Tuesday, July 31, 2012

(No.209) Policyholder issues raised by Economical Mutual Insurance


"More views censored by the Department of Finance in Ottawa on demutualization, Economical Mutual Insurance and related issues"

by

Alastair Rickard

Over time I have devoted a number of columns on RickardsRead.com (q.v., Nos. 159, 166, 179, 206 and 208) to the issue of the proposed demutualization of Economical Mutual Insurance, a large Canadian federally regulated property and casualty insurance company (p and c) and to the ongoing discussion of  the regime that should be put in place by Ottawa to regulate the demutualization of all such companies.

The proposed demutualizaion of Economical Mutual prompted federal Finance Minister Jim Flaherty to begin a process of public consultation in June 2011 by publicly soliciting views about what the regime governing the demutualization of p and c companies should embrace.

A number of submissions from various stakeholders and interested parties were made to the Department of Finance, including one from me. Most although not all submissions have been posted by Finance on its website ( for posted submissions, go to www.fin.gc.ca/consultresp/dffpcic-cdsamf-eng.asp). The gatekeepers at Finance did not want to share publicly some of the views they received on this subject.

For example: my submission to Finance was heavily 'redacted' (i.e., censored) before it was posted to the Department's website, so heavily that I decided to share with readers exactly what Finance had removed from my submission before posting it (see "Economical Mutual's demutualization and public consultation" on RickardsRead.com, column No. 208, posted July 23, 2012). My object was to allow readers to draw their own conclusions about the actual views I expressed that Finance mandarins apparently found to be so sensitive and/or objectionable.

That brings us to an even more interesting exercise in Finance Department censorship on this issue, and the reason for this particular column on RickardsRead.com

Claude Gingras, a leading Canadian expert on demutualization and a former special advisor on the subject to the Department of Finance in Ottawa, made a particularly important, well-informed and thoughtful submission on p and c demutualization as well as about several little noted and understood aspects relevant to par policyholders about the previous demutualization of four major Canadian life insurance companies ( the submission was dated July 28, 2011). I published excerpts from Mr. Gingras' submission to Finance on RickardsRead.com (column No. 179, posted Nov. 28, 2011)

When the time came for Finance to fish or cut bait on whether or not to post Mr. Gingras's submission he was informed that Finance wanted certain statements removed from the submission before it could be posted. No agreement on this matter was reached with Mr. Gingras and his seminal work on this topic has not been posted along with other submissions.

For that reason this column of RickardsRead presents (below) the entire submission by Claude Gingras including those passages which Finance gatekeepers wanted removed as a condition of its posting to the public discussion the Minister said he wanted.

The passages Finance wanted removed are underlined in the text of the submission reprinted below.   Many readers will find, as I did, the reasons for the removal of certain passages desired by Finance gatekeepers both self-evident and revelatory of Finance Department defensiveness involving previous deficiencies.


                                                          *****************



Submission to the Consultation on a Demutualization Framework
for Federal Property and Casualty Insurance Companies

by

Claude Gingras, LL.L, LL.B., LL.M.



Introduction

I am responding to your invitation of June 30, 2011, to submit comments on the establishment of a demutualization framework for federal P and C insurance companies. I was General Counsel for Mutual Life of Canada from 1977 to 1995 and, thereafter, Special Advisor to the Department of Finance of Canada until mid-2003. In this latter capacity, I assisted the Government in establishing a demutualization regime for life insurance companies that was used by four major mutual companies (ManuLife, Sun Life, Canada Life and Mutual Life of Canada) to convert to stock companies. I consent that my submission be posted on the Department of Finance website with the inclusion of my name.

My comments will focus primarily on the broad policy objectives that should guide the Government in establishing a P and C demutualization regime, with emphasis on the need for “fair and equitable treatment of policyholders.” However, I will first address the matter of governance that the invitational message raises.

The Issue of Governance in some P and C Companies

The message asks: “Independent from the demutualization issue, the Government is seeking views on how mutual P and C companies can ensure that they continue to have an effective governance structure, and whether measures need to be taken to increase the number of voting policyholders.” 


That the Department of Finance asks this question, and in these terms, is somewhat intriguing. The fact is that at least half of the mutual P and C companies under federal jurisdiction currently have a seriously defective governance structure that does not deserve to be “continued” at all, and this situation has been well known to the Government for a long time.

While the Insurance Companies Act of Canada (ICA) determines who has voting rights in a mutual life company, it is silent on this crucial governance matter for P&C mutual companies.  Each P and C mutual is therefore free to determine to whom they will issue a voting policy. A number of mutual P and C companies have granted voting rights to all their policyholders by by-law, including, for instance, Wawanesa, a major company. 


