply globally makes it difficult for commercial entities in Alberta to find adequate insurance at a reasonable price. Enabling captive insurance is important to attract businesses and insurance capacity to the province. This will help increase options for the insurance business while helping sustain economic activity and jobs.
Proponents of the bill have big hopes for how it could impact several industries, with oil and gas, in particular, being a large focus.
What is Captive Insurance?
Captive insurance is insurance provided through an in-house entity created to provide coverage exclusively to its owners. Since the insurance provider is owned by the insured, it may provide opportunities for insureds to save significantly on insurance premiums they would normally pay to third-party providers. Of course, this must be balanced with the cost of operating the captive, which functions as an independent business. Further, it enables insureds to customize coverage to their individual needs, rather than purchasing coverage that may not fully meet their requirements.
Captive insurance can benefit entities that may have difficulty obtaining insurance through more traditional channels. At this point, the only jurisdiction in Canada with captive insurance legislation is British Columbia. Businesses throughout the country looking to ensure activity through captive insurance must establish a presence in British Columbia or work with an insurer outside of Canada.
Bill 76: The Captive Insurance Companies Act
Some of the highlights of the new Act include:
- outlining the rules necessary for forming, operating and dissolving a captive insurer in Alberta, which will be further enhanced by regulations; and
- providing requirements to ensure captive insurance companies are conducting business according to sound financial and corporate governance principles.
Under the Act, captive insurance companies serving Alberta must be physically located within the province to ensure the economic benefit of the new rules.
The new Act will empower captive insurance companies to provide insurance to the following entities:
- Single companies
- Industry associations
- Project financiers
Captives will be subjected to regulatory oversight and financial and corporate governance regulations. As long as the regulations are met, organizations in any industry will set up a captive insurance provider. Alberta adapted best practices from jurisdictions with captive insurance already in place, including British Columbia, Barbados, Vermont, and Delaware.
How Might Captive Insurance Impact the Oil & Gas Industry?
Alberta’s oil and gas industry has been particularly hard hit in recent years on several fronts, making it difficult to find adequate insurance coverage. With a shift in focus to environmental issues such as climate change and Indigenous land matters, there has been mounting pressure on insurance companies not to underwrite large-scale projects such as the Trans Mountain pipeline, which transports petroleum from Edmonton to Vancouver. In response, many large insurance companies are withdrawing coverage from oil sands-related projects. According to Canadian Underwriter, insurers have primarily fallen into one of three categories:
- Companies that have withdrawn coverage for the oil & gas industry as part of a public Environmental-Social-Governance strategy;
- Insurers that pledge ongoing support for companies transitioning to a low-carbon model; and
- Insurers that have largely remained unchanged and are relatively silent on the issue.
This, along with fluctuating oil prices and the Covid-19 pandemic, has created coverage problems for many companies in the industry. According to Sarah Hoffman, an Alberta legislative assembly member, the impact is being felt by these businesses and could have a detrimental effect on related issues, such as employment:
Some very large employers, including oil and gas companies, are having a really hard time getting insurance in Alberta right now for large-scale projects. Of course, we want to ensure that large projects that employ many, many people have the ability to move forward in a safe way where workers and communities and the environment are all protected.
Lawmakers hope the new legislation, coupled with a favourable corporate tax rate and diverse financial services sector, will encourage more businesses to move to Alberta and help existing industries rebound from the losses suffered over the past few years.
When does the Captive Insurance Companies Act come into effect?
Bill 76 received royal assent on December 2, 2021. It will come into effect upon proclamation, which is expected to occur in the first half of this year, once the necessary licensing, record-keeping, and investing regulations are implemented.
Calgary Insurance Lawyers Representing Canadian and International Insurers
Our Insurance Team understands how insurers operate and how to handle complex statutory and contractual issues that frequently arise. For questions about The Captive Insurance Companies Act or assistance with claims, please contact us at 403-269-7220 or online today.