Why This Firm Places Business With Mutual Insurers

Two life insurance companies can sell what looks like the same contract. Same guaranteed cash value, same death benefit, same option to take the annual dividend as additional paid-up insurance. Underneath, they can answer to entirely different people. One is owned by its participating policyholders and has no common shares at all. The other is owned by investors who bought its shares, who can sell them tomorrow, and who read a results release every three months. Nothing on the illustration tells you which one you are looking at, and nobody in the meeting is obliged to raise it. This firm raises it, because a participating contract is a sixty year arrangement and the question of who the company answers to over sixty years is not a detail. What follows is the argument for placing that business with mutual companies, the law that sits underneath it, and the honest case against it.

The question nobody asks in the meeting

People compare illustrations. They compare guaranteed columns, they compare the projected values beside them, and they sometimes compare underwriting appetite. It is much rarer for anyone to ask the question that determines how the company will behave in the decades after the illustration is filed away: when this company has a good year, who has a claim on the result, and who decides?

That question has a legal answer and it differs by ownership structure. It is not a matter of one company being virtuous and another being greedy. It is a matter of who the directors answer to when the two possible answers point in different directions. This firm treats that as a real input into a recommendation rather than as marketing colour, and unlike almost everything else in a life insurance file it is something a reader can check without anyone’s help.

Two ways a life company can be owned

A mutual life company has no common shares. Under the Insurance Companies Act a mutual company is one incorporated or continued as a mutual company and not converted into a company with common shares. Its participating policyholders are its members, and membership travels with the contract rather than being bought on an exchange. Quebec puts the same idea in a single sentence for provincially incorporated insurers: section 9 of the Insurers Act says that nobody is the holder of control of a mutual company, because the votes are cast one member, one vote.

A company with share capital is owned by its shareholders in the ordinary way. Shares are bought and sold, an investor can hold them for a week, and the board is accountable to that body of owners as well as to policyholders. The Act recognises the split directly: section 173(4) requires that where a company has both, the shareholders’ directors and the policyholders’ directors must each be at least one third of the total number of directors.

Read that provision slowly, because it is the clearest thing in the statute. Parliament wrote a rule for a boardroom in which two constituencies sit at the same table. A mutual company does not need that rule, because there is only one constituency in the room.

What the participating account actually is

A participating policy, in the words of section 2 of the Act, is one that entitles its holder to participate in the profits of the company. The machinery that makes that entitlement real is the participating account. Section 456 requires a company to maintain accounts in respect of participating policies separately from those maintained in respect of its other policies, in the form and manner the Superintendent determines.

Separation alone would mean little if the company could decide freely what lands in it. So sections 457 and 458 govern the allocation. Investment income and losses are credited, and expenses and taxes are debited, by a method that the company’s actuary has reported in writing to be fair and equitable, that the directors have approved by resolution, and that the Superintendent has not disallowed. Section 459 requires that resolution to be filed within thirty days, and section 460 requires the actuary to report to the directors every year on whether the method is still fair and equitable.

This is why a participating contract is not simply a savings arrangement with a life insurance wrapper around it. The holder has a statutory claim on a pool that is fenced off, allocated by a certified method, and reviewed annually by a professional who answers for the opinion.

Where the surplus can go, in each structure

In a mutual company the surplus of the participating business has one place to go, and that is back to participating policyholders, or into the account to strengthen it for future ones. There is no shareholder line on the page, because there are no common shareholders.

In a company with share capital there is a second line, and the Act constrains it rather than forbidding it. Section 461 permits a payment to shareholders out of the participating account only inside three conditions at once: the payment must fall within a limit set by a formula the regulations prescribe, participating policyholders must be receiving dividends in accordance with the company’s dividend policy, and the actuary must confirm that the payment will not materially affect the company’s ability to keep complying with that policy. Section 462 then closes the door on any other route out, confining transfers from the account to the cases the section lists.

Note what that structure concedes and what it protects. It concedes that a shareholder may be paid out of a pool built by policyholder premiums. It protects the policyholder with a cap, a condition and an actuarial sign off. A person who reads section 461 and concludes that the protection is adequate has reached a defensible view. A person who reads it and prefers a structure with no second line at all has also reached a defensible view. This firm holds the second one.

The three month clock and the sixty year contract

A publicly traded company reports to its owners every three months, and its share price responds. That is not a scandal but the design of a public market, and it does useful work: it disciplines management, prices capital and gives investors a way out.

It also creates a tempo. Decisions that cost something this quarter and repay it over twenty years are the hardest decisions to make when the audience reconvenes in ninety days. Nobody has to behave badly for that pressure to exist. It is simply harder to hold a long position in front of a short audience.

A participating contract is the longest position an ordinary household ever takes. It is funded for decades and it is meant to be held until it pays a death benefit. The reserving, the investment policy behind the participating account and the smoothing of a dividend scale over a market cycle all ask for the same thing the contract asks for, which is patience. A structure whose only owners hold the same instrument the decisions are being made about is a structure whose clock matches the product. That is the argument, and it is an argument about alignment rather than about virtue.

