Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 19 - Evidence - March 29, 2007
OTTAWA, Thursday, March 29, 2007
The Standing Senate Committee on Banking, Trade and Commerce, to which was referred Bill C-37, to amend the law governing financial institutions and to provide for related and consequential matters, met this day at 11 a.m. to give consideration to the bill.
Senator Jerahmiel S. Grafstein (Chairman) in the chair.
[English]
The Chairman: Welcome. Today, we are concluding our study of Bill C-37, to amend the law governing federal financial institutions and to provide for related and consequential matters. The five-year sunset provisions in the statutes necessitate a periodic review. The last review occurred in 2001.
Bill C-37 was introduced in the House of Commons on November 27, 2006, and was referred to this committee on March 21, 2007. The bill covers a range of matters, including disclosure to consumers, which is of particular interest to this committee; streamlined approvals in certain situations; electronic cheque imaging, which is one of our recommendations; mortgage costs; the establishment of cooperative credit associations; and foreign experts on the boards of financial institutions.
The goal of the regulatory framework provided by the Bank Act, the Insurance Companies Act, the Trust and Loan Companies Act, and the Cooperative Credit Associations Act is to allow financial institutions to operate as efficiently and effectively as possible in meeting the needs of consumers and businesses, while ensuring the safety and soundness of our financial services sector. We have less than one month, until April 24, for the renewal of the statutes.
Today, we are pleased to welcome Mr. Frank Zinatelli, from the Canadian Life and Health Insurance Association Inc., and Mr. Normand Lafrenière from the Canadian Association of Mutual Insurance Companies. Present on the committee today are members representing all regions of Canada: Senator David Angus, Deputy Chairman of the Banking Committee, Senator Tkachuk, Senator Di Nino, Senator Eyton, Senator Goldstein and Senator Ringuette.
Mr. Lafreniere, please proceed.
[Translation]
Normand Lafrenière, President, Canadian Association of Mutual Insurance Companies: Mr. Chairman, thank you for having invited us to appear before the committee. I represent the 93-member-strong Canadian Association of Mutual Insurance Companies. Mutual insurance companies are owned by their members: The members elect the board of directors and any profits are shared amongst them once a company's long-term viability is insured. Any profits are distributed to members or corporations to which the companies belong.
CAMIC commends the government for tabling a review of the financial services legislation that maintains unchanged subsection 416(2) of the Bank Act that prohibits the retailing of insurance in the branches of a bank. This will maintain the level playing field in which the insurance industry currently operates.
[English]
With respect to the amendments brought to the Insurance Companies Act, The Canadian Association of Mutual Insurance Companies, CAMIC concurs with the only amendment that specifically targets mutual insurance companies, that is, an amendment to paragraph 449(2)(c), which clarifies the exemption from the Property and Casualty Insurance Compensation Corporation afforded to mutual insurance companies' members of the Fire Mutuals Guarantee Fund.
CAMIC also supports the amendment brought to subsection 346(3) of the Insurance Companies Act to recognize the audit work done by an actuary that is not the actuary of the company. While this amendment is brought to reflect the new audit guidelines set by the Canadian Institute of Chartered Accountants, it also serves provincially licensed mutual insurance companies that often do not have an appointed actuary and will simply depend on the actuary of the audit team to ascertain the company's liabilities.
Our only deception is not to see any measure requiring property and casualty insurers to set up catastrophe reserves in Canada. Because of our lack of action on this front, many foreign companies are better prepared than Canadian companies to face major natural or man-made catastrophes.
Foreign-owned property and casualty insurance companies doing business in Canada often benefit from taxation provisions in other countries that allow them to set aside, free from income tax, reserves to meet their obligations in cases of major catastrophes. For its part, the Canadian system considers as profit, in any given year, sums of money received but not reserved for the payment of a specific claim. To establish a level playing field with their foreign competitors, many Canadian-based companies have resorted to establishing what are called offshore companies. Through these offshore companies, they can obtain the equivalent tax advantages to those enjoyed by many foreign insurers doing business in Canada. For their part, mutual insurers to do not resort to the offshore companies' concept and find themselves in a tax disadvantage with many of their foreign-owned and Canadian-owned competitors. The solution lies in allowing the establishment of man-made and natural catastrophe reserves in Canada, free from income tax, similar to the catastrophe reserve concept implemented in many European countries and in Japan and in tune with the commitment of the U.S. federal government to help should a major man-made, terrorist, or natural catastrophe occur in the U.S. Our catastrophe reserve proposal is self-financing because the investment income generated by these reserves would be taxable.
No measure to encourage the establishment of mutual insurance companies is found in the proposed legislation. Minimum capital requirement is too high to allow new mutual insurance companies to be formed in Canada. The last new such company was formed in the 1940s.
Frank Zinatelli, Associate General Counsel and Vice-President, Canadian Life and Health Insurance Association Inc.: I am Frank Zinatelli, Vice President and Associate General Counsel of the Canadian Life and Health Insurance Association. I would like to thank the committee very much for this opportunity to contribute to your review of Bill C- 37, to amend the law governing financial institutions and to provide for related and consequential matters.
We welcome this opportunity to appear before the committee as you seek to develop your report to the Senate on this important bill. The industry is extremely supportive of Bill C-37 and urges that it be passed in a timely manner.
By way of background, the Canadian Life and Health Insurance Association represents life and health insurance companies accounting for 99 per cent of the life and health insurance in force across Canada. The Canadian life and health insurance industry provides products that include life insurance, disability insurance, supplementary health insurance, annuities, RRSPs and pensions. The industry protects about 24 million Canadians and some 20 million people internationally. It makes benefit payments to Canadians of $51 billion per year, has almost $371 billion invested in Canada's economy and provides employment to over 119,000 Canadians.
Among the various statutes amended by Bill C-37 is the Insurance Companies Act, which is the governing statute for the regulation of life and health insurers at the federal level — of course, life and health insurers are also subject to the rules and regulations that are set out in the provincial insurance acts.
Following up on the June 2006 government White Paper on 2006 Financial Institutions Legislation Review, Bill C- 37 represents a welcome fine tuning of the financial institutions legislation and makes changes in three important areas. With respect to enhancing the interests of consumers, for example, the bill would amend the Insurance Companies Act to require that complaint-handling procedures be made publicly available — mailing and on-line — for all consumers to access at any time. With respect to increasing legislative and regulatory efficiency and to streamline the approval regime, Bill C-37 would amend the Insurance Companies Act to shift the approval for some transactions from the minister to the superintendent. As another example, it would allow the granting of more than one approval in a single instrument.
Bill C-37 would also reset the sunset date for financial institutions, which is currently April 24, 2007, to five years after the coming into force of the Bill C-37 amendments. In this regard, prompt passage of the bill will ensure the legislative stability and continuity that are so important in the financial services sector.
In conclusion, the industry strongly supports the provisions of Bill C-37 that are relevant to the life and health insurance industry and is willing to assist in whatever way it can to ensure the bill's timely passage. The industry greatly appreciates this opportunity to participate in the committee's review of Bill C-37. I would be pleased to answer any questions.
Senator Angus: Good morning, gentlemen. I would add to my comments to representatives of the Canadian Bankers Association and the Credit Union Central of Canada when they appeared before the committee yesterday: We consider you to be among our most important stakeholders in this industry, and we understand you have participated in the consultation process. Is that a fair statement? Mr. Zinatelli, I am delighted that you are pleased with Bill C-37. Mr. Lafrenière, I would like to ask you a few questions. I perceive your mixed emotions such that you are pleased with the bottom line but that you are signposting some issues to be addressed.
Mr. Lafrenière: Exactly. We do not believe that it should be changed in this bill now.
Senator Angus: I believe that you said there are 93 members of CAMIC.
Mr. Lafrenière: Yes.
Senator Angus: Could you elaborate on your association?
Mr. Lafrenière: Most mutual insurance companies in Canada were formed 100 to 150 years ago by farmers who could not find insurance or insurance at a fair price and decided to band together to form their own companies. At that time, they did not need much money to form a company, but they did need to guarantee pay-out should a claim be filed. Approximately 400 companies were set up across Canada. This occurred mostly in the more developed regions of the country — Ontario, Quebec and Eastern Canada, and then Western Canada. Over the years, these original companies have amalgamated, so we now have about 110 companies across the country. Some of them are large but most are small.
Senator Angus: During my time on this committee, which dates back to 1993, we have seen the process of demutualization of some of the bigger mutuals. We have held hearings and participated in the legislation that gave rise to the conversion of some of the major companies. I had not appreciated that there were so many remaining mutuals in Canada. When you described some as being smaller, are you comparing them with some of the familiar names such as Sun Life Financial Inc., Mutual Life Assurance Company of Canada and Manulife Financial?
