Canada: The Feeling's "Demutual" Draft Federal Legislation Released For Demutualization Of Property And Casualty Insurance Companies

Last Updated: March 23 2015
Article by Carol Lyons and Jonathan Rajzman (Student-at-Law)

On February 28, 2015, Canada's Department of Finance published two draft regulations1 under the Insurance Companies Act2 (the "Draft Regulations") that, if implemented, would allow the demutualization of federally regulated mutual property and casualty insurance companies ("P&C Mutuals").3 The Draft Regulations address the two forms of corporate structure: P&C Mutuals with only mutual policyholders and P&C Mutuals with both mutual policyholders and non-mutual policyholders. Demutualization would allow P&C Mutuals to convert from policyholder-based ownership to share-based ownership and subsequently issue shares on public markets. The Draft Regulations are open for a 30-day public comment period.

Structure of P&C Mutuals

P&C Mutuals have a similar structure to traditional share-based corporations in Canada, subject to one key difference. In P&C Mutuals, the policyholders take on the role of both the owner and customer, while in corporations the roles are much more distinct. This distinction can lead to a divergence of interests in a corporation. For example, surpluses in Mutual P&C Companies are returned to the member policyholders in the form of dividends or reduced premiums. In these instances, policyholders benefit from the success of a Mutual P&C. In contrast, surpluses in corporations are returned to investors without necessarily benefiting the policyholder.

The Road to Demutualization

Regulations for demutualization of life insurance companies have been in place since 1999 (the "Life Regulations").4 However, it was not until four years ago that the push towards demutualization of P&C Mutuals began. In late 2010, Economical Insurance5 announced its intention to pursue demutualization in Canada. The federal government responded in its Budget 2011 by proposing to develop a framework for demutualization. The Draft Regulations represent this long-awaited framework.

Summary of the Demutualization Process

In developing the framework, the government's goal was to provide P&C Mutuals with an orderly and transparent process that would ensure the fair and equitable treatment of all policyholders. To achieve this goal, a considerable emphasis on corporate governance has been integrated into the framework. The process itself must be initiated by a board of directors, and can be halted at any time prior to the issuance of letters patent should the board determine that demutualization is no longer favourable. Transparency is also integrated, and is furthered by required valuations and prescribed disclosure to policyholders. Finally, to facilitate the transition process and prevent takeovers of newly converted companies, there is a requirement, subject to exemptions, that all converted companies remain widely held for two years following a conversion.

Compared to the Life Regulations, the Draft Regulations provide far greater protection for non-mutual policyholders. As discussed below, this is ensured through the required negotiation process. However, the supervision of this protection is almost entirely delegated by the Ministry of Finance to the courts.

Although the steps for conversion are similar between the two governance structures, conversion of P&C Mutuals with non-mutual policyholders is far more cumbersome than conversion of P&C Mutuals with only mutual policyholders.

Conversion of P&C Mutuals with only mutual policyholders

For P&C Mutuals with only mutual policyholders, the process is relatively simple. The board must pass a resolution to recommend conversion and provide a conversion proposal to each eligible policyholder.6 The proposal must identify the benefits of demutualization and be accompanied by a formal valuation, verifying that the proposed apportionment of benefits is fair and equitable to the eligible policyholders. The proposal to demutualize must then receive approval by a special majority of policyholders. If that approval is obtained, the company must then seek the approval of the Minister of Finance within three months.

Conversion of P&C Mutuals with non-mutual policyholders

  1. The board of directors must pursue demutualization:

For P&C Mutuals with non-mutual policyholders, the process also begins with a resolution of the board of directors recommending the conversion. However, the board must now identify all eligible policyholders7 and other persons who would otherwise qualify under the regulations to negotiate the conversion proposal.

  1. Eligible mutual policyholders vote on whether to negotiate a conversion proposal:

In order for the process to proceed, eligible mutual policyholders must vote by special resolution to negotiate a conversion process with non-mutual policyholders.

  1. Negotiating the conversion proposal:

At this stage, the negotiation comes under the court's supervision. The company must file an application with the relevant court for an initial order setting out how, among other things, policyholders may participate in the process. The court then receives applications and appoints counsel to each of the two groups of policyholders. Once counsel have been selected, interested policyholders may submit to counsel applications to sit on one of the two policyholder committees. It is the committees, composed of the appointed policyholders and represented by counsel that will then negotiate a conversion proposal.

