The appliance of the alliance

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A year after the launch of its broker alliance proposition, Zurich broker managing director David Smith believes its counter-intuitive approach to the 'SME scrum' means it is in a stronger position than some rivals. Jonathan Swift reports

Just over a year into its broker alliance programme, Zurich's intermediary boss David Smith is busy reflecting on a period in which the insurer - while not quite demonstrating a B-list celebrity's voracious appetite for publicity - has certainly raised its profile. "The feedback we are receiving from brokers is that we have a new hunger for business and a tenacity to hold onto renewals," says the managing director of Zurich's newly created broker division.

"We have generally been quieter than a lot of our competitors. In the past - and this still holds true - we would rather be understated in our deliverance. But we were more expansive during 2007 because with the new platform in place we needed to be more visible than before."

That new platform, dubbed 'the broker alliance', saw Zurich move away from managing personal lines brokers separately from those in commercial lines and instead look after them as a homogenous group.

The company now has 600 brokers populating this alliance, all of whom are offered access to its 10 propositions from small to medium-sized enterprises to property investors; from private clients to pleasure craft. Each also has its own account executive who manages an average of 10 to 25 intermediaries.

"The broker alliance has exceeded our expectations," says Mr Smith. "If you look at our overall broker result last year, we showed around 4% growth in a falling market - and the alliance played a key role in that."

Widening the net

Determined not to be seen as an insurer that solely deals with a select club, Mr Smith claims Zurich has stepped up contact with a host of other brokers outside the broker alliance. These are looked after by eight development executives, each with a remit of a 100 brokers.

"We are making regular contact with 1500 brokers, which is half our agency base," comments Mr Smith.

When plans were first unveiled for this initiative, Mr Smith believes its brokers used, on average, two to three of the 10 propositions; and it was his and Zurich's hope that by uniting personal and commercial lines, intermediaries would adopt a wider range of services.

Looking at the first year of operation, Mr Smith is adamant some success has been marked up on this front. "They are (using more propositions) and that is where our growth is coming from. Depending on how far you think the market has fallen during the year, the 4% growth is organic; it represents us selling more propositions to more brokers.

"Having added financial lines and engineering inspection, we now have 10 distinct propositions, and believe the average use has moved up one notch to three or four. There is, however, huge variation: some brokers will use us for one thing, whether it's Zurich Private Clients or Navigators and General; others will use us for six or seven of those propositions. But we know from the growth pattern it is increasing."

Among the areas Mr Smith boasts Zurich has driven through particular growth are construction, property investors and private clients - all of which showed double digit increases in premiums written. And he insists this was done profitably without sacrificing the bottom line for volume. "We have got our tactics spot on, which is effectively the balance between sales, underwriting and the actuarial side; tactical pricing and technical pricing; and we have also made sure that everyone has aligned objectives.

"So the sales guys are thinking as much about rates and retention as they are about new business; and the underwriters think as much about growth as they do about technical price. Over and above this, the behaviour of our people was exemplary last year. We were really proud of the result we achieved."

Rate increases

Looking at rates, Mr Smith concedes he saw little movement northwards last year across its portfolio of commercial and corporate business, although he adds: "We took it upon ourselves in the final quarter of 2007 to guide the market up on employers' liability, which is our responsibility as the market leader."

Indeed, he has a stark warning for those resistant to putting rates up: "The market needs to rise because the 60% plus rate increases put through in the early 2000s have been eroded by subsequent claims inflation. And if we don't want to go back to that period of high rate increases then steady and sustainable rate rises need to happen during this year."

Reflecting on where Zurich sits at the moment compared to some of its peers, Mr Smith has digested the recent raft of financial results and - without naming specific firms - says he believes all the indications point to it being in a "good place", adding: "We are not in the position of needing to make swingeing rate increases; we think we can put in steady ones that will be understandable to our customers.

"If you look at the market, some insurers' pricing and distribution decisions over previous years are beginning to catch up with them; which is coming through in their results. However, our distribution and pricing choices allow us to build our pricing on a sustainable basis. So we believe 2008 is going to be an even better year for us."

His optimism has not been curtailed by the current level of broker consolidation, or the decisions by other insurers to invest in or acquire brokers. "Consolidation doesn't worry me: it's a feature of our market. There is no point worrying about it. You have to view every change as an opportunity. And as the market changes and consolidates, it provides opportunities for us.

