Zurich has taken a tough line on commission and consolidators for years. Dave Smith, boss of the broker division, says this gives the insurer more options than its rivals. Lauren MacGillivray reports.

Dave Smith comes off as mild-mannered and good-natured – he laughs and apologises when a colleague interrupts the interview by banging on the glass panel of his City office. But Zurich’s managing director of the broker division can’t resist a dig at the competition over commission rates.

Singling out one insurer in particular, he claims Zurich has taken a tougher stance with consolidators. Its relationship with Towergate exemplifies that hard-nosed approach – Zurich does not do any SME business with the broker and underwriter.

It is a bold move given Towergate’s claim that it is Europe’s largest independent intermediary. The consolidator has more than 4,600 staff and reported gross written premium (GWP) of £2.1bn last year. It also provides underwriting services to more than 4,100 non-Towergate brokers and places business with insurers such as AXA, Allianz, Norwich Union and RSA.

By opting out of an SME relationship, Zurich has given up a powerful distribution platform. But Smith says: “It was a choice Towergate and we made about four years ago, that our models didn’t align in the SME arena because of commission. Neither of us could see how it would work for us. So we decided not to play together.

“I don’t think either of us would regret it. I think they’ve done exceptionally well and we’ve done exceptionally well sitting outside that arrangement.”

Zurich does, however, deal with other consolidators such as Oval and Jelf, along with global brokers including Aon, Marsh and Willis. It also deals with personal lines nationals while simultaneously paying attention to the regional market.

But whoever the insurer works with, it maintains a hard line on commission. Which is why, says Smith, it isn’t struggling to crack down on rates like some of its competitors.

Norwich Union, for instance, is saying it would rather deal with brokers directly than with networks.

“We’re in a different place,” says Smith. “We’ve been very disciplined over the last four or five years, while commissions have steadily risen. It’s not always the most popular policy, but we will exit distribution channels where commission levels don’t work for us.

“We’re in a position now where we can make choices rather than implement any draconian reductions. We’re in a sustainable position but that doesn’t mean we’re going to go out and sell our soul.”

As a result, Smith says Zurich’s commission levels are three or four percentage points lower than those of its major rivals. But he adds: “I think there’s a polarisation of the market where traditional composite players such as Norwich Union, RSA and Allianz are all trying to do the right thing and move rates in the right direction.”

He also says Zurich will make some adjustments to commission in the near future. But he declines to say what those tweaks will be.

Until then, there’s the more pressing matter of the economic downturn. He claims Zurich’s SME business has not been affected so far, but adds: “We will obviously be impacted, as we all will, over the coming months. But we are starting to see impact in construction, for example. That’s been impacted for about six months already.”

He expects construction to be the worst hit sector. There will be fewer new builds and as fewer people are employed in construction, employers’ liability premiums will fall.

“It knocks on to businesses that supply the construction industry. A lot of our corporate customers and personal lines home business will be impacted over the coming 12 months.”

Zurich has agencies with more than 3,000 brokers in the UK. The business is split between 60% commercial and 40% personal.

The sales force introduces the whole of Zurich to the broker, including personal and commercial lines, without any division. Beneath that, the company has 10 distinct customer propositions. Brokers have direct access to experts in areas such as construction, property investors, corporate business, personal lines and motor.

The decision to treat commercial and personal lines as one unit was made two years ago.

“We’ve put into play a philosophy across the UK where we look at the broker as a whole,” says Smith. “I look after commercial and personal lines for the broker, so I can look at the totality of a broker’s account as opposed to him having two or three people knocking on his door from Zurich.

“Many other people went in the opposite direction and separated them over time. But we really believe the broker is our audience, and we need to bring the whole of Zurich together for that broker. They will always tell me, ‘Let me understand what you can do for me, but then I want direct access to the underwriter’.”

Smith says Zurich’s broker alliance programme, also introduced two years ago, is the most inclusive distribution initiative in the UK. It offers members preferred commission, better service levels and access to all 10 of Zurich’s propositions. It also provides marketing and development support.

“Most [insurers] have honed their clubs down,” Smith says. “But we deal with around 500 brokers and the top 30 or 40 have completely bespoke arrangements. The next 500 have a differentiated service offering, then our other 2,500 brokers receive a level of service we think is well received. It’s a very inclusive strategy that’s not just for the top few; 500 is more than anyone else does.

“It’s gone down really well and on average, out of our 10 propositions, our alliance brokers would use six or seven. When we kicked off two years ago, it was somewhere between three and five.”

Smith believes, all things considered, Zurich has performed well this year (see page 10). UK results are unavailable, but Smith says two highlights for 2007/08 were Zurich’s two new products – professional and financial lines and marine and cargo. Stuart Quinlan, former underwriting director at Novae, runs the former; Alan Wilkins, former marine cargo regional underwriting and development manager at CNA, is in charge of the latter.

“We captured two teams from competitors in late 2007, so they’re experienced and well known,” he says. “There were gaps in our portfolio, so now we’ve pretty much filled them and have two successful teams up and running.”

The property investors unit has been a success despite the credit crunch, he says. “Whether or not the economy is in recession, property still has to be insured. So it’s more insulated than a construction business, which is based on new build.”

Zurich continues to be big in London property but has increased its focus on the regions and the rest of the world. The regional portfolio is now worth more than £200m, up from about £40m four years ago.

Going forward, one of the biggest issues on insurers’ minds is rates: they have to harden.

“Commercial lines rates have been moving backwards for about three or four years; claims inflation has been running between 6% and 8%. If you take employers’ liability over the past three or four years, that’s an effective rate reduction of 50%. That just can’t continue,” said Smith.

“Many people will remember 2001/02 when employers’ liability rates hardened by 30%, 40%, 50% in a single year. That’s all gone; rates have to rise. Better to start to raise rates in line with claims inflation now, rather than face rate increases of up to 30% in a short period of time.”

He adds that personal lines is no different, with the double whammy of increasing personal injury claims and credit hire costs.

“Claims inflation is now well ahead of the often quoted figure of 6%. So we need rate increases across the market in commercial and personal lines.”

Despite the volatility, Smith remains laidback. Maybe that’s because he tackles his frustrations by chopping down trees.

A father of two, he and his family recently moved from Wolverhampton to Birmingham. He has three acres of land on the outskirts of the city and Smith has hacked down 30 trees in 18 months using an old-school axe and rope. “I don’t like conifers,” he deadpans.

Smith isn’t a tree hater – just the opposite. He has planted three olive trees – which are lovingly swaddled in fleece for the winter – and two giant redwoods. He admits redwoods belong to the dreaded conifer family, but calls them “special conifers” and his “legacy”.

At 49 years old, Smith has been working in insurance for about 20 years. Born in Wolverhampton and an avid Wolves fan, he studied engineering at university in his home city.

He started a PhD at the EU Nuclear Research Centre in Holland and concentrated on fluidised combustion – testing materials in high temperatures – but quit after a year. “It was too boring.”

He then worked for a Swiss materials testing company based in England before entering insurance, joining Eagle Star in 1988. The company was taken over by Zurich a decade later.

Smith joined the commercial side 10 years ago and held various roles before becoming managing director of the division in 2005. He became managing director of the broker division in early 2007.

“Things have changed quite dramatically [since I joined],” he says. “We’ve continued to move through a soft market in the last two years, so I’ve been through hard markets in previous roles, and entered this position in the soft market. The big change now is we’re on the bottom moving towards a hard market.”