Fundamentally, the characteristics of ownership under a life mutual or P&C mutual are non-
existent. Debating the differences would be akin to debating the differences of life and P&C
companies that are stock companies. Mutual structures were created for many reasons, but for
the sake of brevity and relevance, they are not explored in this paper.
Mutual policyholders under a life model or P&C model are no different. One need only look to the
by-laws of the individual companies to understand the rights attributable to each.
For this reason, I do not see the need to vary the policy objectives as they pertain to
demutualization of P&C companies versus those of the life companies.
b) Demutualization Process
1. What should be the process for allowing a P&C company to demutualize? In particular, what
should be considered in determining who should have the right to vote on, and receive the
benefits of, demutualization?
Looking at the life demutualizations, specifically those of Mutual Life (Clarica), Manulife, and Sun
“The entire value of *Mutual Life+ was distributed among individual and group
policyholders who, on the eligibility day of December 29, 1997, had the right to vote
at policyholder meetings” (From Towers Perrin)
“The entire value of Manulife was distributed among eligible policyholders. In
general these are owners of participating policies issued by Manulife in force on the
eligibility day of January 20, 1998.” (From Towers Perrin)
“Policyholders eligible to participate in the Company's demutualization are, in
general, those who held participating policies on January 27, 1998 - when Sun Life of
Canada first announced it would consider a plan to demutualize” (From sunlife.ca)
In the case of P&C companies, the rights of mutual policyholders (participating policyholders) are
the only ones who have, and should have the right to vote at any meetings of the companies
mutual policyholders. In some cases, for over 150 years this has been the case. When the issue
now turns to demutualization, why should this now be changed? Ownership by the mutual
policyholders has been upheld in the life demutualizations, and as the structure of ownership is no
different in a P&C context, neither should the determination of who should have a right to vote.
In the case of the Economical Mutual Insurance Company demutualization, I contend that the date
on which the board of directors indicated that they would undertake a path to demutualize should
be the date of record. Any policies that were in progress of issued after this date should not be
eligible to participate. With the knowledge of demutualization the control over issuance could be
abused and to bring legitimacy to the process, only those not having the knowledge that the
company would demutualize should be afforded this right. In the case of Economical this date
would be December 14, 2011, as indicated on their website
2. What should be considered in ensuring that policyholders are treated fairly and equitably,
including for determining the value of the company and apportioning the benefits of
In the life model two broad formulae were used to apportion value to the owners of the company,
the mutual policyholders. A fixed value, akin to the value for the right to vote; and a variable value
based upon a formula that considered difference policy attributes.
I would agree that using the same broad model would be appropriate in the P&C context, with a
few amendments to account for variations in the number of policyholders.
Fixed component: In the life distributions, this varied between 15 and 25%. As most of the life
companies had a broad base of participating mutual policyholders (Mutual/Clarica 897,000,
Manulife 671,000, and Sun Life over 1 million). Each policyholder did not have significant influence
over the outcome of the vote, and therefore a fixed value that is lower was justifiable.
In the P&C context, it will be difficult to determine any range without first looking at the
characteristics of ownership at the company level. For the purpose of demonstrating this fact two
large mutual P&C companies will be examined, Economical Mutual, and Wawanesa Mutual
In the case of Wawanesa, their mutual policyholder base is broad, and as indicated on their
website, owned by its policyholders. In this case, it would be reasonable to look at the life model
and apportion value in a similar fashion, 15 – 25%. Each individual vote in this case will not have a
significant impact on any issue presented to the owners.
In the case of Economical, where at its recent AGM approximately 940 mutual policyholders were
eligible to vote, each vote was very valuable. At the meeting, the issue of who should be on the
board of directors was being considered.
If the sheer number of policyholders available to vote does not impact the distribution, then one
need only look at the events leading up the last AGM to get an appreciation of how valuable each
Economical issued approximately 10 letters to voting policyholders leading up to the AGM
VC&Co, the company representing dissident policyholders, sent at least 3-4 letters soliciting
votes leading up to the AGM
Economical held countless town hall meetings with mutual policyholders who were
employees, retirees, and brokers to solicit votes
VC&Co held a town hall with all mutual policyholders to solicit votes
VC&Co launched court challenges that were vehemently defended by Economical regarding
the right to put the motion to a vote, and appealed the decision leading to a settlement on
the nature of the proxy.
