August 22, 2020
Pillar: How COVID19 Is Going to Shape the Future
5 min read
While independent insurance agencies have fared well through the first two months of the pandemic, there will be significant impacts on operations and income in the coming months. Commercially focused insurance professionals have already begun to see premium reductions for some renewals, but no agencies have yet begun to really feel the financial impacts to come upon the insurance industry.
Over the next few months we will be faced with significant income reductions:
- Policy cancellations
- Policy coverage reductions
- Lower premium renewals
- Return premium on audit
- Lower or no profit-sharing next year
As of mid-May 2020 the “true” unemployment rate in the U.S. was approaching 25%. But as awful as that rate of unemployment is it still doesn’t tell the whole story - it will trickle down and affect brick and mortar shops, and everything from beauty salons to travel agents.
Payroll Protection Plan
In March Congress passed the Payroll Protection Plan, providing forgivable loans to businesses with under 500 employees - the typical business client of an independent agency.
These loan proceeds kept as many as 30 million people employed according to Stephen Moore, an advisor on the president’s task force to reopen the economy. Those loan payments will be used up in August, according to the latest news. How many of those “saved” jobs will disappear then?
Resuming "Normal" Operations
Practically every kind of business faces unique challenges to their survival, from mom and pop shops to the biggest destinations for shopping online.
At the bottom of all of this is the fact that unemployment is going to remain high for a lot longer than any of us would like. That means lower payrolls, lower premiums, and lower commission for independent insurance agents. Lower payrolls also mean lower sales activity for virtually all businesses, which in turn means lower premiums.
Smaller Personal Budgets
As consumers face continued economic stress, and uncertainty reigns universally, they will naturally seek to reduce their personal expenses. I think it's reasonable to assume they will cut insurance coverage and premium where they can.
Questionable Profit Sharing
Profit-sharing is typically paid by insurance companies to agents who have a large enough book to qualify, based on a loss ratio under 55 to 56%. Many profit-sharing agreements also require either positive premium growth or at least no negative growth to qualify. All three of these things are problematic for profit-sharing income in 2021 and 2022 at least.
So, What Next?
To summarize, virtually all agencies face significant challenges in maintaining income over the next few quarters. In turn, this presents profound problems for maintaining profitability and agency value. This brings us to the questions:
- Is it hopeless?
- What can we do about it?
In answer to the first question, I would have to say it may be hopeless for some agencies. If agencies don’t take the right actions to minimize the damage, they face very uncertain futures.
Communicate with Customers
The first thing every agent should do to minimize their downside (and maybe create some new opportunities!) is to communicate with every client. Attracting and retaining business is now your #1 priority.
Focus on Retention
That’s the challenge. Start with retention through customer relationships, social media, old-fashioned phonecalls. Make it your goal to not lose a single client. You won’t be perfect, but you’ll be better. And that may be enough.
We were already entering a hardening commercial property market as the pandemic began. The fundamentals here haven’t changed. Property rates are going up. In addition, the economic climate will also drive an increase in the moral hazard, which will have an impact on casualty rates. When rates go up while personal and business income are under stress, consumers have a hard time understanding.
Aggressive New Business Programs
If you don’t have an aggressive new business program, now is the time to build one; the biggest advantage for the aggressive agent is that many of their competitors will be at home with the sheets pulled over their heads while you’re out there selling insurance.
Leverage Technology to Expand Your Geographic Market
One massive shift in opportunities that COVID-19 has created for the aggressive agent is that now, geography no longer matters. You now have virtually unlimited access to meet with people anywhere in the world - use it to your best advantage. The agents of the future are not bound by geography.
Generate New Business from Existing Customers
Another opportunity for new business (which will also improve retention) is to sell more business to existing customers. In times like these, they will be interested in it too.
Life Insurance Window
One last new business opportunity to consider focusing on is life insurance. Life insurance sales results are up as a result of the COVID-19 crisis.
Maximize Commissions with Carrier and Book Management
Having an agency’s book of business spread among too many insurance carriers threatens profit sharing, and it also guarantees that the agency isn’t receiving as large a percent payment as they would, due to the gridded nature of profit-sharing agreements. Focusing on fewer carriers now will improve the profit-sharing potential of any agency.
If income goes down by 20% the only way to maintain the same percent profit at the bottom line is to cut 20% of expenses. The only way to maintain the same dollars at the bottom line is to cut more. It’s simple math.
There are essential things to consider in cutting expenses in an agency: payroll and everything else.
Payroll expenses are typically 40% to 60% of a typical agency’s costs. So, there is no practical way to avoid considering payroll cuts if expense reductions are necessary to balance the books.
Are you appropriately staffed?
The best way to make that determination is to compare your income to other agencies in similar lines of business, of similar size in your part of the country. Consult benchmarking data to see how you’re performing.
When you benchmark your agency, start with spread.
Spread is the difference between Average Compensation Per Person (include all agency employees and contractors if any) and Average Revenue Per Person. If your spread is at the average or better, you are staffed for growth!
After benchmarking spread and service staff, look at producer compensation. What you’ll see is that personal lines producer compensation averages under 25% and commercial lines producer compensation averages under 35%. If your compensation is higher you’ll need to ask yourself if your producers can afford that much luxury in the time of COVID.
Book size and customer service
Another metric to look at closely is the average book size of producers compared to your own. This is key to think about as you think about appropriate staffing, appropriate compensation, and how to maintain profitability (or survive) over the next couple of years.
After payroll, the expense controls that the typical agency can put in place are fairly minimal in their potential impact. But I recommend going through the exercise. Begin by looking at every item in your expense ledger and asking, “does it help make the boat go faster?”.
If you’ve stuck with me this far let me offer you a word of encouragement. I believe that the next few years offer huge opportunities to the agencies who are focused on operational excellence and aggressive digital marketing for new business.
Tony Caldwell is a modern “renaissance man,” who is not only immensely successful in the field of insurance, but is also a writer, children’s advocate, mentor and even a licensed pilot.
Always keen on helping others make their dreams come true, Tony and his team have helped independent agents grow into more than 250 independent agencies. This has made OAA the number one ranked Strategic Master Agency of SIAA for the last 5 years, and one of Oklahoma's 25 Best Companies to Work for.
Tony loves to share his knowledge, insight and wisdom through his bestselling books as well as in free mediums including podcasts and blogs.
Tony and his family are members of Crossings Community Church, and he is very active in community initiatives: he’s chairman of It’s My Community Initiative, Inc., a nonprofit working with disadvantaged people in Oklahoma City; and chairman of the Oklahoma Board of Juvenile Affairs., and he has served through many other organizations including the Salvation Army, Last Frontier Council of the Boy Scouts of America, and the Rotary Club.
In his spare time, Tony enjoys time with his family. He’s also an active outdoorsman and instrument-rated commercial pilot.