Insurers Allowed to Invest in Public Infrastructure

Summary#

The Investments in Permitted Infrastructure Entities Regulations are final rules, published in the Canada Gazette on October 11, 2023, that let federally regulated life and health insurers take controlling or large equity stakes in certain infrastructure companies. In practice, the rules define which physical assets and activities count as “infrastructure,” set conditions (including public-sector involvement), and cap how much insurers can be exposed to these investments.

What it does#

• Defines a new kind of company called a “permitted infrastructure entity” (PIE) and lists the physical assets that qualify as infrastructure (the Regs include a long schedule of assets such as airports, roads, water systems, data centres, power plants, hospitals, schools, and courts).
• Allows federally regulated life insurers, fraternal benefit societies and insurance holding companies to acquire control of, or a substantial investment in, a PIE and to hold those investments indefinitely (this is a change from previous temporary exceptions).
• Limits what PIEs may do. Prescribed PIE activities include:
  • operating an infrastructure asset;
  • acquiring or holding ownership in other PIEs;
  • holding or managing real property tied to an infrastructure asset; and
  • designing or acting as general contractor for construction or maintenance of an infrastructure asset.
• Requires that a PIE or each infrastructure asset it works on “involve” a public body. The Regulations define “public body” broadly to include federal, provincial, municipal or foreign governments, Indigenous governments, regulators, certain Crown agencies, and some not-for-profits — and exclude sovereign wealth funds and public pension plans unless they have an explicit public infrastructure mandate.
• Sets tests for what “involve” means for an infrastructure asset, including examples where a public body:
  • owns at least 10% of the asset;
  • is the purchaser of all or substantially all of the asset’s product or service;
  • is the lessor or guarantor of all or substantially all of the asset’s revenues;
  • sets or approves user prices; or
  • controls access or use rights.
• Requires that infrastructure assets operated by a PIE be wholly owned by PIEs or by unaffiliated entities, to avoid routing asset ownership through non-PIE affiliates.
• Requires that at least one purpose of the insurer’s acquisition be to match its consolidated assets with its long-term liabilities (asset–liability matching).
• Caps aggregate insurer exposure to PIEs at 20% of the insurer’s regulatory capital. If an insurer is already above that cap, it may keep existing investments but cannot increase them.
• Sets timing rules for coming into force: the Regulations take effect when the related amendments in the Budget Implementation Act, 2018, No. 1 come into force (or on registration if later). Certain amendment clauses come into force only when specified subsections of that Act are in force.

Who's affected#

• Federally regulated life and health insurance entities — described in the Regulations as life company, society, and insurance holding company — are the main group affected. They are the ones now allowed to invest in PIEs under the new rules.
• The Office of the Superintendent of Financial Institutions (OSFI) will continue to supervise these insurers and enforce the conditions.
• Public bodies (federal, provincial, municipal, Indigenous governments and some public agencies) and owners/operators of infrastructure projects could see more private capital interest from federally regulated insurers.
• Communities and users of public infrastructure may notice effects if more projects attract private investment under these rules.
• Insurers incorporated under provincial law are not governed by these federal Regulations; the Regs apply to insurers subject to the Insurance Companies Act.

Why it matters#

• The change gives large insurers a regulated way to invest long-term in public infrastructure. That can help insurers match long-term liabilities (like pensions and annuities) with long-lived assets that produce steady cash flows.
• It could channel more private, institutional capital into public infrastructure projects, potentially supporting projects that governments want built or maintained.
• The Regs include safeguards — a public involvement test, an ownership test, an ALM (asset–liability matching) purpose test, and a 20% cap on exposure — intended to limit risks to insurers and their policyholders.
• For the public, this means infrastructure projects may find an additional source of funding, but the prospect of more private-sector roles in public services may raise questions about control, user costs, and long-term public interest — issues the Regulations try to address by requiring public-sector involvement.