All these points are highlighted to demonstrate that in the case of Economical, nothing was more
valuable than one individual vote. For this reason, the fixed component distribution for companies
with smaller policyholder bases should be much higher, with 75 – 90% of the company shared
equally amongst the owners, the mutual policyholders
When it comes down the remaining undistributed value after applying the fixed component, the
same argument applies. In the case of companies with smaller policyholder bases, the weight given
the characteristics such as premium size, claims made, or tenure would vary significantly. To
illustrate this point, again, the case of Economical will be examined.
What is it that drives the participation for any individual policyholder? In the life model with a
broad base of owners, it would be reasonable to look at the size of the policy or any other policy
specific data, since as a whole the owners represented a large percentage of the policyholder base.
This cannot be said for Economical. With only 940 mutual policyholders, this group represents an
insignificant fraction of the premium or policyholder base of the company. It is by virtue of
ownerships rights that participation is driven. This is not to say that a policyholder, who has had a
policy for 60 years, should receive 60 times the value of a policyholder who has held a policy for
only 1 year. What really drives the longevity is the performance of the company during the period
of time a policy was held. Furthermore, as P&C insurance cycles are well documented, it would
further be reasonable to band participation in 4-7 year timeframes. A table below illustrated how
this may be applied.
2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993
created 87 92 -177 104 130 173 161 35 -2 3 20 57 66 79 70 72 30 258
surplus 1258 1171 1079 1256 1152 1022 849 688 653 655 652 632 575 509 430 360 288 258
5 yr surplus
created 236 370 292
In the case of owners/mutual policyholders who acquired their policies from 2006-2010, $236
million of the 2010 closing surplus of 1,258 million was created, representing 18.8% of the residual
value. For owners/mutual policyholders who acquired their policies from 2001–2005, $370 million
of surplus was created, representing 29.4% of the residual value. Similarly, for those who acquired
their policies from 1996 – 2000, $292 million of surplus was created, representing a further 23.2%.
The balance, or $360 million is represented by those who acquired their policy in 1995 or earlier,
and this would represent 29.6% of the value. With sufficient data, one could calculate the five year
bands going back further.
So in the case of someone who acquired their mutual policy in 1999, in this model they would be
eligible for their proportionate share of 71.4% of the variable or residual value (18.8+29.4+23.2)
In conclusion to the rights and value components, precedent has been set in the Canadian life
demutualization that only the voting or participating policyholder are the owners of the company,
and only those policyholders have the right to participate in the proceeds of demutualization.
Accepting this fact would then lead one to accept that the form of distribution would follow the
same model. Similarly, the distribution model was varied company to company in the life
demutualizations depending on the characteristics of the mutual policyholder base within those
companies. The same approach is being recommended for the P&C sector, with particular
attention to ensure fairness amongst those eligible to participate. Consideration for a variation for
companies with small numbers of mutual policies versus those with larger numbers should be
c) Impacts of Demutualization
1. What impacts could demutualization have on the P&C sector?
It is in the interest for the Canadian economy to permit a company to demutualize in the PC
industry particularly in light of the heightened systemic risk experienced in 2008.
In 2008 we learned that in the absence to access to capital there is a tendency for institutions
to rely on governments for capital support. Although the crisis in 2008 didn't culminate in same
level of government support in Canada in terms of direct investment, most will agree that the
indirect capital support to the economy was critical to maintain solvency of many industry
For the past 25 years the PC industry has been consolidating with much more capacity being
provided domestically. As such, any risk associated with the industry being reliant on local
capital should be met equally with the ability to augment or raise capital. This model holds true
for all companies except Canadian mutuals. As such, allowing them to grow their market share
in the absence of access to capital is an irresponsible public policy.
Consider a catastrophic event such as a domestic earthquake which would cause domestic
markets to fall. But the inability to raise capital for large mutuals would potentially cause a
shortage on the supply side and culminate in a period in protracted price increases. This would
be met with a shortage in domestic capacity which would possibly impede the growth rate of
To mitigate this risk, mutuals should be allowed to access capital through demutualization or
alternatively be restricted in terms of the market share they can hold.
Any model that does not allow this may pose risk to the economy in terms of access to
insurance, affordability of insurance or adequacy (I.e. consider breach of bank covenants). All of
these aspects will hinder investment or new capital flows to the country which invariably
impact economic growth.
In short to sustain a healthy industry, access to capital is essential.