Mr. Lafrenière: In our case, we are property and casualty insurance companies that insure cars, houses, et cetera. We do not carry life insurance. All of the ``mutualized'' companies are on the life side of insurance and not on the property and casualty side. We even question who owns these companies.
Senator Angus: The policy holders own such companies.
Mr. Lafrenière: Yes, but the policy holders are not necessarily the ones who built the surplus of companies that are in business. Sometimes you see a company having an overriding profit for 10 or 15 years, so the surplus of these companies, if it grows, is because of the investment of these companies. It was from the money that was generated in prior generations.
There is a question as to who owns that money. Of course, on paper, it is the policyholders. If there is demutualization, there should be a debate, at least on the property and casualty side, as to who is really the owner.
Senator Angus: You read my mind. That was my next question. Should there be a debate, and is there a move to demutualization?
Mr. Lafrenière: There is no move in that direction from the property and casualty side.
Senator Angus: In the property and casualty field, I understand there are many companies that are straight corporate entities, with shares under the Canada Business Corporations Act. Am I correct?
Mr. Lafrenière: Yes, there are about the same number of stock companies and mutual companies. Mind you, the mutual companies, on average, are smaller than the stock companies.
Senator Angus: Again, getting back to that question I asked of size, it is hard to measure, I suppose. However, when you say ``smaller,'' could you give us an order of magnitude, a range?
Mr. Lafrenière: On average, the stock companies might have a premium volume of $200 million, whereas the mutual companies might have maybe $10 million or $15 million.
Senator Angus: It is quite significant. Are they largely local?
Mr. Lafrenière: Yes, they operate in a small territory normally.
Senator Angus: Are they industry specific? Would they have multiple lines?
Mr. Lafrenière: Yes, they have personal lines and commercial lines. They operate in the same sectors as the stock companies.
Senator Angus: They are not a bunch of mutual property and casualty companies where one would deal with risks particular to the agriculture industry and another would deal with risks particular to the fishing industry, et cetera. Are they more across the board?
Mr. Lafrenière: They are more across the board, but you are right; we have some that specifically target some sectors. Some companies do 90 per cent or 95 per cent of their business with farmers. Some others do their business with fishermen.
Senator Angus: Again, to understand how important the industry is, your association does not have the stock companies, it only has the mutuals.
Mr. Lafrenière: Exactly.
Senator Angus: How many Canadians are employed in this industry?
Mr. Lafrenière: About 4,500.
Senator Angus: You had one or two points that I thought you made very succinctly, as to further changes to the legislation that your members would like to see; can you just elaborate on that?
Mr. Lafrenière: We would like to see those changes, but not in this legislation. We recognize that you are at the level where you have to bring minor changes, and we are very satisfied with this legislation. We are saying that for the future, we should be thinking about bringing some changes.
There are two types of changes that we would like to see implemented. First is the set-up of a catastrophe reserve. We see changes in the climate. We see large catastrophes occurring elsewhere. Thank God, we have not had those types of catastrophes here, but that does not mean we will never have them. Although we are very strong financially, it would be nice to be ready to face major catastrophes.
Senator Angus: This raises the question of reinsurance. Do the mutuals' property and casualty companies reinsure?
Mr. Lafrenière: Absolutely, they are fully reinsured.
Senator Angus: With the other markets?
Mr. Lafrenière: Yes, on the international market; we have our own reinsurers, and then they turn around and reinsure on the international market.
The Chairman: You have raised the issue of catastrophe, Mr. Lafrenière, and it is a very important issue. If I take your testimony correctly, you are saying you are at a competitive disadvantage with others because of the way a catastrophe reserve is established. Others can establish it in a much more cost-effective and tax-effective way. Could you explain that a little more, and what your proposal would be?
Mr. Lafrenière: We are saying that in other countries — mostly European countries, but also in Japan — companies are allowed to set up catastrophe or equalization reserves; they give them different names but they have the same purpose. Basically, these are monies set aside not to pay a claim that is there now, but that may be there some day. They set that money aside on a tax-free basis. Should there be a need for that, they draw from that reserve to pay their claims.
In the Canadian taxation system, it says that if you have not paid claims — if you do not have reserves for claims that occurred this year — the rest is considered as profit. You pay income tax on that profit and put the rest of it into surplus.
Your surplus is tax paid as opposed to a reserve, which is tax free. Of course, the reserve would be much larger if it was to be tax free. When we charge for the premium, we have to put aside the money for those events that occur every 20, 40 or 100 years. You have to be ready to face those events; but because there is no such claim in the year that we sell the insurance, we generate a profit. We pay tax on that profit and we set money aside, a surplus on the tax-paid basis as opposed to a tax-free basis. It takes more of a premium to build the surplus needed to face that catastrophe that will occur at a later time.
Senator Eyton: The conversation is probably getting way too technical. Could you not, here in Canada, deal with a reinsurer that would be able to have the same benefits that your foreign competition and some of the local companies keep? Could you not treat that as an expense or charge, which would reduce your income and the tax related to it?
Mr. Lafrenière: In fact, every time we purchase reinsurance on the outside market, this is an expense.
Senator Eyton: Could you not have a running arrangement with a resident reinsurer here that would convey much of the same benefits you are talking about that competitors and others have? Could you not structure it that way?
Mr. Lafrenière: I believe the way to do it is to set up offshore companies.
Senator Eyton: I understand that. However, it seems to me you might be able to do indirectly what you want to do directly.
Mr. Lafrenière: We have not found that way.
Senator Goldstein: Thank you very much, Mr. Lafrenière and Mr. Zinatelli, for coming to spend time with us and explain your positions and give us the benefit of your thinking.
I want to talk with you, Mr. Lafrenière, for a moment with respect to the reserves of which you speak. Your approach is appealing. There is no reason why a mutual insurance company should not be permitted to have the same kind of reserve techniques available from a tax perspective as has any other insurance company.
I do not understand why the mutual insurance companies do not do exactly what the Canadian domestic ones do, and that is set up offshore companies to take hold of these reserves. There is nothing in the law to prevent you from doing that.
Mr. Lafrenière: No, although it costs a lot of money to set it up. We need to have a certain size to do that.
Senator Goldstein: Yes, you do.
Mr. Lafrenière: We are not on that level. Most of those companies are not on that level, and we prefer doing business in Canada and keeping everything in this country.
Senator Goldstein: Yes, but there is nothing inherent in the legislation that would stop you from doing exactly that.
Mr. Lafrenière: Exactly.
Senator Goldstein: Your limitation results from your relatively small size, about which legislation cannot really help you.
Mr. Lafrenière: Exactly.
Senator Goldstein: My second question deals with the minimum capital requirements for the creation of new mutual insurance companies. That, too, has appeal to us because we have an interest in making sure that services of all kinds, including mutual insurance companies, are available throughout the country.
To what extent is there a demand for new mutual insurance companies? Let me put it a different way before you answer the question. Have you done any statistical analysis or any polling as to whether there is a need within the Canadian commercial or agricultural society to create new mutual insurance companies?
Mr. Lafrenière: No. We received requests from people who wanted to set up companies and who say they cannot find insurance at a fair price for people. They said they would like to set up their own company and unfortunately it takes $5 million of surplus to be able to start a company. You bring people together, and it is really having the nickel to finance this that is the problem.
Senator Goldstein: Can an existing company that has the capital required to be licensed establish a division for this particular group of people that have a need and cannot supply the capital?
Mr. Lafrenière: If they want to form their own company, maybe we could expand.
Senator Goldstein: Many people want to do many things however there are certain requirements that the law requires that we cannot change.
Surely, if the need were really there, then the Canadian Association of Mutual Insurance Companies could encourage these small people to be a division of a particular company.
Mr. Lafrenière: When we set up a separate company, a subsidiary of our company, those subsidiaries are not mutual companies any longer. They are stock companies owned by a mutual. This does not mean that we cannot set up a subsidiary to serve a population. They just wish to start their own company, be owners of what they put together, and it costs too much money to set it up in the first place. The minimum requirement is too high, preventing them from setting up their company.
The Chairman: Senator Di Nino is our colleague from Ontario. Welcome, Senator Di Nino, to the committee.
Senator Di Nino: I am happy to be here on behalf of my Ontario colleague, Senator Meighen, who is not available today.
One of the stated objectives of the legislation is the protection of consumers, with which I totally agree. I believe the two pillars are competition and disclosure.
