Sunday, March 29, 2015

(No.285) "Part 2 -- Economical Insurance Co, & the draft regime for P & C demutualization"

"Part 2 -- The Economical Mutual Insurance Co. of 
Waterloo, Ontario and the new draft regulations for the 
demutualization of federally regulated property and 
casualty insurance companies in Canada"

by Alastair Rickard


In the previous RickardsRead column on this subject (No. 284, posted March 15, 2015) I should have made clear (but did not) in my introduction of comments by Claude Gingras about the draft federal regulations governing the demutualization of federally regulated property and casualty (P & C) insurance companies that his comments -- and mine -- specifically related to the set of draft regulations involving companies with both non-voting policyholders and voting/mutual policyholders like Economical Mutual Insurance.

Our comments did not and do not apply to the other set of draft regulations relating to those P & C companies all of whose policyholders have mutual/voting status.

I will also repeat here for readers' information what I have stated previously: I am not now nor have I ever been a policyholder of Economical Mutual Insurance Co. or any of its subsidiary P & C companies. I have no financial interest in the outcome of any demutualization of Economical under the federal Finance Department's yet-to-be finalized regulatory regime.


I do not intend to rehearse here either the comments I made in the previous column or those of Claude Gingras (both in No.284). I expressed my agreement with all of his analysis.

However there are other aspects of and changes needed to the draft federal regulations which would govern any attempt to demutualize by the Economical Mutual Insurance Co. -- or indeed any other P & C company in the same category.

I will offer a few comments here for consideration. I will send this column (as I did the previous one - "Part 1") as a formal submission to the Dept. of Finance prior to the end of the 30 day comment period deadline set by Finance when it published the draft regulations on Feb, 28, 2015.

1. It should be noted by both Finance mandarins and those (likely relatively few) among the millions of potentially affected P & C policyholders who are actually aware of the publication of the draft regulations that the 30 day comment period is ridiculously short and needs extension, especially given the fact that the draft regulations about which stakeholder comment must be made within that 30 day period took the Minister of Finance and his department more than 4 years to develop and make available for public comment.

2. In its "Regulatory Impact Analysis Statement" the Dept. of Finance received input during the original consultation period from four federal P & C companies which had both voting ("mutual") and non-voting policyholders.

According to Finance two of the four companies told Finance that "benefits [i.e., company equity on demutualization] be distributed only to mutual policyholders. The other mutual companies and other stakeholders generally held the opposite view and recommended that all policyholders share the benefits."

The two federal P & C companies referred to by Finance who favoured dividing the "benefits" of demutualization only among voting policyholders are not named. However one does not need to be a clairvoyant to know that both have a comparatively small number of voting policyholders but many more non-voting policyholders.

Which companies?

Obviously one is the company which set the demutualization ball rolling with its request to Ottawa back in late 2010 -- Economical Insurance. My guess is that the second is Gore Mutual Insurance Company of Cambridge, Ontario (founded 1839).

3. Although Minister of Finance Joe Oliver at the end of the day was unwilling to allow a ridiculous approach to demutualization, he ought to have ensured (as I think his predecessor Jim Flaherty would have done) that the mandarins in Finance drafting the regulations gave less weight than they seem to have done here and there to the views and desires of those P & C insurance company insiders who want to keep the demutualization playing field tilted as far as at all possible in the direction of a distinct minority of voting policyholders in a company with both policyholder types.

Case in point: the proposed regulations would require that non-voting policyholders must have held their policies for 12 months from the date the company's board decided to recommend demutualization to "be considered as eligible non-mutual [non-voting] policyholders", i.e., in order to be eligible to share in the "benefits".

Reason for this given by Finance:  "The time requirement discourages speculative policy purchases and ensures that policyholders have a reasonable commitment to the company."

Then why not apply using specific regulation the same 12 month period requirement to holders of voting policies? Such a difference in the treatment of voting and non-voting policyholders cannot be justified and requires change before the regulations are finalized.

4. For more than four years two Ministers of Finance and their department's mandarins have avoided by delay bringing forward a demutualization regime for federal P & C insurance companies. I can understand why.

Still, when a draft regime for companies with voting and non-voting policyholders finally sees the light of day, what's on view?

It is a draft regulatory regime with a striking (if politically understandable) absence of genuine leadership. Instead of presenting a regime that prescribed formulae to ensure equitable distribution to all policyholders of company value on any demutualization Finance kicked the can down the road.

