Thank you, Mr. Chairman and members of the committee, for your invitation to appear before you today.
CAMIC is a trade association for property and casualty mutual insurers—the insurers of home, auto, farm, and commercial assets. The association represents the large majority of domestic and foreign mutual insurers doing business in Canada. This includes eight federally supervised Canadian-owned mutual insurance companies.
You will find our list of members in appendix 1 of the document that was given to you. In 2011, CAMIC members had in excess of $5 billion in gross premium written, which represents 11% of the non-government Canadian insurance market.
Most Canadian mutual insurance companies were set up by farmers between 100 and 170 years ago, at a time when it was necessary for farmers to band together to self-insure, as conventional insurance was not available. A number of mutuals were formed for similar reasons by small merchants and businessmen. Their common solution was to form their own mutual insurance companies, whose role was to provide them with insurance products adapted to their needs and at cost.
Mutuals are controlled by the people they insure. The large majority of mutual insurers operate under the governance model of one member equals one vote.
The surplus residing in today's mutual P&C insurance industry is the result of the annual allocation of profits to surplus by many successive generations of policyholders. To operate, an insurance company needs a sizeable surplus.
Each year, the board of directors of the company decides what to do with the profits generated. The options are either to refund them to policyholders, to invest them in the community, or to transfer them to surplus.
The role of the surplus is to provide stable and secure insurance for the current and future generations of policyholders.
In the course of the many decades following their inception, mutual insurers reached economies of scale by opening their membership to others while remaining focused on their founding community’s needs. For instance, while farm mutual insurers now serve rural Canada as a whole, they continue to serve 75% of the farming community across Canada. They also contribute to the rural economy by creating a wide variety of jobs related to the P&C insurance companies: underwriting, inspection, claims settlement, accounting, marketing, and so on.
Also, consistent with their objective of delivering insurance at the lowest cost possible, over the years many mutual insurers resorted to merging with their neighbouring mutual companies. These mergers amongst mutual insurers allowed them to remain true to their mutual charters of incorporation while ensuring that their size would allow them to lower their cost structure.
Mutual insurers do not have access to outside capital. However, because they do not have shareholders demanding dividends and increasing share value, they invest their surplus funds conservatively and operate their company in a responsible manner. Not surprisingly, they meet very high capital test ratios.
When you become a member of a mutual, your entry is free. All you need to do is become a user of the services of the mutual. Policyholders may receive refunds in proportion to the level of business they do with the mutual, and they are invited to vote at the annual general meeting.
However, these privileges do not mean that the policyholder owns the company. It simply means that the policyholder controls the organization while he uses its services. For its part, the surplus of the company is owned by the company and is indivisible amongst policyholders, as no one can ascertain who contributed what to the surplus over many generations of policyholders.
We encourage the Department of Finance to consider seriously the issue of how to responsibly demutualize insurance companies in our sector.
If done improperly, through the allocation of surplus to current policyholders, rural Canada would be negatively affected. It would lose the presence of jobs and assets to the hands of larger North American and worldwide financial centres. The negative impact would also be felt in difficult market situations, where the market becomes more risk averse and many rural communities might become more highly dependent on their traditional local mutual insurance company to provide the insurance they need.
While CAMIC prefers the current situation, where no demutualization rules exist and companies grow organically and through mergers with other mutual insurers, CAMIC supports the Minister of Finance's decision to develop such rules. However, these rules must be fair to the many generations of policyholders who have built the surplus of that company for the long-term viability of the mutual.
You will find in appendix 2 our proposed demutualization regulations, which would meet those objectives.
CAMIC recommends the following: that the vote on demutualization be open to all policyholders; that such demutualization be considered only after the company made significant effort to merge with other mutual insurers; and that, if the demutualization is approved, the surplus of a demutualizing mutual insurance company be retained within the mutual community.
Quebec applies such rules to its provincially supervised co-operatives and financial co-operatives. The success of the co-operative system in Quebec is a testament to the effectiveness of these rules.
Thank you for your time, Mr. Chairman, and I welcome your questions.