Independent agencies are among the most profitable and predictable businesses causing them to be considered recession proof by almost all measurements. Independent agencies have remained strong over the past 15 years which included several epidemics including SARS, Bird Flu, H1N1, MERS, and EBOLA as well as the recession in 2008. In fact, during this time period the number of independent agencies remained constant at 36,500 in spite of an increase in mergers and acquisitions. In 2019, the average agency experienced retention rates of over 90% which created both a stable and predictable cashflow stream.  In addition, over 75% of agencies reported that they are growing year over year both in personal lines and commercial lines business. These are some of the factors that have attracted PE funds into our industry and have driven the multiples to an all-time high deeming independent agencies as an incredibly attractive investment. Regardless of the strength of independent agencies, I believe that the successful agencies of today and tomorrow are the ones that can marry relationships, technology and data, and COVID-19 has accelerated that need.

Impact of COVID-19

COVID-19 has created a dynamic that is unprecedented in our economy.  It is a unique health crisis that has turned into a financial crisis and the impact has been rapid, deep, and far-reaching in a significant number of industries within our economy.  We are experiencing unemployment rates that are the highest we have seen since the Great Depression and some predictions show that up to 21% of small businesses will not be able to survive and re-open.  It is uncertain how long this pandemic will persist and what the short, mid, and long-term impact will be both on our economy and the behaviors of consumers. Many believe that this pandemic will have a long-term impact on the way we work, do business, interact and what we will require of businesses and each other to ensure our own health and safety. While a significant impact to independent agencies may not be felt today, as this pandemic continues, we can expect to see the full impact of COVID-19 in agencies in the coming months.  The impact in an agency will vary based on its specific situation.

A crisis like COVID-19 shines a bright light on the strengths and weaknesses of all organizations.  For those organizations that are healthy well-run businesses, they will continue to flourish as they are designed to measure key performance indicators and adjust as changes occurs.  For a lifestyle business, the impact may be significant as that type of organization is not focused on monitoring the data needed to drive business decisions. The reality is that many agencies that were able to operate successfully as lifestyle businesses will struggle to weather this kind of storm.    Now more than ever before, agency owners should be utilizing data to create a plan for their agencies.

Step 1 – Know your book & assess your risk

Every agency has a different makeup which means both the risk and the impact on your agency will be unique to your specific situation.  In order to estimate the impact that the many factors of COVID-19 may have on your agency, you first need to outline your expected revenue and cashflow.  You can do this by creating a cashflow statement that classifies your revenue into categories of personal lines, commercial lines, life & health, and other income knowing that each of these categories are subject to different risk factors.  Next you will need to assign reasonable risk factors to each category that you have outlined.  For instance, in personal lines, consider the average age of your insureds to estimate the percentage that may reduce or cancel their coverage due to loss of their jobs. For commercial lines, further categorize your book into industries and assign a risk factor to each category in order to estimate any potential area that you may experience a significant increase in lost accounts and reductions in coverage due to reduced staff and revenue.  Categories such as restaurants, hotels, and manufacturing are areas that have a high-risk factor as a result of the extended closures and the many  restrictions on reopening. Once you have estimated the impact on each category of your book of business, you can build a cashflow model that reflects the best case, worst case and most likely case that your agency may experience as a result of COVID-19.

Step -2 Create an action plan

Now that you know what the potential impact may be to your agency, create a plan of action.  Map out a plan in phases to actively monitor your revenue often and take corrective steps as necessary. Immediately identify opportunities to reduce or delay costs, renegotiate contracts with vendors and determine if and when you may need to make any staffing changes to reduce your expenses.  Identify areas that you can grow and focus your resources to support that growth.  Cash is king in times of uncertainty, so make sure you are spending your resources only in areas that are an absolute must and are directly related to your retention and growth.

Step 3 – Apply for relief

There are many programs available for small businesses to take advantage of during this crisis.  You should apply and take advantage of the ones that are best suited for your specific situation.  Having a documented cashflow projection will help you assess your needs and document your situation to support your application for programs like the Paycheck Protection Program (PPP) or other small business loans like the Economic Injury Disaster Loans (EIDL). In addition, if you have any debt, you should consider restructuring that debt to get the lowest rate possible in order to reduce your liabilities.

Step 4 – Focus on retention and growth

Determine the areas of opportunity and over communicate with your customers.  This is not the time to be quiet, so reach out and let your customers know you are there for them.  In times of uncertainty there is great comfort in hearing from our advisors.  Be proactive and reach out to your customers to ask them how they are and communicate how their current carrier is responding to this pandemic.  It is estimated that 8 out of 10 insureds will shop their insurance during this time.  Now more than ever, people want to support their local community and local businesses.  Remind them that you are there for them, are part of their community and that you care.

Using data to assess the risk in your agency and plan for your future has never been more important.  The agencies that have a plan will be able to adjust and make the necessary decisions to navigate these unprecedented times.  We have the tools and resources available to provide you with the resources you need to build a strong plan for your agency.  Our business consulting team can provide you with the support and tools you need to help you build your agency’s cashflow projection. In addition, we have compensation information (State Specific Compensation & Benefits Study) that is relevant to your region and state that you can utilize in your planning as well as the financial and operational benchmarks (RISE Report) based on your size, region, fastest growing and state that you can use to ensure that you are continuing to run a profitable and financially sound agency.

We are here to help you utilize these insights, take action and plan for your agency’s future. Your business consulting team is available to answer questions and can offer you a 30-minute free consultation. For more information contact Carey Wallace at (614)552-3063 or visit our website at www.ohioinsuranceagents.com