"Some of the rises in commission levels seen in other insurers' results are quite frightening. We have not overpaid on commission, but paid it reasonably and fairly to our broker alliance members and are now in a position where we can make choices and demonstrate greater flexibility than some of our competitors. We have not 'sold our soul', so we can be more bullish about consolidation than some."

Indeed, Mr Smith says that, in the main, Zurich has seen its accounts with major consolidators increase rather than decrease as a result of their buying activity. And while Norwich Union's chief executive Igal Mayer has expressed concern over the likes of Axa buying brokers and channelling more business their own way, Mr Smith remains sanguine.

"The different insurer strategies of acquisition and investment are very interesting. It is easy to knock other people's strategies, look inwards and not understand why they are doing it. But it does appear, from the outside, some firms are losing sight of customer value and where they are going to extract the value from, in these acquisitions, under the current regulatory regime."

He muses: "I guess I have great faith in the Financial Services Authority ensuring conflicts of interest are managed. But if there is a movement towards a tied or quasi-tied model then the customer will ultimately decide whether that model works for them or not. So I can't say I'm particularly concerned. We have a good relationship with Venture Preference who are certainly acting in a very responsible and ethical fashion."

Strained relationship

Of course there is one consolidator with whom Zurich's commercial lines relationship has appeared - rightly or wrongly - to be less than cordial in recent years: Towergate. Has this been altered by any of the broker moves of late?

"The relationship with Towergate has always been maintained through the personal lines account and - with its purchases of The Broker Network and Open GI - we have significant accounts that we are working with them on," explains Mr Smith.

"The myth that there has always been a frosty relationship is exactly that - a myth. And I will go back to what we said originally: where our business models align, we will absolutely work with Towergate. That has never changed.

"The reason we moved away from the Towergate SME model is that it did not work for us, the business models didn't align so we couldn't reach an agreement. We are working well with (Open GI's network) Countrywide and TBN and I don't see that changing."

The SME market certainly poses interesting challenges for Zurich because this is one of its 10 propositions where it does not hold a top three place, and Mr Smith readily concedes, "during the early 2000s we did not focus on that book".

But he claims Zurich's hold on this market stabilised and grew in 2007. "We are not top three, but now have an attractive and compelling proposition and are investing in technology. We are in a position where we can talk to more managing general agents and arrange delegated authority, which has not been in the Zurich armoury in the past. And the reason we are prepared to do that is because we believe our position is now a more flexible one, both in terms of pricing and commission."

Asked whether, given the congested marketplace, Zurich can realistically attain that much sought after top three spot, Mr Smith admits: "We are not setting any timeframes; it is an aspiration if it makes sense on the bottom line."

Commenting further on the insurer's recent history, he says that Zurich's strategy since 2001 has been counter-intuitive to the rest of the market. "We have pursued a multi-segment strategy while others have been bringing things together, becoming a jack of all trades for people. We have not participated in a big way in the SME scrum but sat on the sidelines instead. Now we are ready to advance as others retreat."

As Zurich steps up its moves to attract SME business, is Mr Smith worried by the potential broker market impact of Direct Line for Business or other direct players encroaching on this space - including potentially his own parent company?

"There is an inevitability that at the bottom end of the SME market - the micro end where businesses have a turnover of less than £1m - some will go direct. Nobody would argue with that - broker or insurer. Ultimately the customer will make the choice.

Broker future

"But there is a lot of scaremongering about how far 'SME direct' can move upwards because that is a function of how far you are prepared to auto-rate, the cost of distribution and the way people buy. I still don't think a pallet manufacturer in Milton Keynes, with £3m turnover and 20 staff, will purchase direct. There will always be an advisory role there."

Before taking over his new role, Mr Smith had traditionally worked on the commercial side. So what has he made of the personal lines brokers he has become acquainted with? "That has been one of the biggest surprises of the last 12 months. When meeting the major players, such as the Budgets, the AAs and Kwik Fits, the professionalism of these businesses impressed me - it was a shock."

As to feedback from these firms, Mr Smith concludes: "I had the opportunity to ask them their opinions of Zurich and got a similar response from each: you are a great motor panel insurer. So what I have worked on over the past 12 months is to move us away from being solely that. It's great to be regarded as such, but what have we done with household? This is now all on full cycle EDI; we have got our service levels back where they were previously; a new, simple bedroom-rated product is available and our home account has started to grow. And all because we have got the basics right."

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