For fools rush in…

Global insurance brokers should wield their cost-cutting axes carefully because if they sever risk services to corporate clients, they may not get that business back.

Faced with a global economic downturn brokers are suffering along with everyone else. This year, the big three global brokers have announced ambitious cost-saving initiatives.

Staff costs are one of the biggest expenses. In April, Aon said it would slash its contributions to employee pension plans and reduce the sums it pays some employees in bonuses. At the time, Aon said: “No stone is being left unturned during 2009 to drive out further cost.” Marsh hacked about 1,900 jobs in 2008 and outsourced another 900. While Willis chief executive Joe Plumeri offered staff the option of taking unpaid leave.

These initiatives come amid declining results. Aon posted a 35% drop in net income to $123m for the third quarter of 2008. Willis’ fourth-quarter net income also declined 35% to $62m. Marsh’s job cuts helped the broker report better than expected fourth quarter earnings. But net income still fell 6% to $80m.

Since October 2008 all of the global brokers have seen their share prices slide: Aon’s stock price has fallen 6.5%, Marsh has dropped 30% and Willis shares have slid 10%.

Their performance is a major concern for risk managers. Brokers, in an effort to reduce expenditure, may be tempted to cut the risk consulting services they offer big corporates. Marsh has already admitted that it plans further spending cuts in its consulting units. But this would not be a wise move for brokers.

In the current tough climate, the risk management profession is under pressure to prove how it adds value. Companies won’t want to outsource services that they can do themselves in-house. And risk managers are eager to take on more responsibility in order to avoid the axe themselves. That means that what brokers choose not to do, internal risk managers will snap up.

The downturn gives risk managers a major opportunity to add value to their organisations. Risk managers can save their company money by driving down the total cost of risk through loss prevention initiatives, accelerating the closure of claims and insurance programme optimisation. These activities are more important than ever now and successful companies will be putting more emphasis on them. Brokers can help them do this with advice and by doing some of the legwork. Rather than backing away, the clever ones will continue to provide these services to help risk managers.

If brokers want to retain good relationships with their corporate clients, they should be careful not to withdraw help when it is needed most. If they do, they may never see those clients again.