I want to go back to the question raised by Senator Goldstein on competition. You end your presentation on that issue. You are saying — and I would like a clarification — that because of the high capital requirements, the door for new competition is actually not necessarily closed, but difficult to open. There are not that many people with that much money available. Is this what you are saying?
Mr. Lafrenière: I am saying that it is difficult for a group of people to start their own company and come up with the $5-million requirement, which is the minimum capital requirement to start a company.
Senator Di Nino: I understand that.
Mr. Lafrenière: It is difficult to start a mutual, which is not to say it is difficult to start an insurance company. When one has stocks to start a company, of course at that time, $5 million is not all that much.
Senator Di Nino: I wanted you to clarify the difference; you have anticipated my question. You are saying the difference between a mutual and a stock company is that with a stock company one can go out into the public domain through a stock exchange or through some investment dealer to raise the funds required to start a new life company or mutual company. Is that correct?
Mr. Lafrenière: Correct.
Senator Di Nino: Can you not do the same with the mutual company?
Mr. Lafrenière: A mutual is owned by the policy holders. All of the money is their own.
Senator Di Nino: I understand. I just want that on the record. The competition component of this protection of consumers is restricted by the fact that the creation of a mutual company is made that much more difficult because the participants themselves have to come up with the money.
Mr. Lafrenière: Exactly. Therefore, in my view, we need to find a way to help the establishment of new companies. There might be vigorous surveillance or limitations as to what they can insure. There should be ways where new mutuals see the light of that.
Senator Di Nino: I agree with you there. You have 93 companies. I understand you are saying we could have many more if the requirements for capital, at least, were something less.
Mr. Lafrenière: I am not sure how many more. We had requests, in the recent past, of groups who wanted to set up their companies. We were just wondering and have been working on it. However, they are never able to start up because of that minimum capital requirement.
[Translation]
Senator Ringuette: Mr. Lafrenière, your reserve proposal is very interesting. I was wondering how it differs from the requirements under which charter banks operate with regard to reserves and investment guarantees.
Mr. Lafrenière: I am afraid that I cannot answer your question. I do not know what is required of banks.
Senator Ringuette: They are required to set aside a certain percentage of the deposits they receive, but I am not exactly sure how much.
Mr. Lafrenière: General insurance companies face a similar requirement. The Office of the Superintendent of Financial Institutions requires general insurance companies to hold a certain percentage of their written premiums in reserve. It is a mandatory responsibility.
Senator Ringuette: Is it a cumulative reserve?
Mr. Lafrenière: No, it is proportionate to the company's written premiums. It is not cumulative year on year. It is an operational requirement. Companies cannot contribute more to the reserve than the amount recommended by the Office of the Superintendent.
Senator Ringuette: The reality is that you face the same regulatory requirements with regard to reserves as do the banks and are therefore on a level playing field with them in terms of competition.
Mr. Lafrenière: Possibly, I am not familiar with their responsibilities.
[English]
Senator Ringuette: My other question is in regard to consumer complaints. We have heard from the banking sectors, and we know that for a number of years now they have a banking ombudsman on a voluntary basis. I certainly, as a public representative, hear many complaints with regard to disability claims and the way that people are treated. Gentlemen, do you have an ombudsman for your industry?
Mr. Zinatelli: Indeed we do. It is called the Canadian Life and Health Insurance OmbudService, CLHIO. It forms part of the same overarching group as the banking ombudsman. I would be happy to make all that information readily available. It is a service supported by the life and health insurance industry. There is an independent board for the CLHIO. They provide information to consumers, assists in complaints and help the consumer resolve those complaints.
A predecessor of this body was the Consumer Assistance Centre, which was formed by the industry — I might be getting the dates slightly wrong — around 1972 or 1973. We have been providing similar services for all that time for life and health insurance consumers, in both languages et cetera. There is a toll free number for the service. It is something that we try to inform consumers about as much as we can.
Senator Ringuette: Last week, we heard from our federal institution, I believe it was Mr. Jim Callon.
Mr. Zinatelli: Jim Callon of the Financial Consumer Agency of Canada, FCAC? That name is familiar to me. He would be with that agency.
Senator Ringuette: They review complaints with you that they get from the general public in regard to the services.
Mr. Zinatelli: There are a number of consumer provisions under the Insurance Companies Act that come under the jurisdiction of the FCAC. Indeed, we are in touch with the FCAC. We do respond to their jurisdiction.
Mr. Lafrenière: The same applies to the mutual companies. We do have the ombud service to receive complaints from clients of mutual insurance companies.
The Chairman: This committee has been very concerned with consumer issues as they relate to the financial sector — not just your industry, but across the board. In our previous hearings on consumer issues and other matters, we heard some complex and difficult stories about the difficulty consumers have in coming to a resolution quickly with respect to legitimate complaints. All members of the committee are concerned about that. We see that the bill now says, as you have indicated, that it would amend the acts ``to require that the complaint-handling procedures be made publicly available — for mailing and online — for all consumers to access at any time.'' That applies to both your industries. Is that correct?
Mr. Lafrenière: Yes.
Mr. Zinatelli: Yes.
The Chairman: Having said that, do you feel the online transparency will improve and speed up the efficiency of resolving legitimate consumer complaints?
Mr. Lafrenière: We have it online already. Unfortunately, no one so far has used our system online, but it is there for their use.
The Chairman: Having it online is great, but there is still a division in the country between those households that are online and those that are not. At least a sizeable minority in the country is not online. There will probably always be a portion that will not be able to get online.
Have you improved your internal consumer resolution mechanisms in order to expedite resolution of consumer complaints? We have heard that the industry is moving in a much more cooperative way across companies to deal with this in a central, one-stop shopping way. We heard that previously from other institutions. I assume that is what you are trying to do as well.
Mr. Zinatelli: That is certainly something that we do. We believe that this additional step that is set out in the legislation, although a number of companies already do that, will expand the access consumers have to the particular complaint mechanism, so they know the steps they need to follow. It is important for consumers to have that information up front, leading them down the correct path as opposed to fishing around and trying to find the way. I feel it is a positive step.
The Chairman: We are very aware of the confusion in the marketplace when consumers have a complaint. We believe in one-stop shopping. I assume what we are doing here is slowly getting the industry and the regulatory mechanisms in place to deal with that. Having said that, the question remains: Do you feel that the end result will be to resolve these consumer complaints more quickly?
Mr. Zinatelli: I am hopeful that will happen. I note that, within our industry, the issue of ensuring that consumers have access to the complaint mechanism that is available is a big issue to which we pay attention. In fact, within our structure, we have a consumer complaint section, which is made up of representatives of member companies that deal with consumers to ensure that the information that is available is as streamlined and accessible as possible. That is something that we take seriously. The consumer is able to lay out their complaint clearly and quickly. It is better for the consumer and for companies as well, because the issue can be resolved and business can continue.
Senator Eyton: Mr. Lafrenière, you mentioned you have 93 members. Does that include any brokers? I am curious about the relationship between brokers and the companies whose insurance they sell.
Mr. Lafrenière: There are no brokers at all. Our companies either sell through agents or through brokers. Looking across the country, probably 50 per cent of our business is done through brokerage and the other 50 per cent with agents. Agents are not direct employees of the companies. However, they sell only the products of one company, whereas a brokerage sells the products of many companies.
Senator Eyton: This is perhaps addressed to both of you. I was wondering about the regulation and the complaint process, in particular. Does Bill C-37 apply effectively to both categories of salespeople, both brokers and agents?
Mr. Lafrenière: I believe so. I believe that, even before the changes in this act, the system in place was quite fair and quick at solving issues. At least, on our side, we never had an issue with that. We dealt with the complaints that we received rapidly.
When a complaint is received by a broker about the settlement of a claim through the insurance agency, the role of the broker is to put the client in contact with the insurance company. There is a process in place.
Senator Eyton: Has there been a problem?
Mr. Lafrenière: Not on our side.
Mr. Zinatelli: As I understand the legislation, this provision and the provisions that are already there apply to the companies. The rules that apply to agents and brokers are under provincial insurance acts. I indicated in my opening remarks that we are regulated. The industry is regulated both provincially and federally. Distribution issues and issues concerning what is in the contracts themselves fall under provincial jurisdiction. Obviously, in the management of consumer complaints and so on, companies do deal with their distributors.
Senator Eyton: That is why I raised the question. I was wondering about the coordination or symmetry of provincial and federal legislation, given particularly an independent broker. I hear that you believe that, somehow, the complaint system is working. It also strikes me that many complaints, if not most complaints, would be relative to the sales process and to the activity of the broker or the agent in dealing with the policy holder.
