Office of the Superintendent of Financial Institutions
This bulletin establishes for life insurance companies the criteria for
determining whether a transaction with a related party is nominal or
immaterial to the life insurance company.
Part XI of the Insurance Companies Act defines the related parties of
insurance companies and sets out rules for undertaking transactions with
these related parties. The overriding directive is that except as provided
in that Part, transactions with related parties are prohibited, both
directly and indirectly. Part XI subsequently identifies a number of
situations where related party transactions are permitted, one of these
being "nominal or immaterial value transactions."
Section 522 of the Act provides that a company may enter into a
transaction with a related party of the company if the value of the
transaction is nominal or immaterial to the company when measured by
criteria that have been established by the conduct review committee of the
company and approved in writing by the Superintendent. The question then
becomes how does one determine what is nominal or immaterial to the
In an effort to establish a uniform standard for all life insurers, the
Office obtained the views of the Canadian Life and Health Insurance
Association and met with industry officials. The outcome of this process
is the attached table that sets out the materiality criteria for related
party transactions of life insurance companies.
The table divides related party transactions into 13 different types based
on the nature of the transaction and the degree of risk associated with
it. Each category has a transaction threshold and an aggregate threshold,
and there are specific rules for determining the materiality of a
transaction and for aggregating transactions. These are set out at the end
of the table.
It is the intent of the materiality criteria to allow companies to
undertake necessary transactions with related parties in a timely manner,
while simultaneously providing safeguards against improprieties.
Accordingly, transaction and aggregate thresholds are generally linked to
regulatory capital, and transactions that are "nominal or immaterial"
based on these criteria do not have to be individually approved by a
company's conduct review committee.
Two issues that arose during the Office's consideration of this matter are
the questions of what constitutes a transaction and whether it should be
valued on a "gross" or a "net" basis. The Office is of the view that the
term "transaction" should be viewed on a very broad basis, and that
virtually any act or agreement in which more than one person is concerned
and by which the relations between the persons is altered constitutes a
transaction. Further, the Office considers that all transactions must be
valued on a "gross" basis and it is inappropriate for a company to measure
a transaction against the materiality criteria on the basis of the
transaction's "net" impact on the company. Accordingly, for example, the
sale of a $10 million building to a related party for consideration of
another building valued at $9.9 million and cash of $100,000 constitutes a
$10 million transaction. The Office does not subscribe to the view that
this transaction has no net impact on the company and hence, is immaterial
to the company.
As noted in the covering letter, companies that adopt materiality criteria
at least as stringent as those set out in this bulletin will be deemed to
have the Superintendent's approval in writing. Companies wishing to
establish different materiality criteria must submit them to the Office
and obtain the Superintendent's approval in writing. In reviewing requests
for other materiality criteria, the Office will require supporting
justifications, including details of anticipated transactions that would
otherwise require, at a minimum, approval of the company's conduct review
Definition of Capital: