1.4.4 Insurance Companies

Insurance Companies

The insurance industry in Canada has two primary lines of business:

1. Life Insurance
2. Property and Casualty Insurance

Life Insurance

Life insurance includes a variety of related products aimed at providing financial protection and savings options. These products include:

• Health and Disability Insurance: Coverage for medical expenses and disability income.
• Term and Whole Life Insurance: Life insurance with fixed terms or lifelong coverage.
• Pension Plans: Retirement savings plans offering periodic payments.
• Registered Retirement Savings Plans (RRSP): Tax-deferred retirement savings plans recognized by the Canadian government.
• Annuities: Financial products that provide a stream of payments, typically used for retirement income.

Since life insurance companies act as trustees for the funds entrusted to them by policyholders, they must exercise extreme caution in selecting their investments to ensure they can meet future contractual obligations.

Property and Casualty Insurance

Property and casualty insurance protects against loss of diverse items, including:

• Home
• Automobile
• Commercial Business

According to the Insurance Bureau of Canada, the largest aggregate premiums in the property and casualty line of business come from automobile insurance, followed by property insurance and liability insurance.

Key Aspects of the Insurance Business

Underwriting

Underwriting is the process of evaluating risk and the associated contractual responsibility that the insurance company will accept in exchange for its clients’ insurance premiums. It is a critical function that determines the company’s ability to profit from its policies.

Reinsurance

Reinsurance involves the practice of insurance companies exchanging risk among themselves to manage and mitigate potential large-scale losses. It helps insurance companies maintain their solvency and financial stability.

Federal Legislation

The key federal legislation governing insurance companies is the Insurance Companies Act. This legislation:

• Grants companies expanded abilities to make consumer and corporate loans.
• Contains restrictions on activities like in-house trust services and deposit-taking.
• Allows only life insurance companies to offer annuities and segregated funds.

Schedule I Banks and Insurance

Some Canadian Schedule I banks fully own insurance companies. Although these large domestic banks have established their insurance subsidiaries, the Bank Act restricts them from selling insurance through their branch networks, except for insurance related to loans and mortgages.

Key Takeaways

• The insurance industry in Canada is divided into life insurance and property and casualty insurance.
• Life insurance products include health and disability insurance, term and whole life insurance, pension plans, RRSPs, and annuities.
• The main components of property and casualty insurance include home, auto, and commercial business insurance, with automobile insurance generating the largest premiums.
• Underwriting and reinsurance are essential aspects of the insurance business, crucial for risk evaluation and management.
• The Insurance Companies Act governs the operations of insurance companies, while the Bank Act regulates the sale of insurance by banks.

Frequently Asked Questions (FAQs)

What is the primary difference between life insurance and property and casualty insurance?

Life insurance focuses on providing financial protection and savings for policyholders throughout their lives or after their death. Property and casualty insurance provides protection against losses related to property, such as homes and automobiles, and potential liabilities.

Why is underwriting important in the insurance industry?

Underwriting is critical as it involves evaluating the risk and determining the terms and pricing of insurance policies. Effective underwriting ensures that the insurance company remains profitable and can meet its obligations to policyholders.

What legislation governs insurance companies in Canada?

The primary legislation is the Insurance Companies Act, which grants companies the ability to offer certain financial products and imposes restrictions to ensure financial stability and consumer protection.

We hope this guide helps you better understand the role and functions of insurance companies in Canada, key practices like underwriting and reinsurance, and the essential legislations governing the industry.