Mr. Lafrenière: In our case, no. The complaints that we receive are related to claims, either claims being refused or not being paid to the tune that people said was the value of the claim.
Senator Eyton: It does not cover complaints in relation to the sales process?
Mr. Lafrenière: If it is a sale by a broker, no. Brokers are not mutual insurance companies. They are separate entities. They are covered by their own body.
Senator Eyton: It seems to me there may be a gap there.
Mr. Lafrenière, you talked about capital requirement and indicated that you thought $5 million was too much because it precluded new mutual companies. What is the limit that you feel would be agreeable?
Mr. Lafrenière: I certainly want to keep the $5 million in there. To help mutual insurance companies set up, there should be a process by which they get to the $5-million capital requirement; perhaps with more surveillance in the meantime or limitations as to what they can provide in terms of insurance. However, we should allow the formation of insurance companies even though they do not have the $5 million with which to start. That is what we would hope to see. I am certainly not proposing that we should have something less than $5 million on a permanent basis — far from it. We have a strong system in place, and we are completely behind it.
Senator Eyton: Can you comment, Mr. Lafrenière, on the trend for mutual companies? I have a personal experience. At one time, I had a number of policies with a large company that demutualized. It became a stock company. At that time, there was a form of voting. I was never sure how democratic it was, but certainly it was approved. As a result, my insurance continued under the same terms I already had, but I got a whopping cheque, which either meant the company had invested my money very well or I had been overpaying premiums for a long period of time. I thought that process was perfect at that moment in time. Is that a trend? We have very large insurers, and most of them now are stock or share companies, not mutualized. Is there a trend away from mutual insurance companies?
Mr. Lafrenière: There is certainly not a trend away from mutual insurance companies with respect to property and casualty insurance. In fact, we have not seen any demutualization of a property and casualty insurance company in Canada. There are no requests for such demutualization. All the demutualization that you are talking about occurred with life insurance companies and occurred in the mid-1990s.
Senator Eyton: There has been very little since, that I can recall.
Mr. Zinatelli: In part, that is because there are not many mutual companies remaining in life insurance.
Senator Eyton: Mr. Zinatelli, Bill C-37 proposes that reinsurers, who deal exclusively with other financial institutions, are exempted from oversight by the Financial Consumer Agency of Canada. Can you comment on that and its possible implications? Is there a possibility for use, abuse or relief under that provision?
Mr. Zinatelli: If I recall accurately, the provision indicates that reinsurers would be exempt where they are not dealing with consumers; that is, with categories of clients described in the regulations that I would assume to be consumers. As well, they have to maintain an ongoing report or statement with the FCAC confirming that they continue not to deal with consumers. In the event that a reinsurer deals with consumers, the FCAC would ``back in.''
The amendment is aimed at reinsurers who do not deal with consumers. Therefore, there are no consumer issues in this regard. Of course, reinsurers deal with other companies.
Senator Eyton: The exemption is directed at companies that deal only with financial institutions.
Mr. Zinatelli: That is correct.
Senator Eyton: Are you concerned about that?
Mr. Zinatelli: No, because it is a good streamlining provision of the bill.
Senator Moore: Mr. Lafrenière, my question follows along the questions of Senator Eyton. You mentioned that, originally, there were about 400 mutual companies. What is the history of the minimum capitalization? Currently, it sits at $5 million. When did it begin? When did the industry start? What was the required capitalization at the outset? Can you tell us a bit about the history that has brought us to the $5-million minimum capital requirement?
Mr. Lafrenière: The $5-million minimum capital requirement is at the federal level under the Insurance Companies Act. Many mutual insurance companies are provincially incorporated, so provincial regulators set the minimum capital requirement. Of course, much of it comes from the example given by the federal legislation. Many, if not all, provincial governments require a $5-million minimum capital requirement.
Senator Moore: Was it always set at $5 million?
Mr. Lafrenière: No, it was once less than that.
Senator Moore: What was the figure in years gone by, how did it progress and why?
Mr. Lafrenière: Certainly, the purpose of the minimum capital requirement is to protect consumers, and we are in favour of that. In the beginning, when the mutual insurance companies were being formed, they signed what was called premium notes. If people purchased insurance for their houses, some of the money that paid the premiums was to pay the salary of the insurance agent. If a claim was to occur, they were signing that they would be ready to pay their share of the damage amount. Everyone in the group committed the money and signed that they would pay their share.
Over time those mutual insurance companies have developed a surplus and, because of that surplus, there was less need to have someone sign such a premium note. Therefore, we have eliminated the premium note with that surplus in place. It is most likely that those surpluses were in place before there was a requirement to have a surplus. Unfortunately, I do not know the full background of the minimum capital requirement.
Senator Moore: How long has it been at the current level of $5 million?
Mr. Lafrenière: It has been at least 10 years.
Senator Moore: Do you know how much it was before that time?
Mr. Lafrenière: It went from $3 million to $5 million quite some time ago.
Senator Moore: Was it 10 years ago?
Mr. Lafrenière: I believe that it was earlier than that. I recall $3 million being the figure that we had, and then it went up to $5 million. It also depends on the province, because it is a provincial issue.
Senator Moore: What was it before it was $3 million? Was that at a time when you were pretty much self-insured?
Mr. Lafrenière: I do not know the answer to that, but I could obtain that information.
Senator Moore: It would be interesting to know the history.
Mr. Lafrenière: I will search for it.
Senator Moore: Perhaps you could provide it to the committee.
The Chairman: I have a few comments after which I will ask for specific advice or comments from the witnesses.
With respect to the Insurance Companies Act, Bill C-37 contains a number of downloading responsibilities from the minister to the Office of the Superintendent of Financial Institutions. This committee has looked at questions of competitiveness and productivity. We always welcome administrative changes that will improve the efficiency and effectiveness of financial institutions. I assume that part of the downloading responsibility is toward the goal of relieving the minister of approvals that are not mechanically necessary to improve the efficient operations of your industry. Is that correct?
Mr. Zinatelli: That is a fair comment, Mr. Chairman. Those amendments, given the strengths of our financial system and our regulators, are truly useful for the industry, and the protection for policyholders continues in place. They are very useful changes.
The Chairman: Having said that, I want to raise the matter of the allowance, now under this bill, for life insurance companies to transfer seed money from a segregated fund and then back to the relevant life company. Mr. Zinatelli, you are probably familiar with that allowance.
Mr. Zinatelli: Yes. I believe that is one of the provisions whereby OSFI's approval would no longer be required.
The Chairman: Yes, and while we welcome efficiency and effectiveness, by the same token there is also public interest and ensuring that transactions do not take place within a regulated industry that might not be in the public interest.
Historically, these provisions have been in place at the ministerial and superintendent's level to ensure the checks and balances of activities within a regulated industry. What is the implication of that?
Mr. Zinatelli: Allow me to note that segregated funds are not my area of expertise. When a fund is being set up, there is an injection of capital by the company at the outset. We are talking about a fund that has been in operation for many years, perhaps, and other capital has gone into it over time. Therefore, the seed money has served its purpose and the fund is operating on its own, in a sense. It is only in the context of getting that seed money back out that the approval of the superintendent would not be required.
The Chairman: That money is the original capitalization.
Mr. Zinatelli: Yes, I understand the amendment to address that money.
The Chairman: It does not go beyond that.
Mr. Zinatelli: No. It is only with respect to the seed money.
The Chairman: It is limited to that.
Mr. Zinatelli: Yes.
The Chairman: The implication in Bill C-37 is that approvals for indemnity reinsurance and transfers would go from the minister to the superintendent. Why is that? Would it not be an important authority for the minister to retain?
Mr. Zinatelli: These areas are extremely technical in the way in which they work. Effectively, I believe, the superintendent would do the legwork on such aspects. Our regulator understands these matters extremely well. I am confident that they are quite able to do the job of protecting policyholders with regard to the changes in the insurance provisions.
The Chairman: The implications in the bill allow the insurers that offer reinsurance and deal with other financial institutions to be exempted from oversight by the Financial Consumer Agency of Canada. What are the implications of that?
Mr. Zinatelli: It is really fixing an administrative issue.
The Financial Consumer Agency of Canada is there to help protect and educate consumers — to help them overall. When there is a reinsurance company that does not deal with consumers, then the agency is not performing any function in respect of those reinsurers. Consequently, it is really bringing a reality to the relationship between consumers and direct writing companies, and then to reinsurers. The consumer deals with the direct writer and not with the reinsurer.
The Chairman: In other words, a consumer problem would not go up the pipeline and then be caught at the reinsurance level.
Mr. Zinatelli: No, the consumer would always have recourse to the direct writer, to the company with which he or she dealt.
