Profile: Mutual Attraction

“Hand in Hand” – this is the name of the first ever mutual, formed in 1696 in London, England to offer fire insurance, but it also represents a philosophy that guides mutual insurers today. As mutual insurers move into their third centenary of existence, they have come a long way from their origins – formed by rural residents as a means to spread the risk of fire destroying houses, barns and other buildings.

In Canada, the first license for mutual companies to begin operation came in Ontario (then Upper Canada) in 1836 – Gore Mutual was among the first wave of mutual insurers and remains the longest continually operating mutual in Canada. These early mutual companies were an attempt to form domestic insurance companies aimed at rural communities as opposed to the branch operations of foreign insurers that targeted the cities.

Mutual insurance companies were based on the concept of “cooperation”, of sharing risk through a non-profit company owned by its policyholders. That philosophy of cooperation continues today, says Normand Lafreniere, president of the Canadian Association of Mutual Insurance Companies (CAMIC). The association was born of provincial mutual associations and today represents 103 companies nationwide with about $1.9 billion in assets in total.

CAMIC’s focus has expanded certainly, but some mandates have not changed. Originally, the association was formed to represent mutual insurers on legislative issues, specifically taxation matters that were a common problem amongst the provinces. Another focus was networking, information sharing, and education. Today, CAMIC is still the national voice for mutual insurers on Parliament Hill, a resource for information, a provider of networking opportunities, and a means for members to gain economies of scale through the negotiation of large supply agreements. Lafreniere says the association is a perfect example of the strength that comes through cooperation, “CAMIC is truly a mutual system among mutual systems”.

TAXING CONCERNS

The main thrust of CAMIC today, as in the past, is legislative concerns. From educating members about the impact of new privacy legislation to ongoing taxation issues, Lafreniere has a full slate of business in this arena.

He continues to push for the nationwide adoption of the “National Farm Building Code”, as a means to control property losses for still largely rural-based mutual insurers. “It has not been adopted by a number of provinces, and in some cases where it’s been adopted, it’s not being enforced.”

Taxation lobbying is centered on providing a level playing field to encourage reinsurers to keep capital in Canada. “Our system is not level with the taxation treatment afforded reinsurers in other countries.” Canada’s mutual [companies] have formed their own reinsurers – the Farm Mutual Reinsurance Plan and Promutuel Reinsurance – in order to have the capacity to insure larger farms and properties. However, Lafreniere says mutual insurers hope to see international reinsurers look on the Canadian market as a good market in which to share risks.

As well, CAMIC has worked with the government on a draft document to change “section 87” of the Income Tax Act, to clear up confusion over there being tax implications when two mutual companies merge. Recently, CAMIC made a submission on the federal government’s paper on corporate governance on behalf of federally licensed mutual insurers who would be affected. Lafreniere says that mutual boards are largely comprised of farmers and others from the local area in which they operate, unlike the boards of stock insurers. “They [the government] wanted to treat us as stock companies. The special relationship that’s there [between mutual companies and their locally-based boards] means we are not the same. We do think governance should be improved, but we do have to differentiate between small mutual companies and stock companies or life companies.” It is too early to say how the government will respond to CAMIC’s position, he notes.

CAPITAL IDEA

The old mutual system involved members paying an amount at the beginning of the year and then an adjustment at the end of the year to subsidize losses. The commitment to pay this adjustment was called a “premium note”. The premium note system was eventually abandoned in favor of a system mirroring that of non-mutual insurers. However, Lafreniere notes that there are perhaps two or three mutual companies still using the premium note system. But, due to the large surplus mutual insurers typically operate on, they have never had to call on those notes.

“They [mutual companies] don’t have access to capital [i.e. through IPOs and stock market capital raising ventures], so they have to grow internally [through premiums].”

This surplus has its advantages, especially in a market such as the industry is currently facing, where capacity is scarce, international parent companies may be viewing the Canadian market with a jaundiced eye, and insurers are finding shareholders a fickle group. “In a difficult time when the stock market goes down, [non-mutual] companies have lost a portion of their surplus as their stock price drops. They [mutual insurers] can take on marketshare in a difficult time” because of their strong capital base.

This strength is also an appeal for brokers, who see that mutual insurers are in for the long haul – many of Canada’s mutual companies have been around for a century or more. “We have always favored the brokerage system. That relationship is a strong one in difficult times as brokers can see that mutual [insurers] stay and even grow during these difficult periods.”

Brokers may also be drawn to the knowledge mutual insurers have of their local domains and their close community ties, giving them the strength to stick out the tough times. “We [mutuals] cannot withdraw like other companies do,” Lafreniere explains. “Brokers see in us stability.”

Yet another draw is the strong customer retention of mutual insurers, which Lafreniere attributes to their local presence and intimate knowledge of their small markets. “They [brokers] see us keeping clients longer, so they reduce their costs of going out and trying to get new clients.”

STRENGTH IN NUMBERS

One of the key areas of expansion is in the negotiation of supply agreements for association members so they can benefit from economies of scale. Lafreniere sees this “back office” role becoming even more of a focus in the future, as mutual insurers seek to clamp down on expenses and rising supply costs. One example is the agreement CAMIC brokered with the Centre for Study of Insurance Operations (CSIO) to lower the cost for smaller companies to become a part of the system. Mutual insurers have also negotiated group rates on things like credit card transactions and rental car plans.

A few years ago, the association even “got close to” opening a “no-name” bank, something akin to the retail-chain Loblaws’ offering of banking services, but backed off feeling it was not the right time. Mutual insurers are, however, involved in the selling of a variety of financial services. Some may individually write various lines of business, but as a group they also operate two separate entities to sell financial services. Farm Mutual Financial Services and Promutuel Capital are a means of selling life insurance and investment products.

GOVERNMENT PAST

Lafreniere is well-suited to handling CAMIC’s agenda at Parliament Hill. He has been the association’s president for a decade, and before that held a number of positions with the federal government.

Lafreniere’s career started with the Department of Energy, Mines and Resources in 1978, in the Petroleum Division and then the Natural Gas Division. The last government related position he held was with the Prosperity Secretariat, a federal initiative put forward by then Minister of Industry Michael Wilson to help identify strategies to ensure the continued and future prosperity of Canadians. Prior to that, he worked four years for the Department of Finance’s sales tax division, specializing in the taxa tion of so-called “sin products” such as cigarettes, alcohol and energy. And, from 1993-1997, he was with the Department of Regional Industrial Expansion, working on comparisons of the competitiveness of Canada’s income tax system with that of the U.S. Lafreniere hails from Shawinigan, Quebec, and graduated from the Quebec National School of Public Administration with a Masters degree, as well as the University of Sherbrooke.