However Economical, another major P and C company, which announced its intention to demutualize last December, and a few smaller ones, have reserved their voting policies mostly for directors, officers, staff and friends of the company, thus ensuring a very convenient and cosy entrenchment of management. 


Aware of this disturbing situation, the Department of Finance put forward a proposal for legislation in its Consultation Paper of January 2003, entitled “Corporate Governance of Financial Institutions,” that is worth citing in its entirety here:

1. Right of Policyholders to Vote in Mutual P&C Companies

Some federally-regulated mutual property and casualty (P&C) companies have a very small voting base because they sell very few policies that entitle their holders to vote. In contrast, voting policies, particularly par policies, are prevalent in mutual life companies for historical and economic reasons.

A narrow voting base may reduce the effectiveness and fairness of governance because the management of such companies is accountable to only a few policyholders. Moreover, one of the objectives of a mutual structure is to allocate the risks and benefits of ownership to a broad group of people.  As a consequence, it may be advantageous to increase the voting base of policyholders in mutual insurance companies in the P&C sector.

Proposal: To extend [by legislation] the right to vote to all policyholders of P and C mutual companies, subject to certain exclusions (e.g. policies of short duration or that fall below a certain premium value.) One practical approach would be to extend the right to vote to policyholders upon purchase of a policy or renewal of an existing policy.” 

This 2003 proposal, together with others intended to protect and strengthen the rights and interests of policyholders following the massive demutualization movement that had occurred in the life sector, was never implemented as the Government chose to give in to the powerful lobbies of the insurance industry (including by agents, life and P&C company associations and even the Canadian Association of Mutual Insurance Companies) which opposed all these measures. 


The industry even opposed a proposal, also abandoned, that companies be required either to consider the interests of participating policyholders in managing their participating funds or to act in a manner that is fair and equitable when managing these funds.

For precisely the reasons mentioned by the Department of Finance in 2003, I submit that the Government should implement the above proposal in the ICA before even attempting to establish a P and C demutualization regime. Such a provision would not only facilitate the drafting of a P&C demutualization regime but would also ensure that the decision to demutualize is taken solely for the right reasons
.  
Indeed, those few privileged policyholders who have voting policies, who have been told repeatedly that each of their policies may be worth in excess of $1 million, may support demutualization for the wrong reasons.  Human nature being what it is, faced with the prospect of receiving humongous windfalls in the form of demutualization benefits and becoming instant millionaires, these policyholders may approve, or incite, demutualization without having the future well-being of their company in mind. 

Of course, the implementation of this proposal will also strengthen the governance of those mutual companies that decide to retain their current mutual structure.

I now turn briefly to the first three broad policy objectives that supported the development of the demutualization regime for life companies, to see how they could apply to the establishment of an appropriate P and C regime. In my comments, I assume that the Government would implement its 2003 proposal stated above, before approving any P and C demutualization.
  
Fair and Equitable Treatment of P and C Policyholders upon Demutualization

Many generations of policyholders have contributed to the accumulated surplus of their company and, ideally, should receive their share of the value of the company (in the form of shares or as a portion of the proceeds of sale of the entity) upon demutualization.  Obviously, that is not feasible and, in practice, participation in the benefits of demutualization is limited by the availability of records.
 
In a number of foreign jurisdictions, the regulations require that all policyholders of the last 3 to 5 years be included in the payout of benefits, but only the current policyholders are entitled to vote on the conversion. Benefits representing the value of the company are allocated to all these policyholders in proportion to the premiums they have paid during the whole period chosen.

This appears to be the most fair and equitable way to treat policyholders upon a P and C demutualization, taking into account that P and C policies are mostly short-term contracts, while life insurance policies generally have much longer duration.
 
Of the four large mutual life insurers that demutualized in the latter part of the 1990s, I believe that only Mutual Life of Canada had non-participating policyholders with voting rights. Upon demutualization of this company, only a small portion of its value was allocated to these policyholders in compensation for the loss of their voting rights. This could be used as a model to compensate the current voting P and C policyholders for loss of their present voting rights, with the rest of the value going to all policyholders as stated above, although one could very well refuse to reward, in any way, bad governance.

Each of these four life insurance companies had hundreds of thousands of participating policyholders who received all or, in the case of Mutual Life, the vast majority of the demutualization benefits. P and C companies have no participating policyholder as this expression is defined in the ICA. 


P and C policyholders entitled to vote carry exactly the same risk – insolvency of the company – as those without that right. They have no additional risk over the other policyholders, as the right of the company to make a call on premium notes, where it still exists, will never be exercised because doing so would be useless and counter-productive to a company in serious financial difficulties.  


