Sunday, July 10, 2011

(No.159) Economical Mutual Insurance: sham mutuality

Economical Mutual Insurance, a group of property and casualty (P & C) insurance companies whose origins are in Kitchener Ontario in the 1870s, has for the past year and more been engaged in a struggle of sorts with a dissident minority of its par policyholder owners who want the company demutualized and its surplus released to its 'owners'.

The decision has now been made to demutualize and become a stock company but the process must wait on Ottawa to develop and set down the rules governing demutualization for this mutual company. (Economical Mutual is large and federally regulated but not all P & C companies operating in Canada are.)

More than a decade ago Ottawa (i.e., the Department of Finance in whose bureaucratic province resides the regulator OSFI -- the Office of the Superintendent of Financial Institutions) went through this same process for federally regulated life insurance companies. Four large life insurance companies did demutualize: Mutual Life of Canada (which then changed its name to the medicinal-sounding Clarica), Sun Life, Manufacturers Life and Canada Life. Another certain candidate for demutualization, Confederation Life, had already disappeared into federally-supervised insolvency.

On June 30 this year the federal Minister of Finance Jim Flaherty launched a public consultation "aimed at developing a framework for the demutualization of federally regulated property and casualty mutual insurance companies." Among other things he said that he wanted to ensure that "policyholders are treated fairly and equitably [because] mutual P & C companies are owned and governed by their policyholders ....[emphasis added]."

Indeed a mutual insurance company should be regarded as being owned by its participating policyholder owners -- if in fact the mutual insurance company has not been operated, as Economical Mutual has, as a burlesque of a genuine mutual insurance company.

With the recent demutualized life insurance companies in Canada only Mutual Life had almost no non-par policyholders. Virtually all Mutual Life's individual life insurance policies were designated as participating, even Mutual's universal life policies. Hence their owners also received a share of the distribution of company value on its demutualization.

It is true that Sun Life, Manulife and Canada Life had proportionately many fewer par policies in force than did Mutual Life but they all had a significant minority of par policyholders. As a class they did particularly well out of demutualization because the corporate largesse was spread thicker rather than more thinly over all policyholders as was the case with Mutual Life.

The fact was that these three life insurance companies had no history or culture of mutuality as Mutual Life did, having been founded as a mutual in 1868 and as Economical Mutual was in the same Ontario community in 1873.

Sun, Manu, Canada and Confederation were all founded as Canadian stock life insurance companies in the 19th century and changed to mutual status in the late 1950s and early 60s only because it was a way federal Supt. of Insurance K.R. MacGregor offered them, after they had approached him for help, of their avoiding foreign takeover. Their senior managements and boards of directors never believed in mutuality as a superior way of conducting the insurance business. Eventually the companies' senior executives began gazing longingly at the stock company model and the green pastures of executive stock bonuses -- to all of which they happily and eagerly repaired once Ottawa came up with a regime to govern demutualization of life insurance companies.

What makes the Economical Mutual situation so risible also calls into question federal regulation. Founded as a mutual the company was allowed to operate as a mutual that was de facto far nearer to a closely held private company than to anything remotely recognizable as a true policyhold-owned mutual insurance company.

By the 1970s Economical Mutual had barely 100 par policyholders owners. After a supposed campaign by the company over 30+ years to raise that number, the total of its par policyholder owners had risen all the way up to a stunning 600 or so. What a magnificent effort and result! Today the company has more than 1.3 million policyholders [sic] of whom fewer than 1,000 are holders of par policies but who are -- if you believe the company's chairman, among others -- also the owners of the company. What a farce.

How could this be?

Before the life insurance companies demutualized any Canadian who wanted to purchase a participating life insurance policy from Sun or Manu or Mutual or Canada had only to apply for a par policy (rather than for a non-par policy) and if the application passed underwriting the policyholder became an owner of the company. Not with Economical Mutual and the way Ottawa allowed it to practise its sham version of mutuality. Indeed so seemingly determined were the vested interests involved with Economical over the decades to ensure that clients did not become par policyholders and therefore owners of the company that eligibility barriers to the purchase of par policies were maintained that make new member access to a restricted country club look like 'come one, come all'.

In order to be able to purchase a par policy, even supposing the would-be client was even aware of the existence of such policies as something that could be issued by Economical and would make the purchaser an owner of the company, the bar over which the client would have to jump was comprised of a variety of requirements which ensured only rare interest and access. Perhaps the most important element in keeping down the number of par policyholders was the extent to which the several hundred 'independent' agents through which the companies' policies are sold even raised with clients the subject of taking out a par policy, assuming these agents were actually aware of the subject themselves.

The federal Dept. of Finance has posted a public consultation paper on its website [] under the heading "Demutualization Framework for federal Property and Casualty Insurance Companies"; it includes various "Issues for consideration". This was prompted by the proposed demutualization of Economical Mutual Insurance because it is the first federal mutual P & C company to demutualize.

The issues to be considered include the posing for public consultation of questions involving equitable distribution of the "benefits of demutualization"; Economical Mutual has surplus (policyholder equity) of $1.4 billion. Finance also raises questions about a "small" voting policyholder base" vis-a-vis "effective governance of a mutual company". Indeed it should.

Ottawa needs to be on guard against requests for inequitable financial treatment not just favouring the small number of Economical Mutual's par policyholders but also anything smacking of special treatment for members of the company's senior management or board. In talking with Ottawa about demutualization the major mutual life companies quietly tried out the idea of an of allocation of some of the demutualized companies' shares to members of the companies' senior executives citing an Australian precedent. Fortunately for the cause of fairness Ottawa wouldn't fall for that one.

Finance Minister Flaherty is to be congratulated for initiating a public consultation on P & C demutualization before the regime is defined. Clearly the federal regulations need to be developed so as to direct a process that requires distribution of policyholder equity to be made to all or the bulk of Economical Mutual Group policyholders ( all the policyholders of the various group companies are in the same boat in terms of phoney mutuality). As was the case with the Canadian mutual life insurance companies a formula can be devised that is equitable to policyholders of the company according to a reasonable set of assumptions involving the number of policies owned by a policyholder (individual and corporate), the length of time in force, size of the premiums paid, etc etc.

The recent public speculation about each of the handful of par policyholders receiving $1 million+ of value on a demutualization of Economical Mutual would be patently silly if it were not something they have been encouraged to take seriously. The fact is that 'ownership' of Economical Mutual by its par policyholders was maintained at restricted and ridiculously minuscule levels for decades. Nothing can justify distribution of the policyholder equity in the company to other than the bulk of its hundreds of thousands of non-par policyholders generally rather than to its platoon of par policyholders.

If I were a non-par policyholder of one of the Economical Mutual P & C companies (and I am not) I would be writing to Minister Flaherty (as I am doing) and to my MP and to the Department of Finance. I would demand that Ottawa require the company's policyholder equity be widely and fairly distributed given how the practice of mutuality has for so long been made a mockery with access to par policy ownership of the company kept out of reach of nearly all potential buyers.

It would also be appropriate to argue, as I am also doing in this column, that the governance of Canadian federally regulated P & C mutual insurance companies requires an immediate and major overhaul so that nothing like the Economical Mutual travesty can be either repeated or continued.

[Finance is inviting comments from any interested party until July 31,2010.]


the consultation paper is posted on Department of Finance's website --

email comments to --

Minister of Finance Jim Flaherty's email address is --

the email addresses of Members of Parliament are listed at -- of parliament


by Alastair Rickard