Trends in Insurance

Trends in Insurance

Change is underway in the ownership structure of several large Canadian insurers as they continue to demutualize. Insurance companies in Canada are organized either as mutual companies, owned by policyholders or as joint stock companies, owned by shareholders. Demutualization is a process by which insurance companies, owned by policyholders, reorganize into companies owned by shareholders. Policyholders, in effect, become shareholders in an insurance corporation. The significance of demutualization is that it provides insurance companies with access to capital markets, allowing them to acquire other companies with equity, rather than cash, making them better able to compete with other financial institutions such as banks.

Demutualization will likely lead to consolidation among insurance companies and the emergence of fewer, larger companies. Already the number of insurance companies in  Canada is declining, while the size of industry increases.

Added to this environment of consolidation is an increased atmosphere of competitiveness due to new sources of competition, such as that from insurance subsidiaries of Canadian banks. The entrance to large banks in the insurance business reinforces trends found elsewhere in the financial service sector. These are trends primarily to increase competition and the potential rationalization of intermediaries such as agents and independent brokers. While Canadian banks are permitted to own insurance companies, they are still restricted as to the distribution of insurance products.

Current financial reforms affect insurance companies as well as banks. Insurance companies will have access to the payment system, allowing them to offer products such as chequing accounts and debit cards. The flexibility with respect to creating holding companies will allow them to compete on an equal level with banks.

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