  1. Eligible mutual policyholders vote to amend by-laws and all eligible policyholders vote on the proposal:

Once the proposal has been negotiated, it must be approved by the Superintendent to ensure that it does not pose undue operational or prudential risk and that it complies with the regulations. After this approval is received, the eligible mutual policyholders must vote by special resolution to amend the company's bylaws to extend the right to vote on the proposal to the eligible non-mutual policyholders. If the right to vote is extended, a special meeting will be called where all eligible policyholders will vote on a special resolution to approve the proposal. If the special resolution passes, the company must seek the approval of the Minister of Finance within three months.

Comments on the Draft Regulations

The Draft Regulations represent a significant milestone for P&C Mutuals. While they are subject to change, the ultimate question is when, and not if, these regulations will be put in force. The process has been ongoing for over four years and the short 30-day comment window may be indicative of the government's desire to have this legislation move forward quickly.

P&C Mutuals desiring to demutualize argue that conversion will open up additional avenues for growth and access to capital, allowing them to compete with the rest of the insurance industry. Further, as the P&C Mutuals enter the capital markets, investors will be provided with a new industry segment in which to invest. From a corporate governance perspective, conversion will allow P&C Mutuals to unfetter themselves from the restrictions associated with mutual policyholders.

Despite the advantages to P&C Mutuals, it is important to note that there is a divide within the industry and there remains uncertainty as to the far-reaching effects of this legislation. While major insurers such as Economical Insurance are pushing for demutualization, the Canadian Association of Mutual Insurance Companies ("CAMIC"), takes a cautionary approach. CAMIC, which represents the bulk of the industry, warns that demutualization may actually penalize many policyholders, and could result in a retreat of insurers from rural Canada.8

With regards to the industry, the Draft Regulations may signal the end of an era for P&C Mutuals. Many of these companies began as a cooperative effort to mutually insure other rural farmers at a time when most joint stock insurers refused. The result was an affordable member-owned insurance program, where the interests of owners and customers were aligned. Newly converted entities may not embrace these same principles. Further, while the framework only provides the option, not an obligation, for P&C Mutuals to demutualize, it remains to be seen whether smaller niche Mutual P&Cs can compete against the larger converted entities, or maintain their relevance. This issue may be amplified if the provinces independently pursue a similar demutualization framework for provincially regulated insurers.

Finally, the question remains whether or not the Draft Regulations will embody the orderly and transparent process hoped for to ensure the fair and equitable treatment of all policyholders. The Draft Regulations delegate much of the burden to boards and the courts to ensure a fair and transparent process. Further, it is unclear exactly where some aspects of the financial burden of the process (including counsel fees) lies and whether such burden would fall in line with the government's goal of fair and equitable treatment throughout the process.

Regardless of one's position, the Draft Regulations represent a long-awaited mechanism for change within the industry. Interested parties are encouraged to make comments, which will be accepted until March 30, 2015. McMillan expects to provide more information on the Draft Regulations as it becomes available.

Footnotes

1.The first applies to Mutual P&C Companies with only mutual policyholders, available here. The second applies to Mutual P&C Companies with a mix of mutual policyholders and non-mutual policyholders, available here (collectively the "Draft Regulations").

2.SC 1991, c 47.

3.The Regulatory Impact Analysis Statement released alongside the Draft Regulations notes that "[t]he federally regulated Mutual P&C sector is narrow and consists of seven companies, most of which operate rurally and regionally. They are Wawanesa Mutual, Economical Insurance, Gore Mutual, Portage La Prairie Mutual, North Waterloo Farmers Mutual, Saskatchewan Mutual, and The Kings Mutual."

4.See the Mutual Company (Life Insurance) Conversion Regulations, SOR/99-128. Four life insurance companies have completed the demutualization process: Canada Life Insurance Company, Manufacturers Life Insurance Company, Sun Life Assurance Company of Canada and Clarica Life Insurance Company (formerly The Mutual Life Assurance Company of Canada).

5.At the time it announced its intention, the company was known as Economical Mutual.

6.As defined in the Draft Regulations.

7.These include both eligible mutual policy holders and eligible non-mutual policyholders, as defined in the Draft Regulations.

8.Mckenna, Barrie & Nelson, Jacqueline, "Federal demutualization plan divides mutual insurance companies", The Globe and Mail (March 2, 2015), online http://www.theglobeandmail.com/report-on-business/demutualization-plan-divides-canadian-mutual-insurance-companies/article23255408/?cmpid=rss1>.

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2015

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Carol Lyons
Jonathan Rajzman (Student-at-Law)
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions