Non-mutual policyholders warned to ‘pay close attention’ to proposed p&c demutualization rules: mutual insurers’ association

The Canadian Association of Mutual Insurance Companies (CAMIC) warned Tuesday that policyholders of mutual property & casualty insurance firms “need to pay close attention” to draft regulations on the demutualization of property & casualty insurance firms, suggesting those proposed rules do not specify what benefits non-mutual policyholders would get in the event of demutualization.

Canada has had regulations on the demutualization of life insurance firms since 1991, but there are currently no regulations in place for the demutualization of P&C insurers.

On Feb. 28, the federal government published a draft regulation – in the Canada Gazette – for mutual insurance companies that have only mutual policyholders. It also published a draft regulation for insurers having both mutual and non-mutual policyholders.

Interested persons have 30 days from the date of the notice to make representations to the federal finance department.

“Fortunately, the draft demutualization regulations proposed by Ottawa set the stage for some sharing of benefits between the mutual and the regular (non-mutual) policyholders,” CAMIC stated Tuesday in a press release. “However, the rules don’t specify if the regular policyholder will get anywhere near what the mutual policyholder will get.”

In a regulatory impact analysis statement – published Feb. 28 with the draft regulations – the government noted that Economical Insurance announced, in 2010, that it was “pursuing a process” to convert from its mutual structure.

“The company indicated that it saw demutualization as a way to enable it to compete more effectively with the large number of share-owned P&C companies that operate in Canada,” the government stated, of Economical, in the impact analysis statement. “Economical Insurance subsequently requested that the Department of Finance Canada develop regulations to facilitate demutualization.”

Other mutual p&c firms regulated by the federal government are Wawanesa Mutual, Gore Mutual, Portage La Prairie Mutual, North Waterloo Farmers Mutual, Saskatchewan Mutual and The Kings Mutual, according to the impact analysis statement.

In companies with a dual policyholder structure, non-mutual policyholders “are not entitled to vote on decisions of the company,” the federal government explained.

So in the proposed regulations, the federal government is proposing a four-step negotiated process, with the company board first deciding who the “eligible policyholders” would be. The mutual policyholders would then vote to negotiate a conversion process with non-mutual policyholders. Then committees of each category of policyholder would negotiate a conversion proposal.

Eligible mutual policyholders would then vote to amend the company’s by-laws “to allow eligible non-mutual policyholders to vote on the conversion proposal.” If a vote by all eligible policyholders passes, then the insurer’s board of directors would apply to the federal finance department to demutualize.

“There is a lot of money at stake and CAMIC believes that the company’s policyholders need to pay close attention to ensure a just and fair result,” CAMIC stated Tuesday.

“The amount of benefits any person would receive depends on various factors including the total amount of demutualization benefits to be distributed, the total number of eligible policyholders, and the negotiated allocation methodology,” Economical Insurance stated in a release March 2.

“For Economical, the primary focus of demutualization is to become a share company so that it has access to capital that would allow it to better compete with other insurers,” Economical said at the time. “While there is a distribution of benefits, a demutualization is not about the distribution of a company’s surplus. The financial benefits of demutualization derive from a transaction accompanying the demutualization process, for instance through which some or all of the newly issued shares would be sold by way of an initial public offering and stock exchange listing.”

However, CAMIC stated Tuesday it recommends Economical policyholders ask either their broker or the company whether they are mutual policyholders.

“Our board and its special committee on demutualization are reviewing the draft regulations to determine if they can be practically implemented and whether Economical will submit comments to the government on the draft regulations,” stated John Bowey, vice-chair of Economical’s board of directors and head of Economical’s special committee on demutualization, in its March 2 release. “We will make the formal decision on whether to proceed with demutualization once the regulations are final.”