Thus, those voting policyholders have no greater claim to “ownership” of the company than those without voting rights.  Consequently, they should not receive a greater benefit upon demutualization by virtue of their voting rights than the other policyholders.
  
The demutualization regime for life insurance companies allowed senior officers to acquire shares or receive options, free of charge, only one year after demutualization, resulting in a possible substantial windfall upon the exercise of these options or the sale of these shares at a later date. 


Here again, in order to ensure that the management decision to demutualize the company is made with a view only to the best interests of the company, other jurisdictions preclude the granting of options to, or share purchase by, management for a period of 3 to 5 years following demutualization. This longer period is thought to be required for the company to completely settle into its new structure and for its shares to reflect a value determined by a mature market. 


The Canadian government should adopt this approach in order to reduce the possibility of manipulation by management of the value of the company during the first few years after its conversion.
 
Maintaining Safety and Soundness

Since 1997, a Canadian mutual insurance company has been allowed to issue equity instruments in the form of participating shares (sections 83.01 to 83.03 of the ICA) with certain restrictions. Therefore, a mutual insurance company is not forced to resort to demutualization if it needs to access share capital for expansion or safety and soundness purposes.

In the information material to be provided to policyholders by a company seeking their approval of its demutualization, management should explain in detail why demutualization is sought, beyond platitudes such as “this is the right thing to do” and “the need to give the company to its rightful owners.” The other options of the company beyond demutualization, including issuance of participating shares, should not only be explained to policyholders but policyholders should be told why these options have been rejected by management.

For smaller P and C mutual companies unable to effect a successful initial public offering and maintain a presence in the stock market, but wishing to demutualize, merger or sale of all the assets of the company to another entity could be the only avenue. It should be noted that, in at least one large European country where mutuality is well-established, demutualization is prohibited and the only choice is to amalgamate with another mutual insurance company.

Fostering a Competitive and Efficient Sector

There is no doubt that the disappearance of mutual companies in the insurance sector will greatly reduce competition. Indeed, the presence of entities in which policyholders do not have to pay rent to shareholders forces stock insurers to keep premiums at a lower level than they would otherwise set them. This was well understood in the countries that experienced a wave of demutualization in the life insurance sector, as did Canada in the late 1990s. 


The United Kingdom and Australia, for instance, moved quickly after demutualization to enhance the protection of policyholders’ interests and rights, and to increase the flow of information that life insurers must provide in respect of the administration of their funds. Sadly, Canada, after making more lenient proposals in that direction in 2003, abandoned them all in the face of the fierce opposition of the industry and its representatives. 

What will happen to the P and C mutual companies under federal supervision, now that one has announced its intention to demutualize, is anyone’s guess. Surely, if the current voting policyholders of the company, that first announces its intention to demutualize, are allowed by Ottawa to become instant millionaires for no valid reason, the pressure will be great for the other P&C mutuals, where also only a small minority of policyholders have the right to vote, to follow suit.

The P and C sector in Canada is already dominated by foreign companies. It is reasonable to assume that most Canadian P and C demutualized companies would then pass into foreign hands. This would further reduce the market share of the Canadian companies in the P and C sector with the attendant consequences: loss of jobs, lack of the ability to ordain the manner in which the internal affairs of the companies are carried out, lack of control over their governance, etc. 


It is therefore the responsibility of the federal government to ensure that demutualization does not occur mainly for the unjust enrichment of few policyholders.

Let’s hope that Ottawa will find the courage to resist the pressure and establish a P and C demutualization regime that will be fair and equitable to all policyholders and that would not permit demutualization for the wrong reasons.

Conclusion

Each time our courts were asked, they clearly stated that, under the Canadian constitution,jurisdiction over insurance belongs to the provinces. However, in the first part of the 20th century, Ottawa fought very hard to acquire control over the insurance business. It finally succeeded, with the support of the main life insurance companies, to obtain this control through the use of its incorporation power. This gives the federal government control over the internal management of all federally incorporated insurance companies, including the manner in which they handle policyholders’ funds.
 
It is not sufficient for Ottawa to limit to solvency its responsibility to protect the rights and interests of the Canadian insuring public. Currently millions of Canadians hold participating life insurance policies. When they bought these policies, they were told that they would share in the profits of their companies, and, for this right, they agreed to pay a higher premium. But they are currently kept in the dark as to how their participating funds are managed; they are told precious little about how policy dividends are determined and even less about what share of the expenses of the company they are supporting. 


Bill 57, enacted in 2005, gave Ottawa the power to make regulations in order to require companies to provide more meaningful information to participating policyholders about the management of their funds. Unfortunately, to date, almost six years later, the Government has yet to exercise this power for the benefit of these millions of Canadians.

