Personal Finance

An insurance plan 'windfall'

Why some consumers are wary of industry promises

TOM FENNELL August 3 1998
Personal Finance

An insurance plan 'windfall'

Why some consumers are wary of industry promises

TOM FENNELL August 3 1998

An insurance plan 'windfall'

Why some consumers are wary of industry promises

Personal Finance

Just days after their Toronto wedding in 1967, Anne and William Holmes were visited by an insurance agent.

Anne poured the coffee, while the salesman spread his brochures on the kitchen table. Then, like thousands of young couples, the Holmeses listened politely and bought a whole-life policy valued at about $40,000. Because they had purchased insurance from a so-called mutual company, which operated much like a co-operative, they automatically became part owners, could vote at annual meetings, and were paid a dividend each year from the company’s profits. But that could soon change. Faced with growing competition, Canada’s four largest mutuals want to start operating like publicly traded companies. Before they can do so, they will have to spend a staggering $10 billion to buy back the ownership position of their clients—in what will be one of the largest transfers of wealth in Canadian history. Says Robert Smithen, chief financial officer of Canada Life Assurance Co.: “It really is a windfall for our policyholders.”

If it is a windfall, why are many of the two million policyholders—who will receive an average $5,000 each—not cheering? Bill Podmore, president of the 200-member Insurance Consumer’s Group in Montreal, says they simply do not trust insurance salesmen. Recent events have only added to the mistrust. On July 6, an Ontario Court judge approved a $65-million settlement in a class action lawsuit against Torontobased Sun Life Assurance Co. of Canada over the so-called vanishing premiums controversy, in which dividend payments on policies were cut between 1980 and 1995. The decision also clears the way for similar settlements by 14 other insurance companies. Despite the settlement, Podmore’s group is still suspicious of the industry, which he says has kept its clients in the dark over the buyout plan, known as demutualization. But on June 24, Industry Canada gave the group $43,900 to establish a national task force to look into the issue. “There have been lots of good words,” says Podmore. “But we have not seen anything concrete [from the industry] yet.”

The four companies—Sun Life, Canada

Life, Mutual Life Assurance Co. of Canada and Manufacturers Life Insurance Co.—all want to be on a public footing by 1999. Smithen says the industry needs to proceed quickly if it is to stay competitive in the rapidly evolving financial services sector. Without access to the stock markets,

he says, the mutual insurance industry cannot raise enough capital to expand or take over rival firms. As well, Robert Astley, president and chief executive officer of Mutual Life, says the full value of the four companies is not fully realized because they are not listed on the stock exchange where the bull market has propelled financial stocks to record highs. As a result, he says, policyholders, who own the compa-

nies, are being robbed of investment income.

Injecting $10 billion directly into the Canadian economy is also expected to boost business activity. In Britain and Australia, where some mutual insurance companies have already been demutualized, studies show that 25 to 35 per cent of policyholders cashed in their shares within months. If a similar scenario unfolds in Canada, Astley believes that it could add as much as 0.3 per cent to gross domestic product and ere ate as many as 12,000 new jobs in the 18 months following the restructuring. The increased eco« nomic activity could also generate s nearly $1 billion in new tax rev| enues during the same period, g Still, in some demutualization g cases in the United States, policy-

0 holders received very little, or E nothing at all, in exchange for g their ownership position. Astley,

1 however, insists that in Canada 5 there will be no rich stock-option

packages for executives and the procedure will be completely transparent. Policies will remain unchanged and dividends will still be paid. The only real change will be to restrict policyholders to electing just seven of 21 company directors. Podmore, however, wants to read the fine print, and he has written the heads of the four companies asking them to join his task force. “The industry has a real image problem,” he says. “It’s important that they explain what they are doing.”

The federal government is also watching. On July 9, Secretary of State for Finance Jim Peterson met in Toronto with Anne Holmes, who has been fighting the insurance industry over its tactics virtually since that first meeting in her kitchen. She is now chairwoman of the Canadian Life Insurance Policyholders Association, a consumer lobby group. Peterson told her he wants the industry to hire independent actuaries to determine what a fair price for the shares should be. And like Podmore, Holmes believes a national education program is essential. “There should be a full discussion,” said Holmes. “The real strength should be in the hands of policyholders.” It will be up to them to decide whether demutualization will amount to a windfall or a boondoggle.

FOUR-WAY CLOUT Total assets under administration as of Dec. 31,1997, in billions of dollars Mutual Life

TOM FENNELL