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 (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 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, 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 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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