Lessons to learn from the demutualisation of Economical Mutual Insurance

‘Many businesses these days are trying to be fairer, more socially aware and values-led … The Economical demutualisation is a real outlier’

Economical Mutual Insurance, a Canadian mutual insurer set up 145 years ago, has received approval from policy holders to demutualise, a move pending approval from the finance minister.

The plans to demutualise were approved at the third and final special meeting on demutualisation, which was held virtually in May. At the meeting 97% of eligible policyholders voted in favour of proceeding with demutualisation.

Board chair John Bowey said at the time: “This is an important day in our 150-year history, as we are one significant step closer to completing the demutualisation process, which will allow Economical to unlock our full potential as a strong, Canadian competitor in a rapidly changing industry.”

The decision was facilitated by Economical Mutual’s dual class membership structure, through which around 900 policy holders were members with 60,000 not members.

Economical Mutual says the average eligible mutual policyholder could receive demutualisation benefits with an approximate value of CA$300,000 to $430,000, while the average eligible non-mutual policyholder could receive demutualisation benefits with an approximate value of $1,500 to $2,300. Another $100m of the proceeds of demutualisation have been allocated to fund a new charitable foundation. 

Fear of potential demutualisations exists among other Canadian co-ops and mutuals, according to a recent report by the Canadian Centre for the Study of Cooperatives (CCSC). These concerns were exacerbated by the demutualisation of Mountain Equipment Co-op (MEC), the largest consumer cooperative in Canada, back in 2020.

Related: Members of MEC consider life after demutualisation

Co-op leaders surveyed by CCSC said they regarded the demutualisation of MEC as “a cautionary tale” which highlighted the importance of building a board culture that views the co-op model as a strength. They also emphasised the importance of co-op-specific board governance training and education.

Economical Mutual Insurance, which now brands itself as Economical Insurance, argues that demutualisation is an exciting opportunity that will enable it to invest in the business and innovate, especially by acquiring other companies, strengthen its financial position for long-term success and better compete with other insurance companies.

However, Co-operatives and Mutuals Canada (CMC), the apex representing the country’s co-ops and mutuals, says the sector is more resilient than the average business. CMC is undertaking a 2.5-year study on the impact of Covid-19 on the co-op and mutual sector in Canada.

“Co-operatives and mutuals have proven to be more resilient than the average business. The decision by Economical Mutual Insurance membership to demutualise and distribute its assets goes against the intent and business model of individuals who create co-operatives and mutuals – and contribute to their growth,” said John Kay, president of CMC.

Shaun Tarbuck, chief executive of the International Cooperative and Mutual Insurance Federation (ICMIF) also criticised the demutualisation of Economical Mutual Insurance, adding that there was no business case for the move.

He said: “The demutualisation of The Economical is a long-running saga driven by greed of the few. This has been ongoing for over ten years now and was started by less than 1,000 owners of the Economical who saw an opportunity to sell the business and therefore receive over $1m each.

“The unique dual membership structure that The Economical has had since the 1920s meant that less than 1,000 member owners control the mutual and all the other member policyholders have had no ownership rights. There are three other mutuals with similar structures in Canada but they all are firmly committed to mutuality.”

Mr Bowey insists the idea of “neighbour helping neighbour” on which the mutual was created 145 years ago continues to shape the business. He said back in May: “Economical was created 150 years ago in a small town that is now Kitchener, Ontario, with the idea of neighbour helping neighbour. That value still holds true for our company and will live on in the way we serve our customers and through the significant impact of the charitable foundation that this process will bring to life.”

But Mr Tarbuck expects to see class action lawsuits post demutualisation and warns that the mutual’s values might be lost due to the decision to demutualise.

“There have been many challenges made to the validity of the demutualisation, which is why it has taken so long, and there are likely to be class action lawsuits post demutualisation,” he added. “There is no business reason to demutualise, as was the case with the majority of the demutualisations in the 1990s, it was then and is now driven by greed of the few.

“As with most demutualisations, the company may well be acquired within a year or two by a larger stock company and the history of The Economical and the communities it used to serve will be lost or members will probably move to another mutual or co-operative insurer.” 

As to the future, Mr Tarbuck believes that new mutuals will emerge in the years to come.

“Given the mis-selling of so many mutuals in the 1990s, there is now a significant challenge by the regulators, media and customers should any mutual propose to demutualise nowadays, for example LV= in the UK. 

“Thankfully, we are now seeing a trend for the creation of new mutuals with several being started in the last few years and also the re-mutualisation of stock company insurers as we have seen in Scandinavia recently.  

“Demutualisation was a trend in the 1990s which was proven to be driven by greed. However, many more businesses these days are trying to be fairer, more socially aware and looking to be values-led organisations with a social purpose, The Economical demutualisation is a real outlier.”

Despite the recent demutualisations of MEC and the Economical Mutual Insurance, the co-operative sector remains strong in Canada, says CMC. Co-ops represent 3.4% of the country’s gross domestic product (GDP) and provide almost 200,000 jobs.