Sunday, April 12, 2015

(No.286) "Part 3 -- Economical Insurance Co. & the draft regime for P & C demutualization"


"Part 3 -- The Economical 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

This series of columns on RickardsRead.com has as its focus the proposed federal regulations to govern the demutualization of property and casualty (P & C) insurance companies having both voting/'mutual' and non-voting policyholders.

Part 1 (column No. 284 posted March 15, 2015) included some of my comments on this subject but featured as its core particularly cogent and well-informed comments by Claude Gingras, a lawyer with very considerable direct involvement with mutuality and a mutual insurance company as Vice-President and General Counsel of the Mutual Life Assurance Co. of Canada and later as an advisor in the Dept. of Finance in Ottawa.

Part 2 in the series (column No. 285 posted March 19, 2015) was comprised of my further comments and criticisms about both the draft P & C demutualization regulatory regime and the company (or rather the coterie of insiders who control Economical Insurance Co.)  responsible for the federal government having to develop the proposed regime.

In this column, Part 3, I am sharing two informed reactions to Part 2 of this series (No.285) to which I have added some more of my comments at the conclusion of this column.

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I am sharing first the views of an American professor of insurance studies who wrote to observe that
"with the exception of a few rare cases I have always admired Canada’s regulators.  They seem to know their job of making sure that [insurance] companies are financially sound and well-run and that consumers are protected.  However, the extent to which the draft demutualization regulations fall short truly is breathtaking.

"This case makes it clear that mutual insurance companies with both voting and non-voting policyholders have outlasted their usefulness, whatever it may have been at one time.  If a company is a mutual, all policyholders should have voting rights.  Regulators should establish a process for phasing out the current system that allows second class policyholders."

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Claude Gingras, followed up his previous comments on RickardsRead [ I have added highlighted emphasis for certain points] :

"Thank you for Part 2 of your comments. They are not only well put but go at the root of what is wrong with these proposed regulations for P&C demutualization. They attempt to give a varnish of credibility to what is a major flaw in the federal insurance legislation that allows federally incorporated P&C mutual companies to establish a clubbish style of governance while enjoying the privilege of selling insurance to the unsuspecting Canadian public.

"Yes indeed, it’s a mystery as to why the Harper government decided to cater to the managements of the few companies that made unrestrained use of the voting loophole in respect of P&C mutuals in the Insurance Companies Act, rather than plugging that stupid loophole of which the federal Dept. of Finance and OSFI [the Office of the Superintendent of Financial Institutions] have been aware for many years.

"If it needs to be said: like you I too never had a policy from Economical, or Gore Mutual for that matter. My interest in this is different.

"Having spent my whole career in insurance and most of it in a mutual insurance company, I acquired the solid conviction that mutuality, contractually and also in its corporate form, is the best way to service the insurance needs of the Canadian population. In some countries, corporate mutuality is by far the prevailing structure for insurance but here in Canada it is in steep decline.

"Whose fault is it?  Certainly not competition (ref. The Northwestern Mutual Life Insurance Company in the US or the big mutuals in France). In part it may be because of the greed of management envious of the benefit packages enjoyed by their colleagues in stock companies, including in banks; but mostly because of the callous treatment over many decades of the rights and interests of policyholders by the Canadian government, including Finance, OSFI and the Senate. This sad story should be told one day.

"Meanwhile, back to the proposed federal regulations for P & C demutualization of companies with both voting and non-voting policyholders.

"You are right to point out that there will be no genuine proportionality or practical fairness in the negotiation process between the less than 1000 Economical policyholders with the right to vote and the some one million non-voting policyholders, in order to establish the apportionment of the value of the company between them.

"There is no doubt that the less than 1000 policyholders of Economical Insurance to whom the company granted voting rights in its unfettered discretion will be well assisted by it in these negotiations for the simple reason that “they are us.” For the mass of non-voting policyholders, the story is quite different.

"While shareholders are allowed to obtain the list of shareholders to communicate and seek proxies,  the Insurance Companies Act of Canada does NOT grant the same right to policyholders. So it will not be possible to gather proxies or make proposals at the special meeting required to approve the “entente” arrived at by the two negotiation teams, if any.

"How would the leader of the non-voting policyholders’ negotiation team communicate with his or her constituency, otherwise than through the kind services of the company’s management?  Here is the Harper government solution:  application may be made to court “to ensure the efficiency, transparency and fairness of negotiating the conversion proposal” say the proposed regulations. Here it is difficult to miss the irony!

"We all know that the Harper government resents any interference by the courts with its legislation but when it comes to the handling of a political hot potato that same government has no qualms in authorising the court to override the provisions of the legislation, and this by regulations!

"Again, instead of doing the right thing (i.e., correct by legislation the non-voting loophole) this government, in order to avoid Parliamentary scrutiny, first hides a simple power to make regulations in the huge omnibus Bill 31 of 2014 and then proceeds by regulations with an extremely short period for comments, in addition to proposing a most contorted scheme for P&C demutualization.

"No wonder this reminds me of a saying that my good friend and mentor Benson A. Rogers was fond of uttering when faced with similar situations: 'Oh what a tangled web we weave, When first we practice to deceive'! ”

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Those readers with a continuing interest in this financial and regulatory soap opera may wish to consider the reality of the recondite regulatory and 'political' processes now to be involved IF a P & C company like Economical Insurance, i.e., one with two classes of policyholders, attempts to demutualize under the proposed federal regulatory regime.

I would be somewhat surprised if Economical's controlling insiders decide to proceed (at least in the near term) with the demutualization process, one which will inevitably throw up formidable obstacles to their obtaining anything within a country mile of the sort of financial benefit for themselves which appear to have motivated their Dec. 2010 initiative.

I would be even more surprised if, having decided to go ahead with the demutualization process laid down by the regulations, the process came to a decision point in less than two years from now -- if then.

Whether a decision -- if that point were actually to be reached -- is to demutualize will depend on whether or not the process produces a result considered to be fair; also on whether or not the "negotiation" over the respective financial benefits to be shared by the company's voting and non-voting policyholders is seen to be acceptable by a participating majority of those among Economical's 1+ million non-insiders.

The potential for litigation even during the process but especially after a 'decision point' seems to me to be rather considerable.

RickardsRead will return to this subject when there are developments worth noting. Keep reading the only source (since Economical started the ball rolling) of reliable analysis and critical commentary on Economical Mutual Insurance and P & C demutualization.

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email: Alastair.Rickard@sympatico.ca

blog: www.RickardsRead.com

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