Demutualization: Proposed regulations don’t please everyone

Almost four years after launching public consultations, the federal government has published proposed regulations governing the demutualization of property and casualty insurance companies. The regulations will come into force on the day they are published in the Canada Gazette, Part II. This could happen as early as April 1st.

As suggested in an earlier blog, the release of the draft regulations has not pleased everyone.

The federal government’s public consultation process addressed the issue: who will be entitled to vote on, and receive benefits from, a demutualization. Opinions were divided. Some respondents felt that only mutual policyholders should be considered while others felt that non-mutual policyholders should be included. Still others went further and argued that the benefits should be distributed to other mutual insurance companies or to charity. Given the sharply different opinions of various interest groups, it was never going to be possible for the federal government to come up with a set of regulations that would please everyone.

The proposed regulations take into account the fact that some mutual insurance companies issue mutual policies only whereas other mutual insurance companies issue both mutual and non-mutual policies. Some steps in the proposed demutualization process are common to all mutual insurance companies, regardless of whether they issue non-mutual policies. These common steps include obtaining a valuation of the company from an independent expert as well as obtaining the opinion of an independent actuary that the distribution of benefits is fair and equitable to the eligible policyholders.

For mutual insurance companies that issue mutual policies only, the conversion process is fairly straightforward. The board of directors presents the eligible policyholders with a conversion proposal that describes how the benefits of demutualization will be distributed. If the eligible policyholders vote to approve demutualization, the company has three months to seek the Minister of Finance’s approval.

For mutual insurance companies that issue both mutual and non-mutual policies, the process is more complicated. As to how the benefits of demutualization will be distributed, rather than dictate a solution, the government is proposing a framework that gives mutual and non-mutual policyholders one year to come up with their own solution. The proposed regulations outline a four-step process:

• The board of directors adopts a resolution that recommends conversion and determines who the eligible mutual and non-mutual policyholders will be.
• The eligible mutual policyholders vote on a special resolution allowing a conversion process to be negotiated with the eligible non-mutual policyholders.
• A conversion proposal is negotiated within one year by a committee of eligible mutual policyholders and a committee of eligible non-mutual policyholders. Both committees will have access to their own, court-appointed counsel.
• The eligible mutual policyholders amend the company’s by-laws to allow eligible non-mutual policyholders to vote on the conversion proposal. The eligible mutual and non-mutual policyholders vote on the conversation proposal. If the conversion proposal is passed, the board of directors then has three months to apply to the Minister of Finance for permission to demutualize.

In a news release welcoming the federal government’s release of draft regulations, the chair of Economical Insurance’s board of directors, Gerald Cooper, was quoted as saying, “With the greater access to capital that demutualisation can bring, Economical could make the significant investments it needs to compete on an equal footing with other P&C companies that do not face the same constraints on financial flexibility imposed by the mutual structure.” This quote is consistent with Economical’s stated objective for opening up the demutualization debate in the first place. The company has never said it was pursuing demutualization for the purpose of enriching its mutual policyholders. The stated objective all along has been to demutualize in order to gain access to equity markets as a mean of raising capital to fund expansion.

In a media statement issued last week, the Canadian Association of Mutual Insurance Companies (CAMIC) took issue with the idea of distributing the benefits of demutualization to mutual policyholders only, leaving non-mutual policyholders out in the cold. CAMIC’s President, Normand Lafrenière, commented that “you don’t take [the benefits of demutualisation] and just give it to a small group that represents less than one per cent of all policyholders. That would be very unfair to say the least.”

It didn’t take long for Economical Insurance to respond. Later the same day, Doug Maybee, Economical’s manager of public  and media relations, issued a statement pointing out that the proposed regulations leave it up to court-appointed committees of mutual and non-mutual policyholders to determine how the benefits of demutualization will be allocated. The company itself is not involved in the process.

Although the proposed federal government guidelines do not guarantee that non-mutual policyholders will share in the benefits, it is hard to imagine that the non-mutual policyholders and their court-appointed legal counsel would agree to a conversion proposal that doesn’t allow them to share equitably in the benefits of conversion. The question of course is, what represents equitable sharing? Whether the mutual and non-mutual policyholders can come up with an answer to this question within a year remains to be seen.

The proposed regulations, if adopted, lay out the process a mutual insurer must follow if it wishes to demutualize. In the case of an insurer such as Economical that has both mutual and non-mutual policyholders, the process does not guarantee a successful outcome. The process can become derailed at any point along the way. We are entering uncharted waters here. Assuming Economical Insurance pursues demutualization, it will be instructive to see how well the proposed regulations work in practice.