By appropriating jurisdiction through the power of incorporation over most of the industry, the federal government has greatly curtailed and weakened provincial supervision over insurance. The seemingly callous indifference of Ottawa toward the need of Canadians to know how their funds are managed, and toward the need to protect their interests beyond solvency in the insurance sector, does not bode well for the protection of investors should Ottawa succeed in taking control over the securities industry. 


In a recent decision reversing corporate transactions involving policyholders’ funds, which had been approved by Ottawa, an Ontario judge felt the need to remind the Office of the Superintendent of Financial Institutions of its duty to protect the rights and interests of policyholders when carrying out its mandate. Let’s hope someone in Ottawa has been paying attention.
 
July 28, 2011


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email: Alastair.Rickard@sympatico.ca


blog: www.RickardsRead.com


blog archive: to access back numbers of RickardsRead, go to the blog archive listing appearing beside every column on RickardsRead.com


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Monday, July 23, 2012

(No.208) Economical Mutual's demutualization & public consultation



"Economical Mutual's demutualization and Ottawa's censorship of its own public consultation"

by Alastair Rickard

In several previous columns on RickardsRead.com (Nos. 159, 166, 179 & 206) I wrote about the proposed demutualization of Economical Mutual Insurance, a large Canadian federally regulated property and casualty [p and c] insurance company based since the 1870s in Waterloo, Ontario.

A majority of Economical Mutual's fewer than 1000 participating policyholders among the company's hundreds of thousands of non-par policyholders have voted to demutualize the company with the intention of splitting among themselves hundreds of millions of dollars in surplus ('equity').

This development prompted the intervention of the federal Finance Minister Jim Flaherty. Approval by the feds will be required and rules set down for such a demutualization because none now exist for p   and c insurance companies (as they already do for demutualization of life insurance companies). The minister put Economical's demutualization on hold while he and his Finance Department officials consider how such demutualizations ought to be regulated, part of that process involving public consultation.

Since the financial power grab involving Economical Mutual really began to unfold in 2010, there has been precious little media coverage of the financial, legal and governance issues involving billions of dollars and the direct financial interests of millions of Canadian policyholders, not just of Economical but of all federally regulated Canadian mutual p and c insurance companies.

What very occasional coverage there has been in the corporate media has ranged from the nearly  useless to soft on the core issues and fuzzy to opaque on what Ottawa can and should do in terms of setting policy direction and regulation. Meanwhile the business media always has the time or space for a commercial masquerading as real news about the latest iteration of the Apple Ipad or Iphone  and for the umpteenth story generated by a Google press release.

Because the major financial and business media have mostly ignored the story and the implications, a few of the submissions received by the government in response to its June 2011 invitation for submissions from interested parties are particularly useful for their raising of facts, issues and questions otherwise ignored by the media.

Some submissions (although not all) received by Finance were posted on the Finance Department's website.

One Canadian insurance industry veteran took the time to review a number of the submissions and sent some comments to me. [Words in bracketed italics are mine].

"You have got to read Wawanesa's brief: it's a masterpiece. [Wawanesa Insurance, a Canadian mutual company founded in 1896, and like Economical Insurance one of the larger federally regulated p and c mutuals]. What a refreshing text compared to Economical's. ... I loved their analogy with voting and non-voting common shares that receive equal amounts on dissolution of a stock company. ... Wawanesa being the largest Canadian p and c mutual company, I don't see how Finance could circumvent their brief!"

He continued: " I have not read all the submissions but I am surprised that no ordinary [Economical Insurance] policyholder so far has written to denounce the indecent grab [proposed by Economical]. Maybe they were entirely "redacted" [by Finance] for expressing too much frustration or, in Finance's jargon, for using "inappropriate language". ...

"... I read the 43 page submission of Economical [Insurance] and it did not improve my opinion of the humanoids running the insurance industry. It is a long piece of sophistry on two counts: (1) voting life [insurance] policyholders got the whole value of the company thereore the same must occur in a converting p and c; and (2) there would be no negative impact; on the contrary, consolidation will improve productivity and even reduce inspection costs [by regulators]! "

"There are a number of omissions in the Economical submission. For instance:
1. It does not say how many voting policyholders they have (947), how much they would each receive, which criteria applied for granting of this voting status and which extra burden or risk these policyholders carried;
2. It states that in 2008 premium notes were abolished but fails to say why the voting rights were not then granted to ordinary policyholders;
3. It fails to say that there could not be a call on those premium notes as it would not be sufficient to save a company in difficulties but rather would trigger a run on it."

He concluded, referring to the submission to Finance from Economical Insurance, "It is one of the most amazing, depressing submissions. Even Gore [Gore Mutual, another larger Canadian p and c mutual founded in 1839] assumed [in its submission] that Finance would enlarge the number of voters; not these guys. Greed at its worst."

