New proposed federal regulations to allow mutual insurance companies to go public were met with mixed reactions, dividing one large company from its peers.
If finalized, the Department of Finance's recently drafted rules would let federally regulated mutual property and casualty (P&C) insurance companies issue shares in the public markets – a process called demutualization. While Waterloo, Ont.-based Economical Insurance has campaigned for the change since 2010, saying the action would allow it to fairly compete with other public companies, many others in the industry are concerned about the long-term effects of the new rules.
The rules are centred on seven federally regulated P&C insurers overseen by the Office of the Superintendent of Financial Institutions (OSFI), of which Economical is one of the largest. The 143-year-old company has been the chief driver of the recent changes, the company and its opponents say.
"Economical is a fairly big company to be a mutual company, but not quite big enough to compete with our major competitors that are either public- or foreign-owned and really well capitalized," said John Bowey, head of the company's special committee on demutualization.
The Canadian Association of Mutual Insurance Companies (CAMIC), which says it speaks for the bulk of the industry, warns that the demutualization rules risk penalizing millions of policy holders and triggering a retreat of insurers from rural Canada.
Ottawa ignored the association's plea to remove the profit motive for demutualizing by mandating that surpluses be given to the entire industry or to charity, not existing policy holders.
Most mutual insurance companies were created more than a century ago and their surpluses belong to generations of policy holders, pointed out CAMIC president Normand Lafrenière.
"You don't take that money and give it to the current slate of policy holders," he said. "This is a robbery of past generations."
The Finance Department said many provisions within the proposed regulations respond to CAMIC concerns. "For instance, persons other than policy holders, such as charities, can receive benefits from a demutualization if the policy holders choose so," spokesman David Barnabe said in a statement.
Economical, which has $1.7-billion in equity, argues that its surplus belongs to the company.
Large insurers have been buying up competitors in a wave of industry consolidation in Canada. Among the largest deals was co-operative financial group Desjardins Group's purchase of State Farm Canada in January, 2014. Last year, the top five Canadian P&C insurers controlled 45 per cent of premium volume, according to a recent report from consultants at Ernst & Young.
And the deals show no sign of slowing. "As the difficult economic conditions continue in 2015, further consolidation is anticipated," the report stated.
CAMIC's concern is that consolidation will lead to a retreat of insurers from the low-margin farm market, pushing up premiums. "This is bad news for rural Canada," Mr. Lafrenière said.
The federal rules will become a blueprint for a broader swath of provincially regulated insurers, according to Mr. Lafrenière. "That's why we want rules we can live with at the federal level," he said.
Economical counters that there's still a place for niche mutual insurers and says the guidelines simply provided the option, not the obligation, to demutualize.
OSFI said it will be up to provincial regulators to decide whether or not they will apply similar guidelines to the country's other mutual insurers.
Economical has not yet decided whether to pursue demutualization under the new rules. To successfully go public, the insurers' two groups of stakeholders – about 900 mutual policy holders and several hundred thousand non-mutual policy holders – must agree on terms. The two groups have vigorously disputed their ownership of the company in the past.
The proposed process includes court-facilitated negotiation with both of these policy holder groups. They would be given access to external experts, the Finance Department said, and demutualized companies would be required to be widely held for two years.
Economical's Mr. Bowey still has questions about the draft guidelines, namely how much input the company's leadership will have in how benefits are shared.
"For the most part – the way the rules are proposed now – the company would have very little input and opportunity to make recommendations, which, to be frank, is one of the concerns that we have," Mr. Bowey said.