Evidence of meeting #55 for Finance in the 41st Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was company.

A recording is available from Parliament.

On the agenda

MPs speaking

Also speaking

Jeremy Rudin  Assistant Deputy Minister, Financial Sector Policy Branch, Department of Finance
Normand Lafrenière  President, Canadian Association of Mutual Insurance Companies
Karen Gavan  President and Chief Executive Officer, Economical Insurance Group
Dan Lister  President and Chief Executive Officer, Kings Mutual Insurance Company
James Wu  Chief, Financial Institutions Division, Financial Sector Policy Branch, Department of Finance

4:45 p.m.

President and Chief Executive Officer, Economical Insurance Group

Karen Gavan

When our company—

4:45 p.m.

Conservative

Brian Jean Conservative Fort McMurray—Athabasca, AB

That was a joke, by the way.

4:45 p.m.

Voices

Oh, oh.

4:45 p.m.

President and Chief Executive Officer, Economical Insurance Group

Karen Gavan

When our company started looking at our strategic options, we immediately put a moratorium on accepting applications for mutual policies, because—

4:45 p.m.

Conservative

Brian Jean Conservative Fort McMurray—Athabasca, AB

Because of this very issue.

4:45 p.m.

President and Chief Executive Officer, Economical Insurance Group

Karen Gavan

—of this very issue.

4:45 p.m.

Conservative

Brian Jean Conservative Fort McMurray—Athabasca, AB

So your legal team would agree with the premise of my question, that they have the right to do exactly what I said they have the right to do.

4:45 p.m.

President and Chief Executive Officer, Economical Insurance Group

Karen Gavan

Exactly.

4:45 p.m.

Conservative

Brian Jean Conservative Fort McMurray—Athabasca, AB

And I would agree with that, I think.

I think one of the dilemmas we see is the possibility that was brought up by Mr. Mai, in his line of questioning. That if this is done, this will actually lead to a consolidation of companies, and in fact, less competition, which is obviously what we don't want to have happen for consumers.

Would you suggest, in any transition time that is put in with regard to regulations, that there be some form of discouragement for consolidation and to promote competition over a longer period of time—maybe have the shares widely held for a certain period of time?

4:45 p.m.

President and Chief Executive Officer, Economical Insurance Group

Karen Gavan

Certainly. In our submission to the Department of Finance, we did ask that the regulations contain provisions consistent with those in the life insurance regulations, where we are given two years' takeover protection post-IPO.

4:45 p.m.

Conservative

Brian Jean Conservative Fort McMurray—Athabasca, AB

In the limited amount of time I have left, can I ask you—since life insurance companies when this was done in 1999 were obviously much larger than these—would it not be better to have a longer transitional period?

4:45 p.m.

President and Chief Executive Officer, Economical Insurance Group

Karen Gavan

It will have an impact on the value of the company during that period of time and our ability to use our access to the capital markets to acquire other operations.

4:45 p.m.

Conservative

Brian Jean Conservative Fort McMurray—Athabasca, AB

I have just one final comment, Mr. Chair.

4:45 p.m.

Conservative

The Chair Conservative James Rajotte

Very briefly.

4:45 p.m.

Conservative

Brian Jean Conservative Fort McMurray—Athabasca, AB

As was said by Mr. Lister, the direct ownership will leave the rural areas, but isn't it fair to say that ownership, if it's a publicly traded company, will stay right across Canada and possibly around the world, but the control will not? The truth is that the local control will be gone to larger companies.

Is that fair to say?

4:45 p.m.

President and Chief Executive Officer, Economical Insurance Group

Karen Gavan

I think it is a little bit overblown that we're going to go on a spree acquiring all the small mutual companies. They're just too small to spend the resources to integrate, and they have a real place in the marketplace.

4:45 p.m.

Conservative

The Chair Conservative James Rajotte

Thank you.

We'll go to Mrs. McLeod, please.

4:45 p.m.

Conservative

Cathy McLeod Conservative Kamloops—Thompson—Cariboo, BC

Thank you, Mr. Chair.

Certainly it has been a very interesting discussion today.

I actually want to go to you, Mr. Rudin, and go back to the process in the late nineties, of course, when our life insurance companies demutualized, and talk about what happened—the good, the bad, the lessons learned—and how that might inform things differently.

If you could reflect on that for us, I think that would be very helpful.

4:50 p.m.

Assistant Deputy Minister, Financial Sector Policy Branch, Department of Finance

Jeremy Rudin

I'd be glad to. I'll just collect my thoughts....

Actually, perhaps I should pass this one to my more expert colleagues.

Would that be okay?

4:50 p.m.