                                                                  *****

I was one who made a submission to Finance on the subject. My submission was the column I wrote on the subject ( No. 159, "Economical Mutual Insurance: sham mutuality") posted July 10, 2011 on RickardsRead.com. When asked by Finance I had given permission for its posting but I was somewhat surprised to discover that the version which appears on the Finance website had as much or more removed from it as remains in the version of my submission that Finance posted.

My entire column/submission can be read by going to the blog archive of RickardsRead.com, the links to which appear beside every column. However, readers may find it revealing of Finance Department thinking -- as I did -- to read the paragraphs which Finance chose to censor, to read the views to which Finance did not want the public exposed. After reading the excised portions of my submission, you may wonder about the motivations and intentions of the censor vis-a-vis the issues up for public consultation and the identity of the interest(s) being protected.

The excised portions of my submission appear below; the underlined words are the ones that did NOT appear in the version of my submission Finance put on its website. In order to provide context for some of the deletions I have included some preceding sentences that were not deleted from my submission before it was posted on the Finance website.

I wrote that "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."  ...

"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." ...

"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 1960s only because it was a way federal Supt. of Insurance K.R. MacGregor offered them, after they had approached him for help, of 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 pastrues 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 policyholder-owned mutual insurance company.


"By the 1970s Economical Mutual had barely 100 par policyholder owners. After a supposed campaign by the company over 30+ years to raise the 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 less than 1000 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 elgibility 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 to 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. ...

"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 life companies quietly tried out the idea of an 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. ...

"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). ...

"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 miniscule levels for deecades. 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 had for so long been made a mockery with access to par policyholder 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."


                                                              *****

In a future column on RickardsRead.com I will publish in its entirety an important submission on Economical Mutual and the issues involving p and c insurance company demutualization, a submission which the Finance Department has refused to post on its website for public review.

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email: Alastair.Rickard@sympatico.ca

blog: www.RickardsRead.com

blog archive: to access back numbers of RickardsRead, go the blog archive listing which appears beside every column on RickardsRead.com

to set a "Google alert" for new columns as they are posted on RickardsRead.com, go to:
www.google.com/alert 







Monday, July 16, 2012

(No.207) Insurance agents & companies and Obamacare


" The future of American insurance agents and health insurance companies after the upholding of  Obamacare"

by Alastair Rickard


Following the posting of my column "Obamacare & the Canadian comparison" (No.205, posted July 3, 2012) an executive of a Canadian insurance company asked my opinion of a June 29, 2012 piece from Forbes, the American business publication entitled "Insurance agents lose job security with Obamacare ruling".

 Forbes tends editorially towards the Tea Party's apocalyptic vision of President Obama and his policies. The article called into question "the plight of more than 100,000 agents and brokers. The floodgates are about to open for the mass firing of healthcare agents."

I have not seen the slightest piece of evidence to substantiate the claim that there are anything like 100,000 American insurance agents actively engaged in the sale of health insurance, a type of coverage which in any case has been substantially provided through employers' group plans.

My response to my Canadian correspondent included these comments:

"Forbes is a conservative publication. Indeed you may recall that Steve Forbes, son of its founder, ran (unsuccessfully) for the Republican nomination a few years ago and shows up periodically on cable news to go after Obama and his Affordable Care Act. In other words there is an ideological element involved in Forbes playing up supposed negatives in this matter.

"I am far from certain that Obamacare, retaining as it does the central role for private insurance companies, will mean the loss of great numbers of genuine agency jobs. In any case an agent dependent on a single type of policy/product is always at risk vocationally if he/she does not carry a portfolio of products to satisfy a range of client needs.

"Years ago I researched insurance company and agent reaction in Canada to the bringing in of government health care plans by provincial governments, specifically OHIP in Ontario. Many company executives and agents alike thought the absence of the medical insurance business they were issuing and selling -- prior to the government coverage that would supplant it -- was going to be very harmful to their interests.

'The reality: both insurance companies and professional agents went on from strength to strength in the years that followed. So will companies and professional agents (as distinct from order takers) in the U.S."

I also received a very thoughtful response to my column from an American, a longtime analyst of and participant in the U.S. insurance business.

My RickardsRead column (No. 205) had highlighted the absence of a particular viewpoint following the U.S. Supreme Court's upholding of the Affordability Care Act:  that Obamacare, retaining full participation by insurance companies in the health care system in providing insurance coverage for those Americans under age 65 (including the 30 million of the 50 million uninsured in the U.S. Obamacare will bring under the health care umbrella) guarantees that the % of GDP taken up by the health care system will NOT decrease as much as if the American system had gone to a single payer system as in Canada and as the U.S. has with Medicare for seniors.