The Chairman: That remains unblemished.
Mr. Zinatelli: Yes. As I was saying to Senator Eyton earlier, the exemption is only where the reinsurer does not deal with this category of individuals that is to be defined by regulation.
The Chairman: It is a limited exemption.
Mr. Zinatelli: That is right. You must maintain that status because if that changes and the reinsurer starts to deal with consumers, that exemption no longer applies.
The Chairman: Essentially, the reinsurer is the wholesaler in the back room, as opposed to the retailer.
Mr. Zinatelli: That is right.
[Translation]
Senator Biron: What is the minimum capital requirement to form a mutual insurance company in Quebec?
Mr. Lafrenière: Five million, the same amount.
Senator Biron: For companies?
Mr. Lafrenière: Yes, for provincial companies, of which, moreover, there are a good number. Think of Promutuel.
Senator Biron: I was insured by Promutuel and two years ago they stopped providing mutual insurance for ski centres.
Mr. Lafrenière: At any rate, it is five million that is required in Quebec as it is elsewhere.
[English]
The Chairman: Are there any further questions, senators? Gentlemen, I want to thank you very much. Your evidence has been very helpful. It has given us a better insight into the act, and we welcome your support of the act. It will make our work much easier and efficient now that we have heard that major stakeholders such as yourselves approve of this bill. This is a work in progress and we want to thank you very much for your contribution today.
We are very happy at this time to welcome Mr. Winsor Macdonell from Genworth Financial Canada. Mr. Macdonell, you have been viewing these hearings; you are familiar with our questions and concerns.
Winsor Macdonell, Vice-President and General Counsel, Genworth Financial Canada: Our president, Peter Vukanovich, cannot be here today and sends his regrets. I would like to thank the committee for allowing me to participate in the hearings on Bill C-37.
Genworth is Canada's home ownership company — we are the largest private sector provider of mortgage default insurance in Canada and one of the largest in the world. Since 1995, we have helped over 800,000 middle-income Canadians achieve the dream of home ownership.
As you are probably aware, mortgage default insurance protects lenders against losses caused by a homebuyer's default on a mortgage and, in particular, a low down payment mortgage. The benefits of mortgage default insurance are clear. It is the fastest and least expensive way for Canadians to buy a home and build wealth sooner.
Broadly, mortgage insurance increases the efficiency of the entire mortgage industry and contributes to the safety and soundness of the financial sector. Because of these abilities, mortgages with low down payments account for about half of all mortgages originated in Canada and are a major reason why Canada has one of the highest home ownership rates and most stable mortgage markets in the world.
Genworth Financial Canada supports the proposal, in Bill C-37, to raise the loan-to-value threshold from 75 per cent to 80 per cent, above which mortgage insurance is required by law. The 80 per cent threshold is consistent with the thresholds used in other major lending countries, such as the United States and Australia.
I would like to take this opportunity to thank the government, and particularly the Department of Finance Canada, for being responsive to the issues raised during the consultation exercise leading up to the legislation.
For us, the review process provided an opportunity to highlight the value that our mandatory system of mortgage insurance brings to Canadian consumers and lenders.
Mandatory mortgage insurance works in Canada because it allows companies to spread the risk of homebuyer default across a large pool of loans, including varying borrower profiles, different geographic regions and various lenders.
This pooling effect results in fairness and choice for consumers who pay the same premium regardless of where they live. It is clear that a weakening of the mandatory requirement would result in consumers having to pay considerably more by way of higher interest rates for low down payment loans.
The move to 80 per cent will only benefit consumers to the extent that lenders do not replace the premium savings with a new fee or an increased interest rate. Remember mortgage insurance protects lenders from the default risk in the 75 per cent to 80 per cent segment. Removing this requirement means that lenders will now keep that default risk. How lenders deal with the increased risk in this segment is not yet known. Ultimately, only time will tell what impact this change will have on consumers.
Our system is working for Canadians. For the average family, real estate assets currently account for about 35 per cent of overall wealth, up from 29 per cent just four years ago. At that time, Canada's mortgage insurers collectively reduced premiums twice since 2003, effectively keeping $850 million in the hands of homebuyers.
Mortgage insurance also helps Canadian homebuyers in another way. Genworth Financial Canada is particularly proud when it can help homeowners stay in their homes when they experience periods of economic distress and default on their mortgage due to temporary job loss or illness.
Beyond individual consumers, mandatory mortgage insurance also benefits the entire mortgage industry.
The current system enables vigorous competition between national and regional lenders — credit unions, for example — and encourages product innovation to help growing segments of the population purchase a home. These segments include new Canadians, self-employed people and young renters, just to name a few.
Mandatory mortgage insurance helps maintain the availability of mortgage credit at affordable interest rates during good and bad economic cycles because lenders transfer the default risk to well capitalized, specialized insurers.
The mandatory requirement has also helped Canada avoid some of the problems currently being experienced in the U.S. mortgage market. Because of our independence and objectivity, mortgage insurers have the ability to calibrate underwriting standards and provide lenders with a second set of eyes. As a result, mortgage insurers have been able to prudently expand the Canadian mortgage market while maintaining the stability of the Canadian financial system.
In closing, again, we support the change in Bill C-37 to raise the loan-to-value threshold from 75 per cent to 80 per cent, above which mortgage insurance is required. I would be happy to answer any questions.
The Chairman: I have a question about your terms of reference, your mandate. Does your insurance cover what is considered subprime loans?
Mr. Macdonell: It covers mortgages that could include subprime loans. The definition of subprime is probably a mortgage with someone who has poor credit. We do insure some loans down the credit curve. However, subprime in the context of some of the practices that are happening in the U.S. with their market, is a certain level to which we do not go. That is something that is outside of the mortgage insurance sphere.
The Chairman: What is that?
Mr. Macdonell: It really depends on each loan, because a loan is a story for a person. You have to understand each loan characteristic. It is hard to have a black and white characteristic that says that below this credit score it is considered subprime. Typically, that credit score is about 600. There are the income factors. What was the driver of it? It could be a divorce that caused the person's credit score to drop, which means they may actually be a good borrower, but their credit score does not reflect that.
The Chairman: What is the 600 score for the viewing audience?
Mr. Macdonell: There are two major credit bureaus in Canada, Equifax Canada and TransUnion Canada, and a third model called the Beacon score. They take the information and run it through a model for the particular individual; the higher the number, the better the credit rating. When we look at a mortgage credit score, people with a credit score in the 650 to 750 range are considered to have good credit. Below that, their credit is worse; above that they are considered to have very good credit.
The Chairman: Do these consumers have access to their credit, if loan insurance is rejected? Are they entitled to have access to their credit file that you are using to deny that loan?
Mr. Macdonell: They have access, under the credit bureau legislation, because that is the source of their information. Every consumer has the right to go to a credit bureau and ask for the information that credit bureau has on them.
The Chairman: I did not ask that. I asked about the information that you utilize to turn down that loan. It might be a credit check; it might be your own internal logarithm or test. Do they have access to that? Is it a yes or no?
Mr. Macdonell: The application is from the lender, so the information the borrower gives the lender is the information that is sent to us. The borrower has full access to the information they share with the lender. That is then passed on to us. We also go to outside sources, such as credit bureaus. I was trying to say that with that outside source that was not provided by the borrower, they still have access to the credit bureau information by going to that credit bureau themselves directly to get it. Otherwise the source of the information is coming from the application the borrower filled out and the lender.
Senator Angus: If the lender decides to accept the loan notwithstanding the score and, upon receipt of the application for insurance, you find an even lower score from another outside source, do you refuse that insurance or is it that once the lender approves, the loan is automatic?
Mr. Macdonell: No, it is not. When we say we are the second set of eyes, we are truly the second set of eyes to make a decision. We pull credit from both bureaus: Equifax Canada and TransUnion Canada. You may find there is a piece of information at one credit bureau that is not at the other. We will inform the lender about this new information, which they should investigate. They deal with it between themselves and the consumer, so the consumer knows there is this other piece that was not necessarily known to the lender in the first part but are aware of it after.
Senator Angus: We went into this, in detail, several years ago when we did our consumer study of the implications of Bill C-8 and the consumer protection measures. The credit bureaus were here and told us that there is a constant review and how, after time, they expunge certain information from the records. The consumer, who has had an unfortunate happening, does not have to be saddled for the rest of his or her life with bad credit. However, I am finding from personal anecdotal experience that it is still almost impossible for these poor people to get out from under this burden.
