Will the short-term surge in unemployed workers translate to lower fees for benefits brokers?
Yesterday’s blog focused on the Property & Casualty (“P&C”) rate environment and the “hardening” market’s positive impact on revenue. Rolling into 2020, the P&C industry enjoyed a manageable rate lift on all major lines. While the average P&C insurance broker was punched in the gut in March, the growth horizon over the past few weeks seems much brighter.
And while there are similarities between P&C and Employee Benefits (EB) brokerage businesses, there is certainly more short-term consternation about some growth areas. Specifically, the strain on growth associated with group medical commissions on income statements due to the dramatic reduction in private sector workforces in the past two months. The pendulum swing in the unemployment rate over the last 45-60 days is enough to raise concerns. In short, the short-term surge in unemployed workers could translate directly into lower fees for benefits brokers.
Crazy to think that in January, we were expecting 2020 to be our industry’s most challenging talent acquisition year in history. With seemingly every broker wanting to hire, talent demand greatly outweighed supply. In February 2020, unemployment hit a staggering low of 3.5%. Our clients and your clients were growing, and seemingly everyone was focused on talent acquisition, development, and retention as a core strategy.
This environment was positive for the EB brokerage community as most firms operate on a Per Employee Per Month (PEPM) revenue structure. But, as the country shut down, the sheer number of layoffs and furloughs in March and April quickly evaporated any positive PEPM lift due to headcount increases. The Labor Department estimated that U.S. employers laid off 7.7 million workers in April, available jobs fell 16% between March and April, and new hires declined 31% over the same period.1 Just to draw some attention to the numbers, assuming that 50% of those employees had access to medical insurance through their employer, the annual loss in revenue for the brokerage community would equate to $1.15B.1 But even this estimate may be low. According to a Kaiser Family Foundation report, nearly 27 million employees may have lost employer-sponsored health coverage. Using the same methodology as above and assuming that these employees remain unemployed for an average of 4 months, the hit to aggregate industry revenues could exceed $2.7 billion (27 million unemployed workers x $25 PEPM fees to the brokerage industry x 4 months).
Unemployment did drop to 13.3% in May, down from 14.7% in April, but the path back to low single digits will likely take longer than it took to get from 3.5% to 14.7%. Employers of all shapes and sizes will likely hesitate to hire new employees throughout 2020.
If you factor in the unknowns associated with the major medical and ancillary benefits carrier’s loss ratios, given the COVID-19 pandemic, forecasting revenue becomes even more of a head–scratcher. Our clients have told us everything from: “COVID-19 will be the death of employer–sponsored health care” to “This is one of the best loss ratio years for a medical carrier I’ve seen in a long time.”
How 2020 and 2021 employer–sponsored healthcare costs will play out is unknown. Three COVID-19 scenarios may include:
- Effect of delayed elective procedures. There is wide speculation that many individuals have refused or delayed medical attention due to fear of contracting COVID-19 in a hospital or doctor’s office. The delay offsets the COVID-19–related cost impacts in 2020 but potentially creates a spike in medical claims in 2021 and beyond because of the lack of preventative care.
- Closed Health Care Facilities. The shutdown of healthcare facilities in the past few months will also help offset the COVID-19–related cost impacts in 2020. Whether access to ongoing and preventative health care has created a false sense of optimism related to expense/revenue ratios.
- Employer Paid Coverage. If medical claims spike in 2021 due to closed facilities and delayed preventative care, cash–strapped employers might be forced to seek health plans with less coverage (e.g., cheaper costs) or drop coverage entirely. Others that keep their health plans intact might see material rate increases resulting from the claims cost. While rate increases resulting from higher medical costs could potentially increase revenues for the benefits brokers, the net effect of lost revenue from lower coverages is nearly impossible to predict.
If you are an EB firm specializing in the self-funded space, your experience is likely situational. Still, many of our clients have expressed positive results and control spending in these areas due to similar circumstances.
The average EB broker will probably take a hit in 2020 that will filter into 2021 based on the dramatic rise in unemployment, lack of new hiring, slowed new business activities, and changes in health claims trends and costs. We believe it is important to run the numbers. Dedicate the requisite time to understand your group 2020 impacts better and use the meaningful data & analytics you can pull from your customer base to understand your potential revenue downside.
If you have questions about Today’s ViewPoint or would like to learn more about activity in today’s marketplaceIf you have questions about Today’s ViewPoint or would like to learn more about activity in today’s marketplace, insurance financial advisory, or insurance market intelligence, please email or call Tommy McDonald, Vice President – Financial Advisory at 440.392.6700.
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1MarshBerry assumes that of the 7.7M workers laid off in April that 50% are enrolled in employer sponsored medical which pays the average broker $25 PEPM x 12 months. (7.7M x 50%) = 3.85M x $25 PEPM = Monthly Revenue of $96.25 x 12 months = $1.15B