My American correspondent responded that "another factor I have not seen discussed anywhere is the fact that much if not most of the new coverage will be individual [health insurance] policies. The law provides for a 20% expense margin [for insurance companies] on those policies and even at that there is whining despite the fact that we are talking about order taking with no underwriting. (Some have argued to exclude agent commission from the 20% although that seems to be a dead issue.)

"Twenty per cent is much higher than the expense factor on group policies, even accounting for the fact that much of the administrative burden is offloaded onto the group policyowner -- typically an employer. Given the difference in the efficiency of group and individual coverage, if all the new insurance is comprised of individual policies  the aggregate system will be much less efficient than the current employer-based system, which is bad enough.

"But what will happen if, as predicted by many, employers drop their [health insurance] plans and employees must buy their own [individual policy] coverage? We will further undermine the overall efficiencies of the system.

"Of course nothing on the horizon is really designed to solve the problem that you have identified repeatedly -- the out of control cost structure of the health care sector of the economy. Proponents of so-called defined contribution health plans predict an introduction of market discipline into the system but I have yet to see how the elements of an efficient market can be introduced into the health care arena.

"Among the critical components of a free market are (1) informed buyers and sellers, and (2) low barriers to market entry and exit. Even my friends who are physicians tell me they are unsure when evaluating much of the care outside their speciality -- so what can be expected of lay people? As for easy entry, a limited number of slots in accredited medical schools and the substantial commitment of time and expense make that an obvious barrier to an effective market.

"The argument for having private companies compete to write the [health insurance] business is that they will be more efficient than a single payer -- thus keeping a lower cost. Some countries follow this model and are happy with it. The verdict for the U.S. lies in the future, but you may be right that a single payer is the ultimate solution.

"My guess is that Obamacare is just one halting step along a road of exploration to find a new system. No matter what, we can't keep on the track that we have been following because within twelve years we will be spending 25% of GDP on health care -- and still rising. Ultimately the solution rests in finding more efficient ways to provide health care with the financing issue being only a peripheral consideration.

"The fact that the central issue has been misidentified for so long is a tribute to the ability of the health care industry to obfuscate, abetted by the health insurance companies. I don't doubt", he concluded,"that they will redouble their efforts, so watch for more hot air from the talking heads of the media who have no clue about true analysis but who understand who pays their salaries through sponsorships."

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email: Alastair.Rickard@sympatico.ca

blog: www.RickardsRead.com

blog archive: to access back numbers of RickardsRead, go the blog archive listing which appears beside every column on www.RickardsRead.com

to set a "Google Alert" for new columns as they are posted on RickardsRead.com, go to:
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Monday, July 9, 2012

(No.206) "UPDATES: Economical Mutual & the Great-West class action"


"Updates: Economical Mutual and federal demutualization regulations; the Great-West/
London Life class action"

by Alastair Rickard

Three previous columns on RickardsRead.com (Nos. 159, 166 and 179) have addressed the issue of the proposed demutualization of the substantial Canadian federally registered property and casualty insurance company Economical Mutual of Waterloo, Ontario.

A majority of Economical Mutual's fewer than 1000 par policyholders would like to demutualize and split among themselves hundreds of milllions of dollars in surplus. This development and apparent intention precipitated the intervention of the federal Finance Minister Jim Flaherty who has stopped Economical's demutualization while the feds consider how to regulate P & C demutualizations and receive submissions they invited on the subject in June 2011.

I made a submission to Ottawa on the subject as did some other interested parties. These have now been posted on the  Department of Finance website (go to www.fin.gc.ca/consultresp/dffpcic-cdsamf- eng.asp). Of the submissions posted thus far eighteen 'authors' who didn't wish to be identified have been published as "anonymous", presumably including some from persons with a direct and personal interest in receiving a share of the value of Economical Mutual ($1.5 billion?).

Among various other views expressed to Finance there are apparently those who think the value of Economical  Mutual should be allocated to the mutual movement rather than to the company's voting policyholders as well as those who recommend that voting rights be awarded to those with policies in place for five years plus another view that there must be a clear formula laid down by regulation covering who gets what by way of benefits on a demutualization based on objective criteria. Stay tuned.

When asked by Finance I gave my permission to post my submission (which was essentially the column I wrote on the subject and posted to RickardsRead.com on July 10, 2011). I was somewhat surprised to discover that Finance had censored its contents (the polite word is "redacted") before it was posted. I will likely publish in a future RickardsRead the parts of my submission redacted by Finance and readers can judge for themselves what the mandarins in the Dept. of Finance considered too sensitive or offensive to post on the Department's website.

