Thank you, Mr. Chairman and members of the committee, for the opportunity to appear before you today. The matter of demutualization is of great importance to our industry, and specifically our company.
My name is Dan Lister and I'm the president and CEO of the Kings Mutual Insurance Company, based in the Annapolis Valley of Nova Scotia. We are a small mutual property and casualty insurer, established in 1904, writing throughout the Province of Nova Scotia. Like many other mutuals, a large portion of our volume is from rural, residential, and agricultural business.
For over 100 years, the mutual insurance industry has been a stabilizing force in the Canadian marketplace. Mutual P and C companies were formed due to the lack of insurance availability in the agricultural sector in rural Canada. The companies have been profitable and have built up their capital over many years, and continue to provide relevant products.
As a mutual, we require significant capital reserves to allow for fluctuations in the market cycle. These reserves should not be viewed as policyholder value. The reserves provide financial strength, policyholder security, and allow us to effectively compete in the existing marketplace.
Mutual P and C companies were not created to generate wealth for the policyholders, but to provide availability of insurance and security of assets. We are concerned that demutualization regulations will create an environment where successful mutual P and C companies with strong reserves are targeted because of their success. Our company exists for the policyholders, and we wish to protect their interests.
We are concerned that the compelling arguments for the continuation of the mutual insurance system may be reduced or overridden during the regulation process, to a clash of ideals on how to distribute the ownership and therefore the value. Instead, the regulations should create an environment where those companies wishing to demutualize must prove the value of the process to the majority of their policyholders.
If regulations create an opportunity to extract the wealth from mutual companies for benefit, then you will see the decimation of the mutual insurance industry in Canada. Companies will be demutualized and assimilated into stock companies, resulting in job losses and losses to the rural communities they serve.
We feel that a rash of demutualization could negatively impact the overall strength of the P and C sector. A reduction of the number of insurers will ultimately result in reduced competitiveness, availability of products, and loss of Canadian ownership in the industry. Enabling a process of demutualization that would not be in the best interest of the mutual sector would destroy this rich history and encourage greed to prevail. In fact, it would create the very environment that breathed life into the mutuals so many years ago.
We request that deregulation ensures that any meeting to demutualize a company would require a significant majority of policyholders to establish a quorum, and that any vote to demutualize would require, at a minimum, a majority of those present. Under the current federal legislation, a quorum for a meeting is defined as the lesser of 500 policyholders, or 1% of the total number of policyholders. In the case of Kings Mutual, 110 people constitute a quorum. Therefore, as few as 56 people could, in essence, vote to demutualize the company, which represents one half of 1% of our policyholders. A small number of policyholders may then override the overall interests of the company. This is not a preferred governance model.
Additionally, any regulation will have to very seriously consider the distribution of the assets. P and C policies are on a term basis that is negotiated and renewed annually. A policyholder, unlike a shareholder, pays nothing to compensate a previous owner of the company when they become a policyholder. The accumulation of assets in the P and C sector is the result of a long line of past policyholders, not only those policyholders with a current policy in force. Therefore, we believe the time and the total premiums paid by a policyholder while insured with the company should be taken into account when determining any allocation of ownership.
As for those policyholders who assume additional risk by signing a premium note or purchasing a participating policy, I expect there are few alive who have had to respond to that demand. In the modern regulatory environment, with the oversight of the Office of the Superintendent of Financial Institutions and the support of the Property and Casualty Insurance Compensation Corporation, any exposure these policies would have is negligible. A major concern to us is any provision in the regulations that would provide an incentive to a small group of policyholders to encourage demutualization.
Finally, regulations should include restrictions so that no party can share in or be compensated for a policyholder's share of the demutualized value. This would stop individuals or organizations who are not policyholders from gaining financial benefits from the demutualization process.
Any process that leads to the demutualization of a P and C mutual company should be in the best interests of the company, as deemed by the board of directors of the company. It should not be the result of a process driven by outside interests. Our mutual industry has a long and proud tradition of neighbour helping neighbour, and we want to ensure that regulations based on the request of one company do not adversely or unintentionally impair our ability to operate.