Demutualization: No way to make everybody happy

4 October 14, 2014 at 9:53 am by

In trying to draft a legislative framework in response to Economical Insurance’s request to demutualize, the federal government finds itself caught between strongly opposing views from the industry. Not unlike sailors trying to navigate a safe course between the mythological monsters Scylla and Charybdis, the government faces censure from either side of this debate if it goes ahead with its plan to present legislation allowing the demutualization of a property and casualty insurance company.

Up until a few years ago, demutualization was something that seemed to be of interest to life insurance companies only. Bill C-59, enacted in 1999, enabled large, federally-regulated mutual life insurance companies to convert from being a company owned by policyholders to a company owned by shareholders. The primary reason for a mutual company to convert to a stock company is the ability to raise large amounts of money quickly by accessing capital markets. For companies wishing to make acquisitions as part of a bigger-is-better growth strategy, having the ability to raise large amounts of capital quickly and easily in the equity markets is a handy option.

Within a few years of Bill C-59’s passage, the country’s four largest mutual life insurance companies demutualized: Canada Life, Manufacturers Life, Sun Life, and Clarica Life (formerly The Mutual Life Insurance Company of Canada). As a side note, this march to demutualize reversed a trend in the 1950s and 1960s in which companies converted to a mutual structure as a means of fending off foreign takeovers. Although a mutual insurance company can make an acquisition, it cannot itself be acquired because its ownership rests with its policyholders.

With the demutualization of these four life insurance companies, things settled down. That is, until 2010 when Economical Insurance announced its decision to become the first federally-regulated mutual property and casualty insurance company to pursue demutualization. This announcement set the cat among the pigeons.

For the past four years, the industry has awaited direction from the federal government on the legislative and regulatory changes surrounding a demutualization framework. The industry continues to wait. I believe the main reason for the federal government’s delay has been that the industry has not spoken with one voice as to how demutualization should unfold. In fact, on the topic of how Economical’s existing surplus should be distributed, the federal government has received widely divergent opinions. In the absence of any consensus from the industry, it appears the government has opted to kick the can down the road.

In 2011, the federal government issued a paper entitled Consultation on a Demutualization Framework for Federal Property & Casualty Insurance Companies. This paper drew a response from over 80 stakeholders, including mutual insurance companies, their policyholders and employees, industry associations, insurance brokers, accountants, actuaries, and the cooperative sector. On the issue of voting rights, although by no means unanimous there appears to be general consensus that for dual-policyholder companies – that is, companies such as Economical in which some policyholders are mutual policyholders having policies with voting rights and other policyholders have policies without voting rights – only the mutual policyholders should be given a right to vote on demutualization.

On the right to receive benefits, to share in the distribution of the company’s accumulated surplus, there is no consensus. Of the four dual-policyholder companies, two recommended that the benefits should be distributed to the mutual insurance policyholders only. The other two companies recommended that the benefits should be distributed to all policyholders. Some stakeholders went even further, recommending that the benefits should be distributed across the mutual insurance sector or to a charity. This is the position of the Canadian Association of Mutual Insurance Companies (CAMIC). As noted on the CAMIC website, if the Minister of Finance decides to draft demutualization regulations, CAMIC is calling upon the Minister to consider requiring the mutual insurance company’s surplus or sales proceeds, whichever are higher, to be distributed to other mutual insurance companies or to registered charities. Although CAMIC’s suggestion runs counter to the approach taken in the United Kingdom and in the United States, it is in line with the approach taken in France. There, the rules regarding the mutual insurance sector, including the stipulation that the surplus of a demutualized insurer must be distributed to other mutual insurance companies or to charities, have led to the emergence of a robust mutual insurance community, including La Mutuelle Du Mans Assurances, the third largest insurance company in France.

There is a lot at stake here. There are more than 95 mutual property and casualty insurance companies in Canada, representing 20 per cent of the general insurance sector. Four of the top ten insurers in Canada are owned by their policyholders. In addressing her Senate colleagues about the proposed demutualization of Economical Insurance, Senator Diane Bellemare asked, ‘Who owns the surplus that the mutual accumulated over more than 140 years? Does this $1.6 billion surplus belong to the 940 existing mutual insurance policyholders, as Economical Insurance claims, or does it belong to the 900,000 existing insured parties, or is the surplus a public good that also belongs to past generations and must be distributed accordingly, as the [Insurance Brokers Association of Canada, the Canadian Association of Mutual Insurance Companies and The Co-operators Group] claim?’

When Canadian life insurance companies demutualized, a number of subscribers made a lot of money when they received shares. As noted by Senator Bellemare, CAMIC has described this as legalised theft from previous generations. According to its website, CAMIC’s view is that by requiring the accumulated surplus to be distributed to other mutuals or to charities, the federal government can eliminate ‘the circle of self-interest’ that would prevail under other models.

As Senator Bellemare told her Senate colleagues, ‘The government has already said that it will not allow Economical Insurance to divide the $1.6 billion surplus among the 940 insured members, as was the case when life insurance companies demutualized. However, we don’t know what principles will guide that process. A number of stakeholders, including Economical Insurance, stand to make substantial gains from demutualization.’

The federal government has said that its Economic Action Plan 2014 will include the establishment of a framework for the demutualization of property and casualty insurance companies. If the government carries through on this commitment, the rules regarding the distribution of any accumulated surplus will be the focus of much attention. One thing seems certain: whatever position the government takes on this issue will greatly satisfy some and greatly antagonise others.



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