Canada’s Oldest Insurers: Shared Roots. Independent Futures

At a 2010 board meeting in Waterloo, Ont., the now 146-year-old Economical Mutual Insurance Company made a firm decision that demutualization would be integral to its future survival. Canadian insurers were under financial pressure. The financial services industry was rapidly consolidating, with small banks practically devoured by Canada’s big five. Life insurance companies, enabled by changes to federal legislation in the mid-1990s, were abandoning mutual models that had held them in good stead for more than a century, opting instead to go public in search of big capital.

“Our view is there are generally two paths – you can be small, agile and nimble, focused on niche insurance, or you have to scale up,” says Rowan Saunders, who joined Economical as CEO in November 2016. “In order for us to achieve our aspirations to become a market leader and one of the top P&C companies in Canada, we have to scale up.”

Down the road in Cambridge, Ont., leaders at Gore Mutual Insurance, Canada’s oldest P&C insurer, have come to a very different conclusion about their future.

“We made the decision in 2015 that we are going to remain a mutual company, with 100 per cent commitment to our broker channel,” says Paul Jackson, vice-president of marketing, sales and distribution at Gore Mutual. “That was a pivotal moment in our history. We’re not a niche player, not a farm mutual. We’re not one of the big five. So we’re working really hard to make our business unique and differentiated as the standout mid-sized insurance company in the market, and to be a valuable strategic partner with brokers.”

A shared history

That Gore and Economical are forging different futures 150 years post-Confederation highlights a significant shift in Canada’s P&C insurance industry. The two oldest Canadian insurers have, after all, a largely common history. Both were formed in small towns West of Toronto by like-minded businessmen, who sought to protect their mutual assets at a time when devastation from fire was all too frequent.

Fire! Fire! Fire!

A walk down any so-called urban main street in Canada in the early 1870s would be enough to give today’s risk manager a fright. Terraced wooden buildings, sometimes with masonry facades, housed people and businesses alike. Within the same timber walls as the town clerk, one might find a tannery, a blacksmithy, or some manufacturing operation that had emerged as part of Canada’s late industrial revolution. Life was precarious. Settlements, even those as established as Montreal, were prone to massive annual spring floods. Devastation from fire was all too common. In the latter half of the 19th century, fire wiped out entire segments of Montreal, St. John’s, Quebec City, and even Ottawa.

At Confederation, Gore Mutual Fire Insurance Company was 28 years old. Its leaders were reputedly shrewd risk managers. In 1854, the company developed a catalogue for risk assessment that placed properties into 22 different risk categories and diversified its insured properties. In 1873, the company purchased the local fire brigade’s first steam engine. Gore Mutual’s 1876 Annual Report listed 105 fire losses totaling $54,635, with inspectors determining 38 per cent were the result of arsonists. The future of their business must have felt very tentative.

Likewise, the founders of the Economical Mutual Fire Insurance Company of Berlin (now Kitchener), must have been nervous. In 1871, during Economical’s first year in operation, the great fire of Chicago razed 2,100 acres, after Mrs. O’Leary’s cow knocked over a lantern in a barn. W.W. Foot, author of Economical’s corporate history, notes the fire, which burned more than 17,000 buildings, killed hundreds of people and left 98,000 homeless and “eclipsed all others in magnitude and loss.” That Economical was able to survive its inaugural years was largely due to luck and careful asset management. The company had no claims in the first two years and was able to report cash payments of $381.96 in 1873. At the time, the annual income for an industrial worker in Canada ranged from $185 in Quebec to $245 in Ontario.

Survival of the fittest

Over the next decades, as competitors were bankrupted, both Gore and Economical continued on a straight path of growth. They were highly competitive but worked together as industry leaders, pushing for legislative and regulatory change, like the 1914 establishment of the Fire Marshal’s office and changes to federal legislation in the 1930s to allow for incorporation, that would strengthen the industry into the 20th century. They held a common understanding that business success was reliant on the success of their communities. War-time profits funded war coffers. Gore’s headquarters is the result of a Depression-era make-work project. As their assets grew, the two companies made strategic acquisitions in the ‘20s, diversified into automobile accident and injury insurance in the late ‘30s, and made a highly commercialized push into new lines in the ‘50s.

It’s surprising that any P&C company in Canada survived the latter half of the 20th century. Costs outpaced earnings in auto for decades, until the 1976 introduction of mandatory seatbelt laws in Ontario and Quebec and the reduction of speed limits. Worldwide, inflation and the sudden withdrawal of U.S. and U.K. underwriters from the Canadian market in 1974 marked what was considered to be “the worst year in the history of general insurance,” according to Economical’s corporate historian, Foot.

Weather-related catastrophic claims were also starting to take their toll. In 1974, two windstorms in Niagara and Windsor amounted to $300,000 losses for the P&C industry. A Calgary hailstorm in 1981 cost the industry $98 million. Tornadoes in Edmonton in 1987 amounted to $250 million in losses. Another hailstorm in Calgary in 1991 received the largest catastrophic claim in Canadian history at the time, costing insurers more than $400 million. For 21 straight years between 1978 and 1999, every insurance company in Canada reported underwriting losses.

It was the turn of the century that would mark a major shift in Canada’s financial industry and trigger a divergence in the histories of Economical and Gore. On January 31, 2000, Ottawa approved the $8-billion takeover of Canada Trust by the Toronto-Dominion Bank, the catalyst for a series of large-scale consolidations in financial services that would eventually evolve into the P&C industry.

