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1.4.4 Insurance Companies

A comprehensive guide covering the structure and components of insurance companies in Canada, emphasizing life insurance, property and casualty insurance, key legislations, and the unique roles of underwriting and reinsurance.

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.


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## What are the two main lines of business in the insurance industry? - [ ] Life and disability insurance - [x] Life insurance and property and casualty insurance - [ ] Health and auto insurance - [ ] Term and whole life insurance > **Explanation:** The insurance industry primarily operates through two main lines of business: life insurance and property and casualty insurance. ## Which of the following products are included in life insurance? - [ ] Home and auto insurance - [ ] Commercial business insurance - [x] Health and disability insurance, term and whole life insurance, pension plans, registered retirement savings plans, and annuities - [ ] Flood and earthquake insurance > **Explanation:** Life insurance includes health and disability insurance, term and whole life insurance, pension plans, registered retirement savings plans, and annuities. ## What type of insurance generates the largest aggregate premiums in the Property and Casualty line of business? - [ ] Property insurance - [ ] Liability insurance - [x] Automobile insurance - [ ] Commercial business insurance > **Explanation:** According to the Insurance Bureau of Canada, the largest aggregate premiums in the Property and Casualty line of business are generated by automobile insurance. ## What is the most important aspect of the insurance business in Canada? - [ ] Marketing and sales - [ ] Policyholder management - [x] Underwriting - [ ] Customer service > **Explanation:** Underwriting, which involves evaluating risk and contractual responsibility, is the most important aspect of the insurance business in Canada. ## What does reinsurance refer to? - [ ] Selling multiple insurance policies to the same client - [x] Exchanging risk between insurance companies - [ ] Offering discounts on insurance premiums - [ ] Expanding insurance coverage for clients > **Explanation:** Reinsurance refers to the practice of exchanging risk between insurance companies to facilitate better risk management. ## Which act governs insurance companies in Canada? - [ ] The Bank Act - [x] The Insurance Companies Act - [ ] The Securities Act - [ ] The Financial Services Act > **Explanation:** The key federal legislation governing insurance companies in Canada is the Insurance Companies Act. ## Which companies are allowed to offer annuities and segregated funds according to the Insurance Companies Act? - [ ] Property and casualty insurance companies - [ ] Commercial business insurance companies - [ ] Health insurance companies - [x] Life insurance companies > **Explanation:** According to the Insurance Companies Act, only life insurance companies are allowed to offer annuities and segregated funds. ## Are Canadian Schedule I banks permitted to sell insurance through their branch networks? - [ ] Yes, they can sell all types of insurance. - [ ] No, they are not allowed to sell any type of insurance. - [x] Yes, but only insurance related to loans and mortgages. - [ ] Yes, insurance is their main line of business. > **Explanation:** The Bank Act forbids Canadian Schedule I banks from selling insurance through their branch networks, with the exception of insurance related to loans and mortgages. ## Why must life insurance companies exercise extreme caution in selecting their investments? - [ ] To maximize their short-term profits - [x] To ensure they can meet future contractual obligations - [ ] To reduce customer premiums - [ ] To comply with marketing standards > **Explanation:** Life insurance companies must exercise extreme caution in selecting their investments to be sure they can meet future contractual obligations to their policyholders. ## Can life insurance companies also offer in-house trust services and deposit-taking activities? - [ ] Yes, they can offer all financial services. - [ ] Yes, but only in specific provinces. - [x] No, the Insurance Companies Act contains restrictions on these activities. - [ ] No, these services are exclusive to investment banks. > **Explanation:** The Insurance Companies Act contains restrictions on activities such as in-house trust services and deposit-taking for insurance companies, including life insurance companies.

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Tuesday, July 23, 2024