I cannot tell you how many people, just in my own comings and goings, who get into this debt situation. They have a good paying job and a piece of property with equity in it and yet a horrendous-looking credit record; they cannot get any type of mortgage. Rather than being protected and being helped to get out from underneath, all these factors are playing to make it an even worse situation for these people. If they finally do get a mortgage, instead of at 5 per cent interest rate or whatever the market is, it is higher or even double that rate. Do you have any comment on that?
Mr. Macdonell: That is an interesting comment. Over the past year, the mandatory requirement has enabled mortgage insurers to spread the spectrum of what we consider to be insured eligible borrowers. People who were on the margin beforehand with their credit were referred to often as story loans. This is exactly the story they have told us. We explain why the person's credit is where it is; there are justifiable factors, so we can go ahead and underwrite that.
We have expanded ourselves into that marketplace based on the requirement for it. However, it is a different process. It is not your regular family with clean credit who goes through the process. It is a prudent expansion, slowly at the edges, to make sure that the stability of the system works while, at the same time, ensuring that the maximum number of people have access to mortgage financing.
Senator Angus: People from Genworth Financial Canada have been here at least twice in the last two years. At one stage of the game, your firm was the only one in the mortgage insurance business, other than the CMHC. I understand that may no longer be the case. Can you tell us about that?
Mr. Macdonell: That is correct. In the budget last year, legislation was passed that allowed the Minister of Finance to give a government guarantee to new competitors, which is a key factor for entering into the Canadian mortgage insurance marketplace. Since that time, one company has been licensed and is up and running. Two other companies, that I am aware of, are in the licensing process, and there may be a fourth or fifth company looking to come into the Canadian marketplace. The dynamics have changed from just the CMHC and ourselves being in the market to now three players, soon to be five, and potentially more.
Senator Angus: There was some issue with your company, and members of this committee endeavoured to obtain assurances from the Department of Finance because you were not too happy with the implementation measures of the budget. All the members of the committee were approached. Are you people unhappy with the developments? Are you comfortable? Is the situation progressing well?
Mr. Macdonell: I believe the situation is progressing well. The issue we had with the development of competition was that we wanted to make sure that the benefits of competition flowed through to the consumers.
Senator Angus: Exactly.
Mr. Macdonell: We have been working with the Department of Finance since coming before this committee. We have had some productive discussions with them, and the matter seems to be progressing well.
Senator Angus: I wanted to be sure. We had our undertakings from those officials as well. We want to make sure you do not have any major complaints at this stage.
Mr. Macdonell: There has been a productive, two-way dialogue going on with the department.
Senator Angus: I understood that as far as Bill C-37 and the 80 per cent mortgage increase are concerned, you are comfortable with that, and you are happy with the bill as it is. You do not have any particular amendments you want to propose.
Mr. Macdonell: We are fine with the bill as it is, and we are really here to support the bill. For the mortgage insurance industry, that 75 per cent to 80 per cent increase is a significant piece and something we wanted to make sure we presented.
Senator Goldstein: I would like to talk to you about the premiums that you charge and that are ultimately payable by the consumer, that is, the mortgage debtor. Is there a sliding scale depending on creditworthiness, or do they relate solely to the quantum insured?
Mr. Macdonell: We consider it to be an equitable system. The premium is only based on the loan-to-value level that a customer is in, so 75 per cent to 80 per cent, 80 per cent to 85 per cent or 85 per cent to 90 per cent. It does not yet take into account the credit risk or geographic location. There is another issue that, without this pooling of the mandatory requirement, people in rural Canada would likely be charged more than people in urban Canada because their properties are inherently riskier. Their market does not sell as quickly. Right now, it is only based on the loan-to- value level for the particular product.
Senator Goldstein: That brings about my second question. You said the words ``not yet'' and ``at this time.'' Do I take it that your corporation is considering a varying premium depending on creditworthiness?
Mr. Macdonell: When I say, ``at this time,'' with the mandatory mortgage insurance requirement, we are not looking at changing the way the premiums are charged. The research that went into the submissions for the 75 per cent to 80 per cent increase, which was conducted by the Department of Finance, looked at how the market would react if we did not have this mandatory requirement. The general opinion of the experts was that we would go to a risk-based model. Without having the mandatory requirement, where we pool everything together by these loan-to-value buckets, we would have to start pricing by credit risk and geographic risk.
The research showed that about 36 per cent of the people, who currently qualify for a prime mortgage under mortgage insurance, would likely pay more money because they are at the lower 36 per cent and, as a result, on a pure risk-based model, would have to pay more. We believe the mandatory requirement has made an equalization effect, so that people in that group all end up paying the same amount.
Senator Goldstein: Good. Is the premium that you charge an annual premium on a continuous basis or is it a one- shot premium on the way in?
Mr. Macdonell: It is a one-shot premium in the beginning, done as a percentage of the mortgage amount. It is usually paid for upfront, and often it is actually added to the mortgage balance and amortized over the time period.
Senator Goldstein: Does the quantum of the premium have anything to do with the term of the loan?
Mr. Macdonell: There is a premium surcharge now for mortgages beyond 25 years. Extended amortization periods now go up to 40 years.
The Chairman: Is it 40 years or 35 years?
Mr. Macdonell: I believe it is up to 40, but I can confirm that and get back to you. Because of the additional risk that people will not pay it off as quickly, there is an additional amount charged.
Senator Goldstein: You have given us some encouragement about not seeing, in Canada, a repeat of the subprime- loan nightmare that parts of the United States are going through. We are encouraged by that. There are, nevertheless, subprime borrowers within the system.
Some people, who were here at that point, will remember when this committee did a report on bankruptcy and insolvency in Canada. One of the matters that concerned this committee back in 2003 was the fact that the credit-rating agencies upon which you rely — at that point, just Equifax Canada and TransUnion Canada — were penalizing consumers who made consumer proposals in a way that was more disadvantageous to them than any penalties for consumers who went outright into bankruptcy. For these consumers, the disability lasted years longer than the disability of people who had gone into bankruptcy and made a fresh start. Are you aware as to whether that practice has been changed by the credit-rating agencies? Are you able to factor out the consumers who got into financial difficulty and very honourably determined that they would try to do the best they could by making a consumer proposal, so that their creditors would get some money back? Are these people encouraged, discouraged or ignored by your system?
Mr. Macdonell: I cannot speak for the credit bureaus. I do not know what their system does.
In terms of our system, when we get an application that does not have the cleanest credit, it gets kicked out to an underwriter. The underwriter looks at the deal and the credit report and then tries to understand the story behind what went on with that particular credit. It is not an automatic yes or no, they fit into this box. It is very much trying to understand the story behind each person. Someone who has made an effort to make sure they have paid their debts and put proposals together will be looked at more favourably because they have taken responsibility versus someone who has walked away and may not have taken the same responsibility in regard to their debts. That is an important factor and an important part of the underwriter's judgment. They cannot say it is a black and white decision. They have to look at each case individually.
Senator Goldstein: What proportion of your loans would be made to people who are at the 600 credit score or a bit below the 600 level?
Mr. Macdonell: A very small part of our loans would be those people. The significant point is 600 or 660. However, we also have what is called zero scores, which are people who have just not been in Canada long enough to develop a credit rating. They are outside of the rating system. We are developing products to try to slowly expand into that area, prudently, so that we can get those people into financing.
Senator Ringuette: Has your company looked into the risk factor in moving from the 75 per cent to the 80 per cent loan-to-value increase? What is that risk?
Mr. Macdonell: I am not sure what you mean by ``risk factor.'' However, from a Canadian standpoint, the portion of the mortgage market represented by the 75 per cent to 80 per cent loan-to-value is quite small. Therefore, it is not affecting a large part of the mortgage market.
One of our submissions in the review of this was that before any major changes were made to the mandatory requirement, a great deal of study would be required to ensure that the effects of making this change and the flow effects that would happen were well understood. The 75 per cent to 80 per cent increase is fairly minor, so it would not have a significant effect across the marketplace and would bring Canada in line with other international countries, thereby simply catching up.
Senator Ringuette: You said ``significantly minor.'' I would like to have an exact figure.
Mr. Macdonell: I believe that it represents less than 5 per cent of our business that we insure. That is not the mortgage part, but only the part that we insure.
Senator Ringuette: It is less than 5 per cent of your segment of the market.
Mr. Macdonell: From our portfolio, it is less than 5 per cent.
Senator Ringuette: Will that initiate increased premiums?
Mr. Macdonell: Again, it will depend on how the lenders react in that segment. In the 75 per cent to 80 per cent bracket, there is no requirement for mortgage insurance, so the lenders, who will have the default risk, will have to determine how they will price that default risk in the marketplace. Will they charge an increased interest rate or a fee? It depends very much on how the lenders take that change — because they no longer require mortgage insurance — and implement it.
