On February 28, 2015, the Department of Finance released draft regulations under the Insurance Companies Act (Act) providing for a framework for the demutualization process applicable to mutual property and casualty insurance companies (P&C insurers). Demutualization is the process through which a mutual company is converted into a corporation with common shares. The Act requires that rules for demutualizing be set out in regulations. Demutualization regulations for life insurance companies were released in 1999, which resulted in four major demutualizations, including Sun Life and Manulife.

The Department of Finance has released two sets of demutualization framework regulations for P&C insurers, based on the insurer’s type of governance structure: Mutual Property and Casualty Insurance Company Having Only Mutual Policyholders Conversion Regulations and Mutual Property and Casualty Insurance Company with Non-Mutual Policyholders Conversion Regulations.


While the two sets of regulations share common elements, the framework for demutualization of an insurer with both mutual and non-mutual policyholders is complex and would likely create greater uncertainty as to outcome. This framework requires negotiations between defined groups of policyholders with different interests. The courts will appoint counsel for eligible mutual and eligible non-mutual policyholders, who will then, on application to the court, select committee members for each group of policyholders. The two policyholder committees will negotiate the terms of the conversion together with their counsel.

The scheme of federal legislation governing financial institutions generally provides for a substantial role for the insurer and its board. The regulations setting out the demutualization framework for life insurance companies provide for the active involvement of the company and its board throughout the conversion process. In contrast, under the proposed regulations for P&C insurers with both mutual and non-mutual policyholders, after initiating the process, the role of the P&C insurer and its board is limited after initiating the process to providing information or terminating the process. This is somewhat unusual in the context of the legislation governing financial institutions as the company and its board are not substantively involved in a process involving a fundamental change.

The proposed demutualization process is somewhat analogous to the process in class proceedings. The court approves of class representatives in all class proceedings and where there are competing proceedings the court will hear a carriage motion to determine which proposed representative will be authorized to proceed on behalf of the class. The proposal regarding choice of committee members and their counsel in the proposed demutualization process is somewhat analogous. It is unusual that the court appoints counsel first and committee members second. There may be logistical reasons for this; however, it does not seem to give the counsel a status independent of the committee and begs the question of whether a majority of the committee, once appointed, can replace counsel. The P&C insurer (and its board) is not given any role in the selection of, or the ability to object to, the choice of counsel or committee members.  

The P&C insurer’s appointed actuary and an independent actuary must also provide opinions that the benefits of demutualization are fair to eligible policyholders. It is not clear how such opinions will be provided when the division of benefits between eligible mutual policyholders and eligible non-eligible mutual policyholders is the subject of negotiation between the two groups of policyholders. Given the valuations required in the negotiation process, the actuaries will practically need to be involved throughout the process.

A conversion proposal may contemplate that the P&C insurer is held by a holding corporation, but only an insurance holding corporation under the Act. This would put converted mutual P&C insurers at a disadvantage to P&C insurers currently organized under a non-mutual structure, which are not subject to this requirement. Demutualized insurers must remain widely held for a two-year period after conversion (subject to exemptions as a result of financial difficulties) and are subject to restrictions on executive compensation.

Further details of the proposed regulations are summarized below.


The two sets of proposed regulations share several common elements. Under both frameworks, the P&C insurer’s board of directors initiates the conversion process. Both types of companies are subject to similar disclosure requirements when communicating with policyholders and when submitting the conversion proposal to the Office of the Superintendent of Financial Institutions (Superintendent). P&C insurers must provide opinions by an appointed actuary and an independent actuary on the proposal’s fairness to policyholders and its impact on the company’s financial strength, as well as an opinion of an independent valuation expert approving of the company’s valuation estimate.


Companies with Mutual Policyholders Only

The process for demutualizing P&C insurers with mutual policyholders only is straightforward. All mutual policyholders, on the date of the directors’ resolution approving demutualization, as well as certain other prescribed policyholders, are considered “eligible policyholders” that are entitled to vote on the conversion proposal and receive the benefits of demutualization. The Superintendent must approve the conversion proposal and related documentation. Next, the proposal is submitted to a vote of all eligible policyholders for approval by special resolution. The P&C insurer may then seek approval from the Minister of Finance (Minister) to complete the demutualization. The directors of a P&C insurer may pass a resolution terminating the conversion process at any time before letters patent are issued.

Companies with Mutual and Non-Mutual Policyholders

Step 1: Board Recommends Demutualization

In its resolution recommending conversion, the P&C insurer’s board must also identify any groups of policyholders, in addition to those who already qualify, who will be considered “eligible policyholders” for the purposes of voting on, and receiving the benefits from, a conversion proposal.

Step 2: Eligible Mutual Policyholders Vote to Negotiate with Eligible Non-Mutual Policyholders

Within 30 days of the board’s recommendation, eligible mutual policyholders must approve the intent to negotiate a conversion proposal with the eligible non-mutual policyholders. If approved, the P&C insurer must send notice of the intent to negotiate to the Superintendent for authorization.

Step 3: Eligible Mutual and Non-Mutual Policyholder Committees Negotiate

The insurer must file an application for a court order setting out, among other things, the procedures for policyholder participation and counsel representation throughout the negotiation process. Interested counsel can apply to be appointed by the court to act for either the eligible mutual or non-mutual policyholders. Policyholders may apply to the court through selected counsel to be appointed as committee members for each class of policyholder. With the assistance of counsel, the committee members negotiate a conversion proposal that is deemed approved when two-thirds of each committee agrees to its terms. The proposal, along with opinions prepared by the company’s actuary and an independent actuary, must be submitted to the Superintendent for authorization within one year of the committees’ appointment.

Step 4: Amendment of Bylaws, Approval of Conversion Proposal and Ministerial Application

When the Superintendent is satisfied with the conversion proposal, eligible mutual policyholders must then approve amending the insurer’s bylaws to allow all eligible non-mutual policyholders to vote on the conversion proposal. After further authorization from the Superintendent, all eligible policyholders vote to approve the conversion proposal and related matters by special resolution. The conversion is effected when, upon the Superintendent’s recommendation, the Minister approves the demutualization and issues letters patent of conversion. The process terminates if the policyholder committees fail to submit the conversion proposal and opinions of actuaries within the prescribed time period or if the notice of special meeting to approve the proposal is not sent to eligible policyholders within one year of the Superintendent authorizing its sending.

The deadline to make representations on the proposed regulations is March 30, 2015.