Economical: Making History

“Inorganic growth has served Economical well since 1871,” says CEO Rowan Saunders. “But this, until now, has happened at a reasonably modest level. The transformation we’re about to make into a public company is the biggest and most dramatic move we have ever made in our history.”

They’ll also be the first Canadian P&C insurer to do it. Recent decades have seen large scale natural catastrophes and the 2008 shock to capital markets: just two types of incidents that can impact a mutual’s earnings and capital strength.

Unlike public companies, mutuals are often forced to hold extra capital to weather the storms, restricting the speed at which they can enter new markets and hindering innovation, Saunders argues.

The transformation we’re about to make into a public company is the biggest and most dramatic move we have ever made in our history.”

“When you are a mutual company and you don’t have access to alternative sources of capital, it has some limitations on your business and your aspirations,” says Saunders. “You have to be more prudent and conservative than you would otherwise have to be.”

Since 2010, Economical has engaged with policy holders, regulators and legislators on how to shift its company from a mutual, where all shareholders are also policyholders, to a publicly traded company. The path to demutualization is a long one, however. As the industry disrupter, leaders at Economical have had to be patient. Federal legislative framework changes came in 2011, with a number of other regulatory loose ends tied up in the intervening years. Saunders fully expects shareholders will hold the company’s feet to the fire when it comes to getting reasonable returns.

“Operational intensity will change within the business,” says Saunders. “Because there is a demand and competition for public capital, shareholders will have higher expectations for return than do current policyholders.”

Do higher returns mean higher prices for policy holders? Not necessarily, says Saunders.

“In some cases, we may find that we have been inefficient in our pricing until now and have been undercharging,” he says. “But in other cases, our prices will be much more efficient and reflective of the markets.”

Despite the lengthy process of demutualization, which is expected to be approved in 2018, Economical isn’t just sitting around. On January 1, Economical acquired Petline Canada, one example of line diversification into an area of personal insurance that is expanding.

Last May, Economical also made a bold move, entering into the direct-to-consumer market with its digital insurance company, Sonnet. The insurer has marketed it as the first entirely digital (quote-to-bind) home and auto insurance offering in Canada. Michael Shostak, chief marketing officer for Economical and Sonnet, has promised that the technology behind Sonnet – including sophisticated data collection and analytics – is something Economical plans to share with its broker partners. “We want Economical to thrive for the next 100 years as an independent Canadian company,” says Shostak. “But we need to be the size to fend off international competitors. We have to grow the footprint of our business. It’s important to us and it’s important to our broker channel that we scale up.”

Gore Mutual: Broker Champion

Over the next three years, Gore Mutual will be investing more in its broker distribution channel than it ever has in its history, says Paul Jackson, vice-president of sales, marketing and distribution for Gore Mutual.

“We are the oldest insurance company in Canada, we have withstood two world wars and the Depression, but what we’re facing now is unprecedented change in our industry,” says Jackson. “We’re seeing bold moves by large insurance companies investing in buying brokers, new digital channels, and brokers boldly setting out strategies as investments for their future.”

In 2015, Gore made the decision that it would remain a mutual with 100 per cent broker distribution. But Jackson acknowledges that integration between insurance companies and brokers can no longer afford to be difficult, clunky, inefficient and time-consuming.

“If you look at innovative direct models that are coming to the Internet, this puts brokers at a disadvantage,” says Jackson. “We are manufacturing Internet-ready, modular products designed for online distribution, using an API layer to get those brokers in an efficient place to compete.”

On June 6th, Gore hosted a seminal conference to inspire brokers to “think about their future more ambitiously.” It was here Gore announced its new digital sales platform, confirming that it will be replacing legacy technology with new web-based flexible platforms that will, in essence, “Shopify” the broker distribution network.

“Our pricing and product features are designed on the assumption that the customer will do online self-service,” Jackson explains. “What we’re trying to do is create efficiencies through the use of automation and artificial intelligence to allow broker and underwriter to focus on more value-add activities like sales and relationships, while the technology does the heavy work.”

Automation, personalization, simplification, e-commerce. These are innovative tools that will enable brokers.”

Their renewed digital focus aims to create new digital tools that will help brokers compete against direct insurers. “Automation, personalization, simplification, e-commerce. These are innovative tools that will enable brokers,” says Jackson.

He notes that Gore is also focused on creating innovative and forward-thinking products that will only be available to consumers through its broker channels. At the June conference, they launched Padlock, which Jackson believes is the most comprehensive cyber and data protection product in the Canadian market. Besides their online innovations, Gore sees a future for its brokers to modernize their brick-and-mortar shops.

“We think the modern customer is looking for the omni-channel approach,” says Jackson. “Yes, they might want to access it on their smartphone, but they may want to go in-store. But it has to be a modern, digitized, in-store experience, not the old-fashioned experience that brokers have traditionally offered. Brokers need to be where the customers are. By empowering our brokers, we believe we can empower the customer to choose the way they want to deal with us,” says Jackson.

“We have seen the shrinking of the broker distribution network in the U.S. and the U.K. and we believe there are very interesting, growing, ambitious brokers in Canada who have the vision to create a new future with us.”

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Copyright © 2017 Transcontinental Media G.P. This article first appeared in the June/July 2017 edition of Canadian Insurance Top Broker magazine

This story was originally published by Canadian Insurance Top Broker.