When Zurich's UK chief executive Patrick O'Sullivan was given extraordinary performance targets, he came up with a daring plan. He explains his strategy to Andy Cook

The pressure is on. Zurich Financial Services' new group chief executive James Schiro has launched a rights issue to raise £1.6bn. To secure such a sum in the face of the many insurance industry share offers around, the former PricewaterhouseCoopers boss has promised extraordinary performance.

The expectation is a 12% return on risk-adjusted capital. That's a couple of points above the market average. And five points ahead of what Zurich in the UK is producing at the moment.

Schiro, who replaced Ralph Hüppi in May this year, has a simple philosophy. Return to core business and be best in class. In the UK this means goodbye to Zurich's well-publicised online bank (at a cost of £100m plus) and goodbye to venture capitalist Gresham. It also means greater focus on non-life insurance.

Zurich's UK general insurance chief executive is Patrick O'Sullivan. For a man at the sharp end of some tough demands, he is relaxed. O'Sullivan, a Dubliner, laughs heartily and often. But behind the easy smile and the twinkle of Irish charm, O'Sullivan reveals a sharp mind born of Trinity College Dublin, London School of Economics, Arthur Andersen, Bank of America and GE through its insurance subsidiary Financial Insurance Company.

Daring plan
One of our industry's deeper thinkers, O'Sullivan has come up with a plan to reach Schiro's targets. It's a daring plan and one that differentiates Zurich from its competitors significantly. And, should it pay off, will see Zurich continue to scoop industry awards as best insurer.

So what is the plan? It sounds crazy, but O'Sullivan is set to sacrifice Zurich's direct sales operation in favour of broker sales. O'Sullivan's theory is that brokers have successfully fought off the onslaught of direct sales and that supporting two, often competing brands does not make financial sense.

And it is not just rhetoric. Last month, Zurich launched an advertising campaign that directs end users to brokers - support your local broker is the gist. And what's more, once the sales lead has been generated, Zurich allows the broker to place the business wherever he pleases.

Of course, O'Sullivan would like brokers to feel that Zurich would be the best home for the policy.

So where does that leave Eagle Star Direct? "It's not sustainable long term," says O'Sullivan candidly. "We won't be able to support the advertising that we would want for the direct and broker brands in a market that provides wafer-thin margins."

"Hank Greenberg, who is someone you have to admire in this business, said his competitive advantage is that he doesn't need to spend money on brand," says O'Sullivan.

While O'Sullivan's Zurich is aiming to focus more heavily on brokers than any other of the top five insurers, the direct business will not be allowed to wither entirely.

"It would be suicidal not to offer terms direct if our customers wanted to deal direct," says O'Sullivan.

"We can be multi-channel - as long as the broker understands that we are primarily out to support him. But if a customer calls up and says I want to deal with you direct. We'll first say: 'Have you thought of using so and so and here's the contact number'," explains O'Sullivan.

"Of course, if the customer insists we can offer the product direct, but we promise not to price it against the broker," he adds.

It's a cute idea that will ring alarm bells in minds of the more cynical brokers. But there are good reasons not to treat the initiative with too much scepticism.

Zurich has been cultivating its broker-friendly stance for some time now and has won a string of awards based on the service brokers receive from the company. And the company is renowned for keeping a strong force of broker relationship managers in the field, where other major composites have been centralising their relationships.

O'Sullivan recognises that this has an added cost for Zurich but one that, he reckons, is more than made up through "relationship" benefits.

One factor in O'Sullivan's choice to back brokers is the way intermediaries reacted to the threat of direct sales.

"Five years ago everyone predicted the demise of brokers. It hasn't happened. They're fighting back with service and understanding the customer better. That's great and we think it will continue," says O'Sullivan.

Broker consolidation
Isn't this a dangerous strategy when the future of brokers under the watch of the FSA is in doubt? O'Sullivan doesn't worry about numbers.

"There will be consolidation after the broker regulations are introduced," he says.

"The small ones will find it too expensive to survive. If we have, say, 4,000 brokers today, then there will be 1,000 in five to ten years' time," he adds.

Bigger brokers

It is the attrition of smaller brokers that could catch up with Zurich. Rivals admit that Zurich has a strong presence among mid-tier brokers, but it is not regularly used by the larger firms. O'Sullivan admits that there is little presence among the top brokers.

"It is a consequence of the merger and the underperformance of the Eagle Star book. We were not making money with the very big brokers," he says.

But, adds O'Sullivan, Zurich is coming back into the fold of bigger brokers. "We're back now with Kwik-Fit. We sat down with them and said we are not making any money on your account and now they understand that we must make a return," says O'Sullivan.

To reinforce the point, O'Sullivan explains how Zurich and Endsleigh parted company, despite Eagle Star and Endsleigh being based in Cheltenham. Now Zurich is a minority shareholder of the broker.

If the pressure is on, there is no way of knowing. He's even confident and relaxed enough to be self-deprecating.

He jokes: "I've been in general insurance now for five years - I know enough to be dangerous." And I expect he does.

O'Sullivan on . . .

"If banks get into underwriting they will soon learn that they must stick to their knitting. I used to think there was a huge amount of similarity, but there isn't."

"It's a tough problem for whoever takes over. No one wants to see further deterioration of the company. It would be bad for the industry."

Norwich Union
"It is a powerful competitor, but it is a life company by definition."

"Brokers won't move their business when service is intolerable. Is it that there aren't enough alternative suppliers with the right service, or is it too difficult?"

"Analysts and investors are more aware now of how the general insurer makes his money. Now people know they won't be able to cloak their performance."

"The biggest long-term threat for primary insurers is that reinsurers will muscle in on the market. We know Swiss Re and Munich Re are looking at being primary insurers in commercial risks."

"You can never be sure about how much more pain is to come. The group as a whole has a survival ratio [the number of years before reserves run out at current estimates] of 25. It's well over 30 for the UK."

"John Tiner is ex-Andersen just like me. I like what he is doing. He understands how the general insurance business differs from the life side. We must invest the time and effort so that the people who work with John understand that we aren't just another bunch of insurers that you can pursue because they have margins bigger than 1%."

"The government appears to view us not as an industry that has a legitimate right to make a profit, but rather as a deep pocket that can constantly be dipped into."

Personal File
Name: Patrick O'Sullivan

Family: Wife and three children

Car: BMW 7 series

Home: Woking

What book are you reading? Statecraft by Margaret Thatcher

TV: CNBC Power Lunch

Hobbies: Golf, jogging (40 mins every day)

Hero: Jack Welch

Heroine: Margaret Thatcher