What P & C policyholders now have before them instead is a serpentine process requiring, inter alia, the appointment of a legal counsel and a 3 to 9 member policyholder committee for each side (i.e., voting and non-voting policyholders). I will not review here this tortuous demutualization process; readers can consult the draft regulations published in the Canada Gazette and cited in my previous column.

At this point it is sufficient to note that at Economical Insurance, for example, there would not on a demutualization under the proposed regime be any genuine proportionality or practical fairness of process. Fewer than 1,000 voting policyholders can organize themselves easily and effectively in order to have ongoing direct input to and influence on the process of negotiation. Contrast that with the challenge to meaningful participation and representation confronting one million non-voting policyholders.

For this reason alone -- among several others related to the process the draft regime prescribes -- I would expect (if Economical were to proceed with demutualization) that various non-voting policyholders -- individuals and sub-groups of various sizes -- will sooner rather than later seek legal advice and/representationn of their interests before and/or during the demutualization process.

Nor would I be surprised to see legal action(s) if either the process of negotiation or its result is considered unsatisfactory. If this seems unlikely it is worth noting the incentive for Economical's non-voting policyholders to take the demutualization process very seriously indeed:  $1.7+ billion of equity.

5. The possibility of a regime that could produce a result approaching the equitable treatment of non-voting policyholders plus a court-supervised process of negotiation between the legal representatives and policyholder committees of the voting and non-voting policyholders in a P & C company already seems to have reduced the once unalloyed enthusiasm within Economical Insurance's senior management for a demutualization regime, the creation of which Economical forced on the federal government.

After the release of the draft regulations John Bowey, Economical's board vice-chair and head of the company's demutualization committee reacted. Unsurprisingly, for the head of a group of insiders who kicked off this attempted financial grab with an expressed declaration that all the company's equity belonged to them, the reaction seemed to be one of rather diminished enthusiasm, not least for a proposed regulatory regime under which the division of that equity with the many non-voting policyholders would have to be negotiated and voted upon if demutualization is to occur.

Declared Mr. Bowey: "The way the rules [for demutualization] are proposed now the company would have very little input and opportunity to make recommendations, which, to be frank, is one of the concerns that we have." My translation: 'on behalf of the fewer than 1000 insiders of the company we -- representing the insider group -- will have an impossible task under the proposed regulatory regime obtaining even a lion's share of the company's equity'.

6. Today, as previously, the Economical insider group have sought to camouflage with an unconvincing rationale the alleged need to demutualize and divvy up the company's equity among themselves. Why their obviously financially self-interested views enjoyed any credibility with Finance remains a mystery, all the more so since Finance acknowledges that except for one other P & C company (Gore Mutual?) the other submissions in the government's original consultation were opposed to what they sought.

Perhaps the leading reason advanced by Economical for demutualization is to make it possible for the company to raise capital for company growth via acquisition. This from a company with current equity of more than $1.7 billion and assets of $5+ billion; and from a large mutual company that as a mutual has acquired a number of P & C companies as subsidiaries.

Their argument reminds me of the similarly transparent nonsense advanced by the board and senior management of the Mutual Life Assurance Co. of Canada for its demutualization, while blithely ignoring publicly the fact that Mutual Life -- as a mutual -- had recently had no difficulty buying the long established and substantial Canadian operations of both Prudential of England and Metropolitan Life.

Economical's board vice-chair is still advancing the gormless argument that the "company is too big to be a mutual company [sic] in some ways and yet too small to compete with the big non-mutual companies. So we are caught in the middle."

That does not seem well grounded. Indeed if Mr. Bowey's comments indicate his actual grasp of the relevant facts, there is cause for at least mild alarm. They fall more than embarrassingly short of even tenuous contact with industry reality and are as insubstantial as the smile of the Cheshire Cat in "Alice's Adventures In Wonderland".

Then again those who post-2010 have advanced arguments pushing for the allocation of the (now) $1.7 billion among fewer than 1000 Economical voting  policyholders have rarely allowed facts to detain them for long. Doubtless they felt encouraged by the nearly complete absence of critical analysis of their plan in the mainstream media both regionally and nationally.

As the past four years have shown: in this sort of non-critical environment a self-constructed reality, indeed a cognitive illusion, is easier to maintain.

7. I am less than satisfied with the draft demutualization regime. It is awkward and convoluted in terms of going about getting equitable treatment for non-voting policyholders in a company like Economical. This RickardsRead column and the previous one (No.284) have pointed to a number of points to consider before the draft regulations are finalized.

