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Global Scale by Coletta Kemper Subprime Ooze

The subprime blob is eating almost everything in its path, including opportunities to sell your firm.

By  Coletta Kemper

“Beware of the Blob! It creeps and leaps and glides and slides across the floor.”

The subprime meltdown reminds me of the classic 1950s sci-fi movie “The Blob,” where an alien jelly-like creature oozes across the earth, devouring everything in its path. Two teenagers try to warn the authorities of the Blob’s threat but are ignored. By the time the police take them seriously, a number of notable townspeople have been eaten by the insatiable creature. While people panic, the government throws all its resources at controlling the Blob’s spread.

As the credit crisis blob continues to eat its way through the economy, feasting on rich and poor, I want to know how the economic turmoil is affecting insurance brokers. To answer that question, I have asked a few wise guys in the industry what they are hearing from their broker clients.

There’s no doubt that the general economic downturn is hitting brokers’ bottom line, says Tim Cunningham, principal with Optis Partners. The soft market was already depressing revenues, but the weak economy is taking its toll, he says.

“The crisis is hitting segments of the economy hard: transportation, the auto industry as well as ancillary businesses, and construction. Many clients are contracting, and some our closing up.”

Rob Lieblein, managing partner at Hales & Co. and a regular Leader’s Edge contributor, agrees. “Companies are laying off workers, and that will have an impact on how much insurance clients buy, such as workers comp,” he says.

Lieblein also sees another trend. In the past, corporate clients bought more insurance in a soft market because of lower prices. That’s not true today, and that hits brokers’ revenues.

MarshBerry President John Wepler and Executive Vice President Patrick Linnert see still another troubling trend. Clients are falling behind in their premium payments, leaving brokers with aged receivables they have to pay.

MarshBerry says margins on average are down 4.2% over the last year ending June 30. High-performing firms are able to weather the economic storm because they can focus on core business practices put into place over the last two decades.

“Firms are managing to the best numbers and looking closely at earnings margins. Those that do that are well positioned to remain healthy and viable,” Wepler says.

Lieblein says the large brokers are tightening expenses and may contract payrolls. Middle-market firms are cutting out the extra expenses, such as business travel, rather than laying people off. Margins are tight, but firms with best practices are investing in the business.

Firms also are focusing on internal efficiencies, using technology better and pushing tasks down to the lowest level person capable of doing the job right, Cunningham says.

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