Canadian Underwriter

Desjardins’ Sylvie Paquette on flood coverage, the IBC and “adopting” State Farm

January 6, 2016   by Sara Tatelman

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Sylvie Paquette is not in the broker business. “We own a brokerage, a huge one, and what we want is access to their customers,” the CEO of Desjardins General Insurance Group told me bluntly over breakfast on the thirty-ninth floor of her company’s downtown Montreal tower.

In 2011, Desjardins bought Western Financial Group, a brokerage based in High River, Alta., and was primarily concerned with expanding its product reach. But “our plan with Western,” Paquette says, “has been slowed by the acquisition of State Farm.”

And that last acquisition is why brokers should care about this direct insurer from Levis (that’s across the St. Lawrence from Quebec City). Here is a mid-sized Canadian company that can Google the phone number of an American insurance behemoth’s CFO on a Friday, get a call back the next Monday and buy part of their company within four months.

In an era of instability and lots of M&A, Paquette realized, companies stuck in the mushy middle wouldn’t last long. “You can decide to be part of the giant,” she says, “…Or you can decide to be a niche player. [You can be] very successful in both. If you stay in the middle, wanting to be everywhere, do everything as a small player compared to the big ones, you lose.”

So Desjardins had a choice: withdraw from the rest of Canada and build a niche company in la belle province or try to become one of the largest insurers in the country. In 2013, the company decided to grow quickly, and that meant an acquisition.

Which brings us to State Farm Canada and a search for the CFO’s phone number.

“Of course [Paul Smith] didn’t answer,” Paquette laughs. “It was a voicemail. So then [our SVP and COO said] ‘Hi, I’m Denis Dubois from Desjardins Canada. I don’t know if you are aware––there is a consolidation in our market and we’re looking at your business in Canada.’”

That turned into an in-person meeting in Chicago just ten days later. “It was such an unbelievable experience,” Paquette says. “When I was studying at university, State Farm was the name that you see on every book. So I had been reading about them for 35 years, and now you’re in front of… the top four [executives].” State Farm was willing to listen to Paquette and her team, but the execs were clear they weren’t planning to sell the Canadian branch of the company.

“Are you good people?”

But Desjardins was persuasive, though it took four months for then-CEO Edward Rust Jr. to come around. The clincher was convincing Rust his Canadian employees and agents would be better off with Desjardins. State Farm’s U.S.-centered business model wasn’t working for its Canadian arm anymore, which some industry experts think may have been related Ontario’s mandated price cuts. And State Farm didn’t want that for any part of its family.

“I have a daughter [whom] I adopted, and when you go through adoption like that, you have to be evaluated as a parent,” Paquette says. “So will you be a good parent? So I went through that for my daughter, and I felt exactly the same. At that meeting there, it was not about money. It was about ‘Are you good people? Will you take good care of our employees, of our agents, of our customers?’ I really felt the questions were only around that. And through the transaction, all through the negotiation, everything was about their employees, their agents, their customers. It’s an incredible culture.”

Desjardins took over State Farm Canada on January 1, 2015, but the sale has been a gradual transition for both customers and the company. “There are so many things that need to be fixed, so the brand change, that could not be our priority.” Desjardins will continue to use the State Farm brand for five years, with the U.S. company believing “we won’t destroy the value in their brand.”

Desjardins was founded by Alphonse and Dorimene Desjardins (above)
Sylvie Paquette’s Ajusto score
3 years
the oldest a smartphone can be to run the Ajusto app

So in January of this year, customers received policies from State Farm but underwritten by the Desjardins owned Certas Home and Auto. “So that was the first change. But it was still their pricing, their product, their underwriting rules.” Auto customers remained covered by State Farm’s products through the autumn, with Desjardins-written policies taking effect in September for Albertans and New Brunswickers and in November for Ontarians. “So we’re [introducing] one product like that at a time.” Desjardins life insurance rolls out in spring 2016 and personal property that fall, after which will come commercial insurance. “So it’s huge.”