However, if Economical Insurance proceeds to demutualize the negotiated division to be required by the regulations of the company's value between fewer than 1,000 voting policyholders on the one side and the company's hundreds of thousands of non-voting policyholders on the other at the very least guarantees that this gang of Economical insiders will not be walking away from a demutualization with $1 million+ each.

But then, as I have pointed out more than once in RickardsRead columns during the past several years, only those Economical insiders who resided in cloud-cuckoo-land were likely to have thought that their desired financial grab using company demutualization would proceed unimpeded.

RickardsRead will return to the subject of Economical Mutual insurance Co.
and Ottawa's demutualization regime.




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Sunday, March 15, 2015

(No.284) " Part 1 - Economical Insurance Co. & the draft regime for P & C demutualization"

"Part 1: the Economical Mutual Insurance Company of 
Waterloo, Ontario and the new draft regulations for the 
demutualization of federally regulated property and 
casualty insurance companies in Canada"

by Alastair Rickard

When the Economical Mutual Insurance Company of Waterloo Ontario announced in Dec. of 2010 (more than 130 years after its founding) its intention to demutualize it forced the federal government of Canada in the person of its Minister of Finance and his department to do what had previously not been done: come up with a regulatory regime to provide both a method and a framework federally regulated property and casualty (P & C) insurance companies would have to use if they demutualized.

To say that the feds were less than eager to engage with this task is self-evident. Since the Economical Insurance Co. announcement and request more than 4 years ago one federal finance minister (who wisely kept kicking this can down the road) has died and been replaced by a far less politically astute successor who has now allowed/directed his senior mandarins in Finance to produce a draft regulatory regime for public comment.

This was done on Feb. 28, 2015. The draft regulatory regime that, unless amended, will govern the demutualization of any federal P & C mutual insurance company, is detailed on the Canada Gazette website (www. Vol. 149, No.9, Feb.28,2015: "Mutual Property and Casualty Insurance Company Having Only Mutual Policyholders Conversion Regulations".

Since July of 2011 when I first began writing about this matter in terms of issues of equity and public policy there have been more than a dozen columns on RickardsRead devoted to it, especially to the matter of the patently ludicrous intention and expectation of fewer than 1000 "voting policyholders" of Economical Mutual to force demtualization of the company as a prerequisite to dividing among themselves more than $1.2 billion in company equity.

As I predicted nearly 4 years ago the federal government has not allowed this corporal's guard of Economical insiders to carry out unimpeded the financial skinning of the hundreds of thousands of non-voting Economical policyholders.

However, the contorted and complicated regime outlined by Finance in the draft regulations is far from satisfactory although I don't deny that inside Finance and indeed the Ottawa beltway it is likely seen as providing more than a fig leaf of political cover.

I will return to this matter in my next column.

The Department of Finance will receive comments on the draft regulations for only 30 days, i.e., until March 30, 3015. Comments can be submitted by email to


Followers on of the Economical / P & C demutualization subject will recall the contributions to intelligent discussion of relevant issues by Claude Gingras (see column nos. 179, 209 & 258). He is a lawyer and a former Vice-President and General Counsel of The Mutual Life Assurance Co. of Canada who was subsequently associated in Ottawa with the Dept of Finance, notably during the development of a demutualization regime for federally regulated mutual life insurance companies.

Mr. Gingras has prepared for RickardsRead his commentary on the federal regulatory regime for P & C companies published on Feb.28. As usual his comments are both very well informed and insightful.

I will return to the Economical Insurance / P & C demutualization subject in Part 2 of this column.


                                 "Comments on the proposed demutualization 
                                   regime for Canadian property and casualty 
                                              insurance companies"

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

Background information

Last February 28, the Department of Finance published draft regulations for a P&C demutualization regime, more than 4 years after Economical Mutual Insurance Company of Waterloo, Ontario, announced its intention to convert into a stock company.  Before commenting on these draft regulations, some background information could be useful.

Economical is one of the large Canadian mutual property and casualty (P & C) insurance companies that have very few policyholders entitled to vote, in fact less than 1000, but with over a million policyholders in total.

This situation was allowed to develop because the Insurance Companies Act of Canada (ICA) grants the right to vote to participating policyholders that can be found only in life insurance companies, not in P&C companies.  Nothing is said in the ICA about voting rights in a mutual P&C company. These companies revert to their Charter for their policyholders’ voting rights.