Who declares the dividend, and on what

Whatever the ownership structure, the annual dividend is a decision, not an entitlement to a number. Under section 464(1) the directors of a company that issues participating policies may declare a dividend, bonus or other benefit in accordance with the dividend or bonus policy the board established under paragraph 165(2)(e). Section 464(2) requires the company’s actuary to report in writing on whether the proposed declaration is fair to participating policyholders and whether it accords with the policy, and requires the directors to consider that report before they declare.

So the discretion is real and it is bounded. It is exercised by a board, on the record, against a published policy, after a written professional opinion. That is a great deal more structure than most people assume sits behind the word dividend.

It is still discretion. A dividend can be reduced. Scales have moved in both directions across the history of the Canadian market, and they will move again. Anybody who tells you a dividend scale is safe because a company is mutual has told you something the statute does not support. The guaranteed values in the contract are the contractual promise. The dividend sits on top of them and is not guaranteed.

The honest argument against this preference

Ownership structure is a statement about incentives. It is not a statement about competence, and it is certainly not a statement about outcome. A company with shareholders can be conservatively reserved, well capitalised, patiently invested and superbly administered. A mutual company can be complacent, slow to modernise, weak in service and mediocre at investing. Both of those companies exist somewhere.

There is a second objection, and it is the better one. A public market imposes a form of scrutiny a mutual company does not face. Analysts pick at the numbers. A falling share price is an immediate, public verdict. A mutual company’s members are dispersed, are rarely organised, and in practice almost never vote a board out. Discipline that arrives from outside is a real good, and mutual structure buys patience partly by giving some of it up.

A third objection is practical rather than philosophical. Underwriting appetite, contract features, the design of an additional paid-up insurance option, service quality, the treatment of a particular occupation or a particular medical history: these differ between companies and they decide real files. A household turned down or heavily rated by the company with the ownership structure this article prefers is not helped by the preference.

The right weight is therefore modest. Ownership is one input among several, it speaks to the next fifty years rather than to this year’s brochure, it does not override suitability, and it is not evidence of a better result.

A mutual company can stop being one

The preference has a further limit that is worth stating plainly, because it is the one people forget. Mutual status is not permanent. There is a federal framework for converting a mutual life company into a company with common shares, set out in the Mutual Company (Life Insurance) Conversion Regulations made under the Insurance Companies Act. Canada has been through a round of such conversions before.

A policyholder who bought a contract from a mutual company partly because of its structure can therefore find, years later, that the structure has changed around a contract that has not. The contractual guarantees do not evaporate when that happens. The governance argument in this article does.

That is a reason to hold the argument loosely rather than a reason to abandon it. It also argues for reading the guaranteed columns of an illustration as the real floor, since the guarantees are what survive a change in who owns the company.

A preference, not a rule

This firm places most participating business with mutual companies. It does not place all of it with them, and it does not hold itself out as being unable to do otherwise.

The cases where another structure is placed are ordinary ones. Underwriting is the commonest: a rating, an exclusion or a decline at one company and an offer at another decides the file, and no argument about ownership outranks a household actually being covered. Contract design is next, since a particular feature or the way an additional paid-up insurance option is built can suit a plan better elsewhere. Provincial availability and the fit with a contract already in force appear as well.

The rule the firm does hold to is narrower and more useful than a preference about ownership: the recommendation is written from the suitability record first, and the reasoning, including what was considered and set aside, is put in front of the client in writing. A preference that cannot be overridden by evidence is not a preference. It is a habit.

What you can look up for yourself

Almost none of this needs to be taken on trust. Federally regulated insurers are supervised by the Office of the Superintendent of Financial Institutions, and its Guideline E-16 on participating account management and disclosure sets out what a company is expected to have in place: a written management policy for the participating account, a dividend policy, and disclosure to participating policyholders that includes participating account financial statements and the history of the dividend scale. Read the guideline first, then ask a company for the documents it describes.

Then read the statute itself. Sections 456 to 464 of the Insurance Companies Act are short, are in plain enough language, and are free on the Justice Laws Website. Section 461 is the one to read twice. Quebec incorporated insurers are supervised instead by the Autorité des marchés financiers under the Insurers Act, which is free on LegisQuebec.

Finally, ask the direct questions of whoever is recommending a contract. Is the issuing company a mutual company or a company with share capital? What does its dividend scale history look like across a full market cycle rather than a good decade? What alternative was considered, and what made it a poorer fit? An answer that treats the question as impertinent has told you what you needed to know. Policyholder protection in Canada is provided by Assuris within its published limits, and deposit insurance does not apply to an insurance contract.

Frequently Asked Questions

Continue Learning

If you have not read the contract itself yet, start with the participating whole life strategy and then how dividends are determined, which explains the account this article is about from the policyholder’s side. The Canadian history of dividend scales shows how they have actually moved. Transparency and compensation sets out what the firm earns and why that belongs beside any preference it holds, and where the strategy does not fit is the page to read before any of it.