This is the second in a seven-part weekly series, "Thriving During the Coronavirus," on how insurance agencies and companies should handle the pandemic and ways to work around new economic challenges.
Here’s the bad news: Your insurance agency is very likely going to see a drop in revenue over the next two years.
You can change that going forward, but in the next six months you probably need to have a plan that acknowledges you will probably see lower revenues.
But there is good news, too.
Insurance agencies are in much more stable positions than many businesses. People are required by law to have car insurance and workers compensation insurance. They are required by their lenders to have homeowner coverage and business property coverages. They are required by contracts to carry liability coverages.
That’s the big picture. Now, let’s look at some individual facets of the industry.
Workers comp is based on payroll. With over 40 million Americans applying for unemployment, payrolls are going to be down. That means workers comp premiums will be down.
Liability premiums are based on sales. Sales dropped over 17 percent in April. Even the May recovery was still down 6 percent from May of 2019.
Finally, some businesses are closing and more are going to close. Their insurance policies will be canceled or not renewed.
Most industry experts I talk to expect a 20 percent or more drop in written premiums in the U.S. Property and Casualty insurance market over the next two years. Since the drop during a four-year period of the Great Depression was 35 percent according to the best estimates, I honestly think a 20 percent drop is not realistic.
What Will the Drop in Premiums Be?
During the Great Recession these premiums went from growing around 4% annually to dropping at least 2 percent over two years. It then took another two years to recover to the pre-recession level of written premiums.
The May 2020 unemployment rate in the U.S. was 13.3 percent, in April it was 14.7 percent
If an average unemployment rate in 2008 was 5.8 percent, and Property and Casualty premiums in the U.S. dropped 1.6 percent without adjustment for inflation, the simple math gives us maybe a 4 percent drop in premiums unadjusted for inflation.
Balance the Reduced Premiums Against Your Planned Growth
Premiums were growing between 2 percent and 3 percent nationally going into 2020.
Adding the projected growth and the projected reduction resulting from Covid gives us a rough number of 2 percent plus 4 percent — a combined difference of about 6 percent less than your planned budget may have been.
Plan for a Range
Since the actual drop is unknown, your best planning is to plan for two or three possible scenarios. I suggest you create plans for drops of 5 percent, 10 percent and 15 percent.
This range of outcomes will let you prioritize how you budget for the coming 18 months. What would you do differently in each scenario.
The next article in this seven-part weekly series will focus on keeping and maintaining your staff during the downturn so be sure to check back next week.
If you missed "Part 1: How Your Insurance Agency Can Weather the Global Pandemic and Economic Downturn," click here.