Originally, subscribers of policies issued with a premium note – a 19th century attempt to refurbish the coffers of a mutual P&C in financial difficulty – were given the right to vote. In fact there has never been a call on those notes, as such a call would do more damage than good, sending a clear message that the company is in real financial trouble.  Economical abolished these notes in 2008, while preserving the right to vote to the privileged few holders of those policies.

In 2003 the Department of Finance proposed to extend by legislation the right to vote to all policyholders of Canadian mutual P&C companies. “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” said the Department in its Consultation Paper. But faced with the fierce opposition of these companies, Finance abandoned this proposal.

Except for the right to vote, there is no difference between voting policies and non-voting policies in these P & C companies.  Their holders pay the same premium for the same coverage, and carry the same risk, that of the possible insolvency of the company, nothing more, nothing less.  Add that these voting rights are granted at the sole discretion of management and it is understandable that Finance raised the issue of fairness in 2003. It should be of no surprise also that those voting policies are held in great majority by directors, officers and employees of these companies.

During the consultation period prior to the draft regulations, Economical requested a demutualization process “essentially the same” as was established for the conversion of life insurance companies some 15 years ago, adding: “mutual policyholders of federal P&C mutuals enjoy at least as strong ownership rights as participating policyholders of federal life mutuals and accordingly have the exclusive rights to demutualization benefits, as did the participating policyholders of the demutualized federal life mutuals.”

If the Government had accepted this argument, each voting policyholder of Economical would receive an amount in the order of $1.5 million at least, in the form of shares or equivalent cash!

But there is a world of difference between participating life insurance policyholders and the voting P&C policyholders of Economical.  The former’s right to vote is given by legislation, not at the discretion of the company. The participating policyholders pay a higher premium than non-participating policyholders and there is a regulated system of policy dividends.  These dividends have long been used by the mutual life companies as a cushion against insolvency.

There were hundreds of thousands of par policyholders in each of the four Canadian life insurance mutuals that demutualized at the end of the last century and none received any amount that would approach, even by far, what the voting policyholders of Economical were expecting to receive. And, in a mutual life insurance company, the non-par business can be considered an investment of the par policyholders. This is at least what the Carter Commission of the sixties argued for the Government to start taxing mutual life insurance companies in 1969. Nothing of that sort can be said about voting policyholders at Economical.

The proposed demutualization regime for P&C mutuals

Ottawa did not “buy” the arguments of the management of Economical. Rather it has proposed a very complex and protracted process of demutualization where voting and non-voting policyholders would be asked to negotiate a fair allocation of the value of the company between the two groups and do so under court supervision.

Each negotiating committee would be represented by a lawyer and 3 to 9 policyholders appointed by the court, with each eligible policyholder having the right to challenge the appointment of even the lawyer that would lead the other policyholders committee - s.8(5). The negotiations would have a year to reach a conclusion, with a possible extension.  Then the “entente” must be submitted to the vote of all eligible policyholders, those with and without right to vote currently.

To allow this the regulations require that the voting policyholders give, at a special meeting, to the non-voting policyholders the right to vote at another special meeting to approve or reject the conversion plan. This in fact is a fundamental change under the Act (extending voting rights to non-voting policyholders) within another fundamental change (the demutualization itself.)

The opinions of independent experts must be obtained on a variety of matters, including the value of the company, the appropriateness of the measure to be taken to ensure the marketability of the shares, the appropriateness of the cash given in lieu of shares, and on the equity and fairness of the allocation of demutualization benefits.

Numerous applications may be made to court, which has the power to make all orders “it considers necessary to ensure the efficiency, the transparency and fairness of the process of negotiating the conversion proposal” – s. 7(3).

In addition, a large volume of information (at times different for each group) must be provided for the various special meetings of policyholders that the conversion process requires, and to the federal Superintendent of Financial Institutions.

Faced with such a complex exercise, it is not surprising that Economical announced that it is pondering whether these draft regulations “can be practically implemented.”  All this to give value to a voting right allocated by the company to some staff and a few privileged policyholders!

 Here are some aspects of these regulations that are questionable:

These regulations would apply to all mutual P&C that have some non-voting policyholders – s.2

Will a P&C insurance company with all its policyholders entitled to vote, except a few with short term policies  like travel insurance, be required to use these regulations if it wants to demutualize, or would a simplified process be available?

