Canada: Proposed Regulations For Mutual Property And Casualty Insurance Company Conversion

In connection with our previously issued e-Lert, the Department of Finance has recently released two draft regulations under the Insurance Companies Act ("Act") to allow federally regulated mutual property and casualty ("P&C") companies to convert to share companies (a process called demutualization). One set of proposed rules addresses P&C companies comprised of only mutual policyholders ("Single Structure Conversions"), while the other set addresses P&C companies with both mutual and non-mutual policyholder structures ("Dual Structure Conversions"). Although the Act already contemplates the demutualization of both mutual life and P&C insurance companies, regulations for P&C companies do not currently exist.

Summary of the Proposed Regulations

Below is a high level summary of the proposed framework applicable to both Single and Dual Structure Conversions:

  • Initiation and Termination

    Only the board of directors may initiate the process by passing a resolution recommending demutualization (the date of which is referred to as the "Eligibility Date"). Once commenced, the board may terminate the process at any time before the conversion is completed.
  • Disclosure

    The board of directors must provide prescribed disclosure information, including a "conversion proposal" to eligible policyholders and the Office of the Superintendent of Financial Institutions. The conversion proposal must include, among other things, a description of the benefits to be distributed to eligible policyholders.
  • Eligibility

    In general, mutual policyholders are eligible to participate in the process if they held a mutual policy on the Eligibility Date. Non-mutual policyholders are eligible to participate if they held a non-mutual insurance policy for at least 12 months leading up to the Eligibility Date. The board of directors may choose to expand (but not reduce) the prescribed scope of policyholder eligibility.
  • Voting and Determination of Benefits

    A vote must be held among eligible policyholders to accept the conversion proposal. In the case of Dual Structure Conversions, eligible mutual and non-mutual policyholders must engage in a court supervised negotiation to agree on the terms of the conversion proposal. The two groups will have one-year to reach an agreement and vote on the proposal, otherwise the demutualization process will terminate. If the vote is passed in favour of demutualization, the company may apply to the Minister of Finance to request final approval.
  • Transition Period

    The company must remain widely held for at least two years following the demutualization.

For additional details, please see the Regulatory Impact Analysis Statement released by the Department of Finance.


The proposed regulations for Single Structure Conversions are generally similar to those currently in place for mutual life insurance companies. However, the rules proposed for Dual Structure Conversions contain a significant difference in that non-mutual policyholders may effectively veto the demutualization by refusing to consent to the conversion proposal.

One advantage of demutualization is that it provides the company new access to capital by issuing shares in the public and private markets. As part of the process, mutual policyholders (as owners of the company) would have their interests converted to shares, cash, or other benefits, while non-mutual policyholders (as non-owners) would not receive a benefit. The move to empower non-mutual policyholders is partly explained by the unique nature of Canada's mutual P&C industry. Some of the country's largest mutual P&C companies are comprised predominantly of non-mutual policyholders. For example, Economical Mutual Insurance Company ("Economical"), a P&C company with approximately 940 mutual policyholders and 900,000 non-mutual policyholders, has announced plans to pursue demutualization. If the proposed regulations are put into force, demutualizations by mutuals such as Economical will likely result in a form of shared allocation among all eligible policyholders, as opposed to a windfall for a small group of mutual policyholders.

It is likely that there will be significant criticism of the draft regulations dealing with Dual Structure Conversions. If the regulations are implemented without significant changes, litigation is a real possibility if a mutual insurance company attempts to demutualize. An argument exists that only mutual policyholders should be able to participate in the demutualization since they are the legal owners of a company in the event of a wind-up. The regulations have taken a long time to be released and clearly reflect an attempt by the Department of Finance and the Office of the Superintendent of Financial Institutions to try to balance competing (and possibly irreconcilable) interests among various policyholder groups. It will be interesting to see whether any material changes are made to them before they are implemented.

Making a Written Submission

Persons interested in submitting comments to the Department of Finance on these newly proposed regulations must do so no later than March 30, 2015.

Submissions may be forwarded in the following manner:


Glenn Campbell
Financial Institutions Division
Department of Finance Canada
90 Elgin Street, 13th Floor
Ottawa, Ontario
K1A 0G5
Telephone: 613-369-3945
Fax: 613-369-3894

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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