But not quite as huge as the company first thought. When Desjardins first announced the purchase in January 2014, pro forma calculations suggested Desjardins would become the second-largest insurer in Canada. But State Farm continued to shrink through that year—and Aviva continued to grow—so by the time Desjardins officially took over, it was in third place. Both Aviva and the post-M&A Desjardins now bring in roughly $4 billion in annual premiums. “So [the difference] is peanuts,” says Paquette, grinning. “…So I wrote to [Aviva president and CEO] Greg Somerville and I said, ‘Sorry we sold the skin of the bear before killing it.’”

In June, Paquette was appointed chair of the IBC, five years after she joined the board of directors. In the six months leading up to the announcement of the appointment, Paquette met each board member individually and asked what they thought about the IBC. “Because sometimes, there are some insurers complaining about IBC. I say, hold on a minute—IBC, it’s us. We have created IBC to serve us. So if we are not happy with it, we have to change it.” That requires members put more resources into the bureau and take on responsibilities held by IBC staff—“you have to free your executives or some of your experts to really… bring the solution.”

Albertan courage

IBC members agree, however, the industry needs government support to properly protect Canadians against flood risk. Desjardins offers water seepage and sewer backup endorsements in every province, but not overland flooding. The company “could add it tomorrow and not sell it to people who need it” because it’s simply not sustainable at this point. Paquette questions whether insurers who have recently started offering overland flood insurance—the Co-operators in May, Aviva in June and RSA in November—will make the product available for those actually living in flood-prone areas. “I guess the answer is no, because it’s not sustainable. Or you will make an offer that will not be affordable.”

To make overland water insurance affordable to those in flood-prone areas, governments need to invest in flood mapping, build catastrophe-resilient infrastructure and especially subsidize flood insurance for at-risk property owners who currently rely on the government’s disaster assistance fund. Paquette says a major problem is property owners who aren’t at risk of flood don’t want to pay the higher premiums insurers will charge to offset those who are. “That’s where the government needs to play a role, and say ‘OK, you don’t want to subsidize them, but overall we will.’”

Canadians also need a stick with that carrot—they shouldn’t be allowed to rebuild in areas likely to flood again, though that’s permitted in wet Holland. “We just don’t have the space to rebuild somewhere else sometimes,” Ralph van Helden, Lloyd’s regional manager for Belgium, the Netherlands and Luxembourg told Top Broker back in August. But Canada can’t complain about being pressed for space.

So “if we are allowing you to rebuild, and you know that you are in a flood-prone area, why should everybody else pay for that?” Paquette points to the Alberta government, which helped homeowners relocate or rebuild after the 2013 floods. But according to a provincial government website, if a homeowner decided to rebuild in a flood plain, “they will not qualify for future [disaster recovery program] assistance for overland flooding.” For homes in flood fringe areas, owners will only be compensated after future floods if they implement minimum mitigation measures, such as installing moisture-resistant flooring, protecting against sewer backup and moving main electrical panels out of basements.

“At least [Alberta] had the courage” to hold back on rebuilding in flood zones and risk angering some residents, “because those houses close to the river are houses with high net worth values that pay a lot of taxes, so [governments often] don’t want to stand up to them.”

Paquette is one of those business leaders never lacking in candour. At the IBAO convention’s CEO panel in October, for instance, the execs were discussing the value of telematics programs. Some had decided against them because the technology is changing too quickly to keep up and UBI wouldn’t cut down on the fraud that’s keeping Ontario insurance rates the most expensive in the country. Paquette, treated like a distant cousin crashing the family Thanksgiving dinner, spoke up to say that, yes, Desjardins had lost money implementing its first telematics program—but “it was a conscious decision to learn from it.” And in March, Desjardins launched Ajusto, a telematics app, which Paquette said allowed her company to better connect with its customers. She anticipates the app will become especially popular in Ontario, since the potential 25 percent discount on the sky-high premiums there could mean many more dollars saved.

At the end of that breakfast in Montreal, Paquette pulled out her smartphone and opened up Ajusto. “So that’s my score,” she said, pointing to an 84 at the top of the screen. “…I’m better than 95 percent of my friends, and I’m better than 68 percent of all the Ajusto population.” One of Paquette’s colleagues had scored an 89 on the app and another also has a score of 84. “So I’m number two.”

Copyright 2015 Rogers Publishing Ltd. This article first appeared in the December 2015 edition of Canadian Insurance Top Broker magazine

This story was originally published by Canadian Insurance Top Broker.