It is required by the regulations that those few policyholders with a voting right must receive greater demutualization benefits because of their voting right – s.12(3)

What is the valid reason for such a requirement?  Should it not be left to all the policyholders that would negotiate the conversion plan to decide this matter? Non-voting policyholders have contributed as much to the success of the company, and in much greater number! Further, these few policyholders with right to vote may already have received dividends that, if so, may not have been produced solely by their own premiums. Why this monumental extra gratification?

While the opinions of independent experts are required on various matters, when it comes to opine on the fairness and equity of the demutualization benefits and their allocation, the opinions of both an independent actuary and of the actuary of the company must be given – s. 13(2)(b)

Why the need for the opinion of the actuary of the company who is not "independent” by the very definition in the regulations of this term, and may well be the holder of a voting policy? Can we imagine an independent actuary giving a contrary opinion to that of the actuary of the company?  And what if he or she does?  Given that the person is retained and paid by the company, this is unlikely to happen.

The eligibility to receive benefits is different for holders of voting policies and for those of non-voting policies.  Holders of non-voting policies must have held their policies for the 12-month period ending on the day the company decided to proceed with demutualization.  But policyholders with right to vote need just have their policies on the day of that decision if the company so decides!

In addition, only holders of voting policies may reinstate their policies to participate in the allocation of benefits – Definitions of “eligible mutual policyholders” and “eligible non-mutual policyholders” in s.1.

This is strange.  Instead of plugging the loophole in its legislation, the government is giving the opportunity to the company to make further use of it at a moment where it will really pay for the selected new policyholders! Is this a faintly disguised way of giving legally some of the value of the company to more management, staff and favoured clients?

Each group of policyholders will receive different information. For instance,  holders of voting policies would be given “a detailed description of any significant transaction contemplated in connection of the conversion” but not the holders of non-voting policies – s. 14(j)

This information would be important for both groups of policyholders, to decide for instance,  to take their benefits in form of shares or cash, to keep their shares for the time being, etc. Why give it only to the holders of voting policies?

The regulations require that the by-laws of the company be changed to give to the holders of non-voting policies the right to vote, but only for the approval, or rejection, of the conversion proposal, and to authorize the company to apply for letters-patent of conversion in case of approval – s. 13(1)

The right to extend voting rights is provided in the ICA (s.238(1)(i)) and constitute a fundamental change, but that section authorizes  only a change to vote at all future meetings of policyholders.  While the regulations model the procedure outline in the Act to effect that change, it is questionable whether it is possible to limit, by regulations, its effect under the Act, i.e., to restrict it to voting only at the special meeting of eligible policyholders. In fact it is questionable to provide that right by regulations when the process to do so is already in the Act.

There are other questionable choices that have been made by the drafters of these regulations, albeit of lesser or no legal consequence. For instance, the million plus policyholders of Economical Insurance with no right to vote, who have subscribed their policies with a mutual company, and who have contributed greatly to its success, may be miffed to learn that they are not “mutual” policyholders.

The term is one that Economical likes to use in its communications for those policyholders who have the same rights and obligations as they have, except for this additional voting right. And Ottawa is obliging.


Voting policyholders in a mutual P&C company got their right to vote because they had to sign a premium note obliging them to pay a second premium at the request of the company if in need to replenish its coffers in times of financial difficulty.  As far as it can be ascertained, such a request has never been made, making the obligation highly spurious!

When Ottawa finally revised its insurance legislation in 1992 (the first major revision in 60 years), it should have indicated who shall have the right to vote in a Canadian P&C mutual insurance companies, rather than leaving it to management of each company to decide on a case by case basis. Ottawa could have corrected this oversight again in 2003, but did not.

When Economical abolished its premium notes in 2008 it should have extended the right to vote to all its policyholders with the same contractual rights and obligations.  If the right thing had been done on any one of these occasions, the governance of some mutual P&C companies would have been greatly improved.  And Canadian policyholders would not now have to put up with these contorted regulations.

There is still time for Ottawa to act, before the first P & C demutualization.

March 11, 2015


Part 2 of the attention currently being paid on to Economical Insurance and the proposed federal regulatory regime for P & C insurance company demutualization will appear in the next column (No.285).




to access previous columns and this blog's archive, the links to which
are listed chronologically in the margin beside each column
as it appears on the website, go to
a recent column and use the links

to set a "Google Alert" for RickardsRead columns
in order to receive automatic notice off new columns
as they are posted to, go to