Senator Ringuette: The lender will be able to lend 5 per cent more on the value of the property.
Mr. Macdonell: They can lend that now.
Senator Ringuette: Is this not an incentive for them to do so?
Mr. Macdonell: I do not know. It depends on how the lender factors in the risk. Currently, the premium is 1 per cent for a mortgage in that segment, which is not a large fee. It comes down to how the lenders, without having mortgage insurance to transfer the default risk to the mortgage insurance company, determine to handle the default risk that they would have. Will the lender charge the same premium as before or charge extra? I do not know. It is a question for the lenders.
Senator Ringuette: You have indicated that there has been a premium reduction twice since 2003. Are you talking about your company only or about your company and CMHC, which were the only players in the market?
Mr. Macdonell: I am talking about both parties.
Senator Ringuette: Are you saying that if CMHC is at 2 per cent, your rates will be at 1 per cent and vice versa? Is there a kind of collusion?
Mr. Macdonell: There is no collusion. It is a strange part of the marketplace because the lender is the beneficiary of the insurance policy and the one who technically pays the premium, but the cost of it is passed on to the borrower. The borrower is not looking at the benefits of the insurance policy but at a pure expense. As a result, the premiums generally have to be in the same line or the borrower will always choose the lower one. The lender, as the beneficiary of the policy, is looking at the policy features and everything else. It is an important oversight role for the government to ensure that the premiums are accurate and that they properly reflect the risk.
Senator Ringuette: You are saying that because we have a government agency that provides the same service to the private sector, consumers have the competitive advantage.
Mr. Macdonell: It is also that competition between the mortgage insurers helps to force mortgage insurance rates down. The information developed by CMHC and us, over the last ten years, has greatly increased our ability to predict risk, which has driven the ability to reduce the premium. We can see where the risk has gone and, therefore, are able to figure out the right premium for it. Technology has made a big difference in the way that mortgages are processed. They are no longer factored manually, so costs have been removed from the system. These savings have been passed on to the consumer as well. We are dealing with a long-term risk in mortgage insurance. Over 25 to 40 years, with premium from day one, the losses on a mortgage policy do not happen until we are well down in the years of the mortgage.
Senator Ringuette: One end of the equation is the mandatory mortgage instrument provision. At the other end, before you increase your premiums, does a government agency need to approve that increase in premiums?
Mr. Macdonell: No government agency needs to approve our increase or decrease in premiums. OSFI looks at our capital levels to ensure that we have sufficient capital to pay claims at the end of the day. There is not a direct mechanism for it, but they do examine the solvency of the industry to ensure that all claims will be paid. Premiums constitute a key factor in the ability to pay claims and capital is the other part. If there is a change in the premium, it is necessary to know how it will affect the amount of capital needed to retain to ensure that claims can be paid.
Senator Ringuette: That adds to my previous arguments. Thankfully, we have CMHC to act as an unofficial regulator to ensure that consumers have the best rates on their mortgages.
Mr. Macdonell: The biggest factor is competition. We have been talking with officials from the Department of Finance to make sure that the benefits from competition ultimately flow through to the consumer, whether it be private sector competition or competition between the private sector and CMHC. It is an important piece to ensure that flow.
The Chairman: Mr. Macdonell, you can be assured that this committee will have ongoing oversight and interest in precisely this question. We are one of the committees, or one of the groups, that have been stimulating this competition. We hope that the model works exactly in the way that you suggest.
Senator Ringuette: What happens with a second mortgage?
Mr. Macdonell: I will reference the Bank Act in my response. If there is a first mortgage of 70 per cent and a second mortgage of 5 per cent, that equals 75 per cent and, therefore, mortgage insurance is not needed. If there is a second mortgage that takes the total above the threshold of 75 per cent to 80 per cent, then the total amount of the mortgages needs to be insured. The Bank Act is worded such that the total amount of the mortgage outstanding is used for the calculation of the percentage. However, I have to be careful and clarify. It is not the entire amount of the mortgage that requires insurance but the amount over 75 per cent that has to be insured. They use the calculation of the first, second, third or fourth mortgages to add up to the actual loan-to-value of that final mortgage. Even though the second mortgage might be for a very small dollar amount, it could be the one that takes it up to a very high loan-to-value on the property.
Senator Di Nino: I believe that you said the percentage of the loan-to-value threshold from 75 per cent to 80 per cent will have no impact on premiums. Is that correct?
Mr. Macdonell: It is not a premium question. Rather, it is a question of where it is mandatory for the banks to get insurance for it. The provision states the 75 per cent to 80 per cent bracket and, even though the insurance would not be mandatory if the bill were to pass, the premium would still be the same if that mortgage were insured. It is simply that it would not be mandatory, and this is dealing with the mandatory nature of it.
Senator Di Nino: My other question deals with the matter raised by Senator Ringuette. You have advised us twice, over the last several years, of a reduction in premiums. Would you be in agreement with the statement that the fact that you folks came into the market and brought competition may very well be the reason why premiums have been reduced?
Mr. Macdonell: I believe competition is good for the market. That is part of the reason why the private sector is competing with CMHC, to make sure the market is competitive and consumers are benefiting from that. It is very self- serving, but we would say that since we came into the market in 1995, Canadians have benefited from competition.
Senator Di Nino: Genworth Financial Canada is not opposed to additional competition in the field, I take it.
Mr. Macdonell: No, we are not; we look forward to competition. Again, it is making sure that consumers benefit.
Senator Di Nino: In your presentation, you raise the spectre of lenders not passing on the savings. Would you like to make a comment on that? Is there some history you would like to tell us about? Why would you make that statement?
Mr. Macdonell: The research that was done on the mandatory requirements asked the question: If you did not have mandatory mortgage insurance and a large pool of mortgages in which to spread risk over, how would you price the risk associated with that? It came down to the fact that there is additional risk that must be addressed in the equation somehow. If it is not done through paying a mortgage insurance premium, which transfers the risk to the mortgage insurer, something else will need to come into it.
Most people say it will somehow be priced on credit or the property or something else. We know that without mandatory mortgage insurance, lenders will keep the risk; what we do not know is what lenders will do with that risk.
Senator Di Nino: Your concern is that they may increase rates to offset the risk; is that it?
Mr. Macdonell: We will see how time plays out. Determining how they deal with it or what goes on with it will be based on how much risk they see in that segment.
Senator Moore: In 2003, when CMHC and Genworth Financial Canada were the only two companies in the business — and even up to the time when the third company was licensed — what percentage of the business was done by each?
Mr. Macdonell: Obviously, in 1995, our market share was zero and 100 per cent was done by CMHC. We have grown since then. There are no clear public statistics on it, but I would estimate it is about a 60-40 share in the market right now, with CMHC having 60 per cent of the market.
Senator Moore: For the record, could you confirm that in the United States there is not a mandatory mortgage insurance requirement?
Mr. Macdonell: There is not a statutory mandatory requirement — and this is where the U.S. gets a bit more difficult. Two federal funding agencies, Freddie Mac and Fannie Mae, which are empowered through statute, have an 80 per cent loan-to-value mandatory requirement in order for mortgages to be secured through their vehicles. It is not as direct as having a requirement in the Bank Act, but they are the main vehicle through which mortgages are securitized in the U.S. Your point, I believe, is if the mortgages do not go through that vehicle, there is no mandatory requirement to insure those mortgages, which has driven some of the behaviour in the U.S. marketplace.
Senator Moore: Some of the press stories about the number of defaults and foreclosures in the U.S. recently are quite alarming. Was that a result of not having a statutory requirement for the mandatory insurance? There must be other lenders besides Freddie Mac and Fannie Mae.
Mr. Macdonell: The funding sources are the balance sheet of the institution lending the money. Mortgages can be sold to Freddie Mac or Fannie Mae or a securitization vehicle can be set up, which is how many of the mortgages you are talking about are done. Through various credit-rating agencies' tranches, they have sliced the risk associated with a mortgage from a triple-A risk down to one that cannot be rated, and used that as a funding vehicle. It is not one area that has created this situation but a combination of factors.
Senator Moore: On average, is the premium usually 1 per cent of the principal amount of the mortgage?
Mr. Macdonell: It is 1 per cent in the 75 per cent to 80 per cent bracket; it will go up to over 2 per cent when we start to go up into the 90 per cent to 95 per cent bracket. As you would assume, the higher the loan-to-value or the smaller the down payment, the higher the risk associated with the default and the loss that is associated with such a default.
