#COVID-19: MEASURING THE FINANCIAL IMPACTS OF COVID-19 FOR INDEPENDENT INSURANCE AGENCIES
LIKELY THE HOT QUESTION ON EVERY AGENCY OWNER’S MIND IS “HOW IS THE COVID-19 PANDEMIC GOING TO IMPACT MY AGENCY FINANCIALLY?” AS YOUR AGENCY CFO MY INSIGHTS AND EXPERIENCE WILL HELP PROVIDE THE ANSWERS.
If you notice, the word “answers” was plural.
That’s because there is no single simple answer as to what the impact of COVID-19 will be on insurance agencies. Every agency will be impacted differently based on a large number of factors. These factors include, but are not limited to lines of business, cash positioning, client demographics, regional economic impact based on severity and longevity of the pandemic, and industry niche concentrations.
To help with the beginning stages of understanding, I’ve identified four ways in which your revenue may be impacted soon and one to start thinking about for next year.
Delayed Revenue
Lost Revenue – Temporary/Short Term
Lost Revenue – Permanent
Opportunity Cost of Decreased New Business Production
2021 Contingency
The volatility of the situation.
It is completely understandable that the majority of the concern is placed on losing revenue. There is a depth to revenue that we need to be careful to fully consider. Future revenue “losses” may only be a temporary situation with just a delay in revenue receipt; not a true loss at all. Some revenue loss will be for a relatively short period of time and then will return to normal levels while some losses will be permanent.
WITH THAT DEPTH IN MIND, BELOW ARE THE FIVE IMPACTS TO REVENUE.
1. Delayed Revenue
→ Impact: Temporary
As many carriers are offering extended grace periods for payment of premiums, agency commission receipts may be delayed. This will initially be felt as a near-term revenue loss but will be recouped later in 2020. Revenue all nets out by the end of the year and the only impact to the agency is a drop in short-term cash flow.
2. Lost Revenue | Short-Term
→ Impact: Temporary
Consider a business that temporarily lays off a significant number of employees. The company’s payroll drops and therefore workers compensation premium drops. This returns to normal once the workforce is brought back to normal levels. Similarly, employees may drop from some medical insurance plans. Fewer lives on plans equates to lower premium and therefore lower commission revenue. Again, this is for a temporary period of time if insured’s business returns to normal employment levels.
3. Lost Revenue | Long-Term
→ Impact: Permanent
Organizations that close and are never able to reopen will become lost clients. Consider an insured restaurant that has been forced to close and finds it impossible to ever reopen. This is true client retention loss and will have long-term ramifications for your agency.
4. Opportunity Cost | Decreased New Business Production
→ Impact: Temporary with Potential Long-Term Implications
Prospects may either delay or abandon making insurance decisions and therefore normal new business production drops. Consider an example where an agency normally writes $50,000 of new business revenue per month. Normal client retention loss amounts to $25,000 per month. Therefore, the agency has net growth of $25,000 per month. Now if regular production drops by 50% to $25,000; normal growth now turns flat ($25,000 new business offset by $25,000 retention loss).
5. Contingent Revenue | 2021 and beyond
→ Impact: Temporary with Potential Long-Term Implications
We’re in 2021 and waiting for our contingency revenue. Contingent revenue could be impacted in a number of ways through net premium loss, missing growth targets, and increased losses associated with the pandemic. The moral of the story: It’s not business as usual anymore. Pay special attention to carrier statements and contingent revenue projections
To understand the true financial impact of the COVID-19 pandemic on your agency, determine the reason for all revenue loss. It will take some digging into the data. Try to quantify the total amount of revenue drop and the amount of dollars that belong into of the five buckets defined above. Update your budgets and projections frequently. Evaluate your data monthly and manage the agency accordingly.
It’s important to note there is also a human factor to consider in all five of these situations. The need for your agency to rise above and provide excellent customer service and support is more pronounced than ever. Doing so will contribute to the relationships and maintain a rapport in the current environment of social distancing. Even those unfortunate businesses that will permanently close have the potential to be valuable prospects and referrals in the future. Helping them now is a way to proactively protect your future revenue streams.
This is a practice that we are currently very focused on at RD Advisory Group. We are continuing to research the current issues, reaching out with “wellness check” phone calls, and keeping a pulse on what might crop up next. This is the time to keep your clients and prospects close – be more than just the person who shows up at renewal time.
Taking these considerations in mind will ensure that you are positioning your agency to come out of this as strong as ever. Also, remember you are not in this alone. As the Agency CFO, at RD Advisory Group we are prepared to use our extensive industry-specific experience to help guide agency owners through these uncharted waters.
Thanks for reading!
Be well,
The Agency CFO