There was an even more interesting submission to Finance prompted by its Economical Mutual-inspired public invitation for submissions on the subject. This particular submission is conspicuous by its absence from the Finance website. It came from Claude Gingras, a former general counsel of the Mutual Life of Canada who later served as a special advisor to the Dept. of Finance. Among other things he assisted the federal government in establishing a demutualization regime for life insurance companies, a framework that was used by the four major Canadian life insurance companies (Manulife, Sun Life, Canada Life and Mutual Life of Canada) which converted more  than a decade ago to stock companies.

I published excerpts from the July 2011 Gingras submission about an appropriate federal regulatory regime for property and casualty insurance companies on RickardsRead.com (No. 179, posted Nov. 28, 2011). On the face of it one would think that Finance would have welcomed the chance to post a submission on public policy from a lawyer of such experience and expertise not only with the subject but also the Dept. of Finance. In fact they were apparently prepared to publish his submission only if he agreed to certain deletions.

Why? I think it was because Mr. Gingras had included some criticisms of the Dept. of Finance itself in relation to the subject of insurance company demutualizations. I intend to publish the entire Gingras submission to Finance clearly indicating those portions the Department wanted to remove as a condition of its publication. Readers can judge for themselves the cogency of what did not appear.

Meanwhile there is no reliable indication I have seen or heard about when Ottawa will be ready to publish its draft regulations for property and casualty company demutualizations. The draft will likely provide for at least a 30 day comment period.

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I have written several columns (Nos. 118, 124 and 185) about the class action lawsuit led by the former London Life senior executive D'Alton "Bill" Rudd opposing the use of London Life participating policyholders' funds by Great-West Lifeco. to assist financially in its takeover in Oct 1997 of London Life.

An Ontario Superior Court decision in Oct. 2010 awarded $455 million to the par policyholders. Great-West appealed the decision to the Ontario Court of Appeal. Its Nov. 2011 decision had the effect of upholding certain aspects of the appealed decision and cancelled the raiding of the par policy accounts but without upholding the entire payout to the policyholders.

Because the decision of the Ontario Appeal Court was rather a dog's breakfast the leaders of the class action utltimately decided to seek leave to appeal the decision to the Supreme Court of Canada. In June 2012 the Supreme Court declined to hear the appeal.

My understanding of where things now stand is this: negotiations are taking place concerning par funds actions between the class action leaders and London Life/ Great-West ( as a practical matter,  negotiations are with the leading Canadian international business law firm Torys LLP on behalf of G-W and London).

More to come.

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Finally: following my column (No.203) about "Life insurance companies: are they investment companies with small insurance departments just for the sake of appearances?", I received this interesting comment from a Canadian journalist:

"I can tell you that [RickardsRead.com] is getting huge circulation. Individuals who don't know [I read  it regularly] already keep sending it to me! I'm not kidding. It's the single most re-sent blog I've ever seen."

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email: Alastair.Rickard@sympatico.ca

blog: www.RickardsRead.com


blog archive: to access back numbers of RickardsRead, go to the blog archive listing which appears
beside every column on RickardsRead.com

to set a "Google Alert" for new columns as they are posted on RickardsRead.com, go to:

www. google.com/alerts









Tuesday, July 3, 2012

(No.205) "Obamacare & the Canadian comparison"


"Obamacare, insurance companies and the Canadian comparison"

by Alastair Rickard


Last Thursday (June 28) the U.S. Supreme Court issued its decision on the constitutionality of President Obama's major first term initiative the Affordable Care Act dubbed 'Obamacare' by his poltical opponents.

The Court's decision itself was yet another example of the danger of paying attention to the predictions of 'experts'. The preponderance of the talking heads so beloved by the cable news networks had declared that the Court would disallow all or most of the health legislation's core elements. Indeed an online betting site with a superior record for predicting events gave the odds of Obamacare being overturned at about 80%.

During the political and public debate over the proposed reform of the American health care system I wrote several columns on the subject for RickardsRead.com as well as an article for the Toronto Star (see references at the end of this column).


Like most Canadians I could only shake my head in puzzlement during the debate in the U.S. not only over the routine misrepresentation of the Canadian single payer health care system by opponents of the President's proposal but by the strength and vehemence of the opposition to improving and expanding the American health care system's coverage. It is a system that is dysfunctional, an awkward hybrid of public and private insurance that, for example, sees more than 50 million people with no health insurance and tens of millions more who are under-insured.


Because American insured health care for those under 65 is rooted in employer-provided plans that originated in the 1940s, the total of uninsured Americans continues to increase following the onset of the 2008 recession: lose your job, lose your health insurance. Annual premiums of $10,000 and more for a decent level of non-employer related private health insurance family coverage are unrealistic if not financially impossible for many Americans.

