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more than 4 years ago one federal finance minister (who wisely kept kicking this can down the road) has died and been replaced by a far less politically astute successor who has now allowed/directed his senior mandarins in Finance to produce a draft regulatory regime for public comment.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).




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