Chief, Financial Institutions Division, Financial Sector Policy Branch, Department of Finance

James Wu

As was described earlier on in the speech, the life insurance regulations for demutualization were brought in around 1999, and four of the five companies proceeded to demutualize. In those cases, votes were provided to just their participating policyholders, so those are the type of policyholders who traditionally get to vote on management of those mutual companies. There was one mutual life company that actually decided to provide votes also to non-fire policyholders. Those would be similar to the cash policyholders who we're speaking of in the P and C world. That was Clarica.

So that's how the votes were distributed, and benefits were also provided basically to those different groups of policyholders.

On the other issue of apportionment of benefits, there was a very similar approach taken where there was a fixed benefit given to policyholders who had a right to vote, and in addition to that other variable benefits were given, based on other factors as well.

This was assessed. Actuaries were involved in the process and made determinations that this was fair and equitable to those policyholders involved, and the companies proceeded with their demutualization in that case. As was mentioned, in the case of the life mutual companies that demutualized, there was a two-year moratorium on takeovers. There was a requirement that the companies continue to be widely held.

4:50 p.m.

Conservative

Cathy McLeod Conservative Kamloops—Thompson—Cariboo, BC

Was there any sort of formal reflection done after the fact? Probably it goes back in your time with the department, but do you know if there was anything created in terms of a reflection on that process? Once a major policy decision was made and there was a shift, was there a process that looked at the impact?

4:50 p.m.

Chief, Financial Institutions Division, Financial Sector Policy Branch, Department of Finance

James Wu

We have assessed, as you said, large changes in policies impacting the financial sector every five years. I believe there was a review of the demutualization of the life companies at the time. It's not clear to me if I have that information available here, but we can review our records and assess if that was done.

4:50 p.m.

Conservative

Cathy McLeod Conservative Kamloops—Thompson—Cariboo, BC

Thank you. I would appreciate that, if you could submit it.

I'll go on to my next question. I do have some concerns, and maybe because I don't know the business, but I had a letter from one of my small sawmill companies last week. Of course, we've had these major significant events in British Columbia with two sawmills. Would this change have any impact at all in terms of the ability for our farmers or companies to have access to the products that they need, and is there any difference in terms of cost?

I know your answer will probably take longer than a minute.

Mr. Lafrenière?

4:50 p.m.

President, Canadian Association of Mutual Insurance Companies

Normand Lafrenière

Can I try to answer that question?

Yes, indeed. Mutual insurance companies have a 75% market share of the farm market in Canada. Should they be taken over—because now it's possible to buy them, following the issuance of regulations that allow the demutualization of the companies—we're afraid that many areas of the country may not have the access to insurance that they have right now, and that is even more of a concern in times when the market is difficult, and we have such times in the market. We've had ups and downs in the Canadian insurance market, and the mutuals are always there to cover whenever the market becomes difficult. We saw that many years ago when we had such a hard market, and we, the mutuals, increased our market share when other companies were leaving the market because the times were difficult.

So you can count on these mutuals—they have nowhere else to go—to be there in difficult times. Should they not be there, or should the market change to be bought up by other companies, then the underwriting rules of the buying companies will apply.

For instance, not all companies would offer insurance for homes that are heated with oil. But we offer that because of course if we did not offer it we would not do business in rural Canada. Should we be bought up, it's possible there would be difficulties in finding insurance.

4:55 p.m.

Conservative

The Chair Conservative James Rajotte

Thank you.

Colleagues, we have about five minutes left in this session, and we have a subcommittee at 5 p.m. I have a couple of questions I wouldn't mind asking. I don't know if members want to push this further, or if we can finish at 5:00, and then do the subcommittee. Thank you.

I just wanted to mention, perhaps to Ms. Gavan, an article by John Greenwood in the Financial Post. I think a lot of members have touched on it. I just want to repeat it because this, it seems to me, is the rub of the issue, and I just want to quote from the article.

It talks about your board indicating that, after 140 years of being a mutual company, you're considering demutualization. Then he says:

If the industry follows the route taken by the big life insurers which demutualized at the end of the 1990s, the money would get distributed in the form of shares to “participating policy holders.”

Then he goes on to say:

But here’s the twist. Like a handful of other property and casualty companies, Economical was very selective about who got to own its participating policies. While it has more than 700,000 cash policies outstanding, there are only 943 mutual policyholders — about 0.2% of the total. According to the company, about one-third are held by company employees and brokers. If the surplus gets distributed evenly to this upper tier, each holder would stand to collect a life-changing $1.3-million.

That is the issue that I think has to be addressed by you, Ms. Gavan, before the committee.