Senator Moore: You mentioned that some people are now extending the payments to 35 years and 40 years amortization, and that would trigger an additional premium. When does that happen? I presume that is when the homeowner comes in and says, ``I want to do this.'' How do you calculate the percentage of the additional premium? Is it factored on what is left outstanding on the loan? Do you then go through the whole reapplication — maybe the property has gone up or down in value?
Mr. Macdonell: We would bucket mortgages into two categories. One is the original purchase of a house, and the first mortgage on it; the second would be a refinance of the mortgage along the lines you are talking about. It would be done at the beginning of either event.
When the first mortgage is taken out, and the person says he or she would like it amortized over 35 years, it would be calculated on a 35-year time period and paid at that point. If someone came in later to refinance, it would be based on the refinance at that point. It becomes a question of what is the lesser amount. Is it from the additional amount you are pulling out in the refinance transaction or is it cheaper to reinsure the whole mortgage?
Senator Moore: The insurance that you provide is to the company or bank that lends the money to the homeowner, is that correct?
Mr. Macdonell: Yes, the beneficiary is the lender.
Senator Moore: On page 3 of your presentation, you say:
Genworth is particularly proud when it can help homeowners stay in their homes when they experience periods of economic distress and default on their mortgage due to temporary job loss or illness.
What do you do? Do you permit a homeowner a couple of months' grace period? What does your help involve or include?
Mr. Macdonell: It is really how creative we want to be. I will give you examples to describe that.
We had one case where a construction worker broke his leg playing pickup hockey. He had no disability or anything else to cover him. He would not have income for the next three months, but he was a family person, and it was clear he was going back to work. We arranged a financing arrangement that he would not be in default for that three-month time period. Theoretically, it could have put him into default and led to foreclosure on his mortgage. It is a benefit for us.
Senator Moore: What would happen? He has missed three months; do you add those three months on to the principal? How is that handled? Do you give him an opportunity to make those payments up in portions as he can afford to do it?
Mr. Macdonell: We have a variety of methods. We can add it to the principal of the mortgage or issue them a promissory note, where we pay it ourselves. In some cases, we make it forgivable; if the person shows good behaviour — after one or two years, they have gotten themselves back on their feet — we will forgive part of that mortgage for them. For us, it makes perfect sense to help people out in those situations. There is no reason they should be disadvantaged by the situation at hand.
We have many financing options and solutions. It would be based on a case-by-case analysis. We had a case where a woman was diagnosed with cancer. She and her husband were living in the house, and her life expectancy was not that long. We helped restructure the mortgage, so that when she passed away, her husband would be able to keep making the payments, which they could not have done in the original arrangement.
It is very much a matter of what each particular situation might be, and how can we help people stay in their homes?
Senator Moore: In those situations, such as the construction worker and this couple, how do they reach you? Do they go back to the bank or mortgage company and explain their predicament and the bank tells them to talk to you?
Mr. Macdonell: There are many ways.
Senator Moore: They may not know about you.
Mr. Macdonell: We try to promote it as much as we can. We also try to promote it with lenders so they raise it with their clients when these situations arise. In our loss mitigation group, we look for opportunities to help people out. We look at the facts behind the claims to see if we can help keep people in their homes.
Senator Moore: You do some creative helping, then. Thank you.
Senator Ringuette: From your comments, your company has a 40 per cent share of the housing mortgage insurance in Canada, and CMHC 60 has the other 60 per cent. That is remarkable growth. You have been in operation in Canada for a short period of time.
Senator Moore: There was an existing company, and they took it over.
Senator Ringuette: Yes, I understand that.
You also confirmed that the loan-to-value increase from 75 per cent to 80 per cent is only 5 per cent of your market share. That begs the question of how your risk segment compares to that of CMHC.
Mr. Macdonell: I do not know CMHC's data to make the comparison.
Senator Ringuette: If you, in your line of business, are targeting the higher income bracket of homeowners, leaving the lower income bracket to CMHC, then your risk is much smaller than the 5 per cent that you stated earlier.
Mr. Macdonell: We are not targeting what you consider to be the higher income loan bracket. We serve all Canadians from every region of the country. We do not look at people in certain segments — referred to by some as cherry-picked mortgages. We try to serve all Canadians across the country.
Without knowing how CMHC's portfolio looks, I would assume ours looks much the same because we try to serve all Canadians. We look at the broad spectrum of borrower types. When I talked about our portfolio, 36 per cent are people with low or poor credit. Those are the people who are at risk. If we were cherry-picking, we would not go to those people; we would only go to the people with medium or higher credit.
Senator Ringuette: Therefore, you are not cherry-picking.
Mr. Macdonell: No.
The Chairman: What is your average premium?
Mr. Macdonell: I will have to get back to you on that.
The Chairman: You do not have time to get back to us.
Mr. Macdonell: The last estimate I heard was around 2 per cent. It might be a bit higher than that.
The Chairman: I am trying to give the committee and our viewing audience a sense of what we are talking about here and how important the premiums and the competitive pressure on the premiums is, as you suggested. It is around 2 per cent roughly.
Mr. Macdonell: On an average base across the board, yes.
The Chairman: That is a once only cost amortized over the length of the mortgage. Is that how it works?
Mr. Macdonell: Yes.
The Chairman: There is a proposal in the act to allow CMHC to work with liquidators of private mortgage insurance and to permit CMHC to provide services and manage mortgage portfolios. We have no problem with that. It will permit CMHC to accept and reinsure policies. Does that affect you?
What is the purpose of that? Have they become the insurers of last resort?
Mr. Macdonell: I am not sure where that goes. It may be a factor of a government guarantee arrangement. They may be looking at CMHC as being a liquidation vehicle in case the guarantee was ever called upon.
The Chairman: In effect, it provides underlying security for the system as a whole.
Mr. Macdonell: It provides a vehicle to help administer mortgages as you would have a trustee in bankruptcy administering a company. This would be somebody with expertise to provide that management on the back end.
The Chairman: It is a different aspect. One aspect is to allow them to work with liquidators and then permit it to accept and reinsure policies. Are you saying that is an insolvency provision or if they are threatened with insolvency? I assume not.
Mr. Macdonell: I do not know the details of why the government projected that, so I am speculating here.
The Chairman: Mr. Macdonell, I want to thank you. You are the final witness of this review. We obviously continue to be concerned with the consumer interest as it applies to financial services and the valuable services that you and your associates provide. We are very pleased about and will be watching with great care how the new competitive model is working. We hope that it will work as you suggest you would like it to work in the interest of all consumers. Again, I want to thank you for coming forward, being very helpful and candid with your evidence and informing the committee on very complicated matters that affect the consumer and public interest.
Mr. Macdonell: Thank you very much.
The Chairman: We will not take an adjournment at this point. I want to proceed as best we can with a clause-by- clause study of the bill. Is everyone ready?
Hon. Senators: Agreed.
The Chairman: Is it agreed, honourable senators, to proceed with clause-by-clause consideration of Bill C-37?
Hon. Senators: Agreed.
The Chairman: With leave of the committee, I would like to group the clauses of the bill.
Hon. Senators: Agreed.
The Chairman: Shall the title stand postponed?
Hon. Senators: Agreed.
The Chairman: Carried. Shall clauses 1 to 134 in Part I, Amendments to the Bank Act, carry?
Hon. Senators: Agreed.
The Chairman: Carried. Shall clauses 135 to 185 in Part II, Amendments to the Cooperative Credit Associations Act, carry?
Hon. Senators: Agreed.
The Chairman: Carried. Shall clauses 186 to 336 in Part III, Amendments to the Insurance Companies Act, carry?
Hon. Senators: Agreed.
The Chairman: Do I hear any negatives? Please mark that unanimous.
Shall clauses 337 to 385 in Part IV, Amendments to the Trust and Loan Companies Act, carry?
Hon. Senators: Agreed.
The Chairman: Carried. Shall clauses 386 to 449 in Part V, Amendments to the Other Acts, carry?
Hon. Senators: Agreed.
The Chairman: Carried. Shall clauses 450 to 452 in Part VI, Coordinating Amendments and Coming into Force, carry?
Hon. Senators: Agreed.
The Chairman: Are there any negatives? Carried.
Shall the title carry?
Hon. Senators: Agreed.
The Chairman: Do I hear any negatives to that? Carried. Shall Bill C-37 carry?
Hon. Senators: Agreed.
The Chairman: Do I hear any negatives to that? Carried.
Shall I report Bill C-37 with or without amendments to the Senate? Without?
Hon. Senators: Without. Agreed.
The Chairman: Do I hear any negatives to that? Carried.
Thank you very much. I mark that unanimous.
The committee adjourned.