However the decline in the number of Americans covered by employer health insurance plans began before the recession. By 2000 65% of workers had employer plans; by 2010 this proportion had declined further, to 55%.

Governor Mitt Romney of Massachusetts understood when he brought in a health insurance system in 2006 for the residents of his state (a plan on which Obamacare was modelled) that employer-provided health insurance plans are a bad approach to the provision of health care. Romney, as the Republican nominee for president this year, is trying rather unconvincingly to be the arch-critic of Obamacare, i.e., of a plan whose genetic inheritance is his own creation.

In the 5 to 4 Supreme Court decision last week the conservative Chief Justice John Roberts not only voted with the Court's 4 liberal justices but wrote the majority opinion. It surprised the media and nearly all of its expert 'talking heads'. Cable news coverage for several embarrassing minutes following the decision's release breathlessly reported that the Supreme Court had held the Affordable Care Act to be unconstitutional.

Lost in the 'political horse race' mentality of much, too much of the American media (e.g., "what does this decision mean to the presidential race?") are a variety of serious questions central to the whole debate about the American health care system.

For example: over the next decade what will be the actual additional net cost of the Affordable Care Act? How will the rising cost of the American health care system be paid for? How will the system address health care for the 20 million out of the 50 million not brought into the system by Obamacare? What will happen to health care for the very poor Americans eligible for Medicaid when a majority of the U.S. Supreme Court also ruled that the states cannot be required to participate in the revised program?

Indeed, it must be said that there are detailed proposed alternatives -- not merely rhetoric -- from the Republican side of the debate that have, perhaps because of the mindless shouting from the Tea Party elements, received less attention than they deserve. [See, for example, in the Spring 2012 issue (No.11) of the American publication National Affairs the article "How To Replace Obamacare" by James C Capretta and Robert S. Moffit. The authors work for two conservative 'think tanks'.]

But no significant politicians care to propose what Barack Obama himself once formerly publicly supported and what is needed in order to help make economic sense of the American health care system: a universal, single payer system in which insurance companies are present only on the margins.

There is one point about the future costs of the American health care system I have not yet seen addressed. It was the subject of a letter I wrote recently to the National Post. The letter appears below.

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July 1, 2012

To the editor,

The National Post,

Toronto, Ontario

After the U.S. Supreme Court's decision upholding as constitutional President Obama's health care legislation I have read the views of several Canadian columnists, including the National Post's Jonathan Kay, about the American vs. Canadian health care systems.

The comparative cost of the the two systems ca. 2010/11 is: in the U.S., nearly 18% of GDP, 11.7% in Canada, yet with overall health outcomes significantly inferior in the U.S. plus 50 million people uninsured.

The President managed to get as much as he could in improvements to the American health care system given political realities. The fact is that much of the improved coverage will not be implemented until 2014 and beyond and the results evident even further into the future. However the likely reality is that while health outcomes overall  will be improved for Americans the cost of the U.S. system vis-a-vis those of Canada and other developed countries will not improve by much comparatively.

Why? Because the cost efficiency of the American system for people under 65 [i.e., the age Medicare starts] will be seriously handicapped by the absence of a single payer system. Instead the revised system (with even a proposed "public option" excluded) continues to embrace many insurance companies dealing with premiums and claims involving tens of millions of insureds, hundreds of thousands of employer firms, and countless hospitals and medical professionals.

This will mean a continuing and increasing level of health care cost that will keep greater efficiency much lower that it would otherwise be even under a flawed and incomplete single payer system like Canada's.

Preserving a key role as intermediaries in the American health care system for private insurance companies (each with its own underwriting, claims, countless forms, processes and employees) is not only unnecessary but foolish and ultimately counter-productive and expensive.

My views are those of a former executive in the Canadian insurance business.

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Other views on this subject by Alastair Rickard:

In the Toronto Star, Sept.9, 2009: "A puzzled Canadian ponders surreal healthcare debate".

On www.RickardsRead.com:

No. 44, posted Aug.8, 2009: "Pt.1 -- Insurance companies and U.S. health care " &
No. 45, posted Aug. 13, 2009: "Pt.2 -- Ins. Companies and U.S. health care."

No. 51, posted Sept. 9, 2009: "American reaction to my Toronto Star op-ed on health care reform".

No. 55, posted  Sept. 28, 2009: "Fear and loathing in U.S. health insurance reform".

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email:Alastair.Rickard@sympatico.ca

blog: www.RickardsRead.com

to set a "Google Alert" for new columns as they are posted on RickardsRead.com, go to:

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