John Wepler brings to light the most disturbing aspects of insurance brokerage — the Ugly Denial of Reality.
This week, MarshBerry’s Today’s Viewpoint explored The Good, the Bad, and the Ugly. The Good is that the insurance brokerage industry is better positioned than most to weather the current economic crisis. The Bad is we’ve identified some underlying risks that could hurt individual brokers and the industry. Today, we cover the most disturbing aspect of insurance brokerage, the Ugly Denial of Reality. Specifically, MarshBerry has witnessed too many clients and prospects adopting a nonchalant attitude toward financial and operational preparedness should the economic downturn be prolonged and/or deepen dramatically. So we’ve prepared points for developing contingency plans for COVID-19 insurance delays. While you should hope for the best, you should also plan for the worst. We can all rationalize reasons to remain positive, but no one knows where this will end.
It’s Time to Take your Head Out of the Sand
As described earlier this week, insurance carriers are granting up to 60-day deferrals on premium payments for consumers and small businesses without cancellation of coverage. Depending upon the carrier, broker commissions could be delayed until the carrier receives cash. There is also the possibility that many small businesses may not survive an extended hiatus with little to no revenue collections during the next few months. These scenarios could result in reduced commissions to insurance brokers. When MarshBerry asks whether individual brokers are creating contingency plans in case actual cash flows are materially less than budget, we often hear: “Oh, we are going to look into that issue soon.” What? Do you plan to stress test your future earnings and consider contingency plans soon?
The Time for Contingency Planning is RIGHT NOW
If cash commissions are delayed 60-90 days, can you weather a cash shortfall? The last I looked, 90 days is one quarter or 25% of your revenue. For those highly leveraged, will you face a liquidity scenario that could morph into a solvency issue if revenue dries up for a significant period? To avoid such draconian outcomes, MarshBerry suggests the following analysis:
- How do your actual YTD and most recent monthly (March) cash receipts compare with a budget? How do they compare with Q1 2019 receipts?
- How does a deferral of all non-essential spending affect your cash flow modeling for April to June 2020? Or April to September 2020? Which unnecessary expenditures can be permanently removed from your 2020 budget?
- Have you analyzed expected cash receipts if some or all of your clients defer premium payments until the end of May, the end of June, or later?
- Will across-the-board salary reductions need to be considered? If not companywide, which employees will be least affected by a (temporary?) payroll cut?
- If you conclude that a workforce reduction must occur, when will you implement the change? How prepared are you to swiftly make changes?
- Have you applied for the government EMFLA/CARES legislation recently approved by the Trump Administration? What cuts will you make if you are allocated less than the amount you applied for? What contingencies have you put in place if demand is oversubscribed, the government does not allocate more funds and your allocation is limited?
- If you have a material debt on your balance sheet, how will a 50% reduction in EBITDA (Earnings Before Interest, Tax, Depreciation, and Amortization) affect your debt covenants? What could happen to your debt service coverage ratio? If you are operating at a four times EBITDA leverage ratio, such a reduction could take your ratio into the eight times zone, which would bump you into a highly leveraged category.
- Have you spoken with your lender about debt covenant relief when commission receipts are delayed 60-90 days?
These decisions need to be made today to avoid a bigger crisis down the road. When faced with difficult choices, leadership in these uncertain times is often defined by preemptive moves, decisiveness, and conviction. Making these tough decisions without adequate preparedness rarely results in a positive outcome. At best, one could expect survival if decision–making is put off even by a week or two. Proactively developing contingency plans today, irrespective of when or if you need to pull the trigger, could set the stage for a successful 2020 financial outcome, not just mere survival, as the economy recovers.
Review Part 1, Part 2, and Part 3 of The Good, the Bad, and the Ugly for prior information essential to the 2020 insurance industry.
If you have questions about Today’s ViewPoint or want to learn more about potential risks to your business, organic growth, or insurance aggregation, please email or call John Wepler, Chairman & CEO, at 440.392.6572.
Special Announcement: The second session of the “Evolve Your Selling: Changing Your Sales Approach During the Pandemic” webinar has “sold out.” Please follow MarshBerry’s blog for the latest updates about new content and additional webinar sessions.
Marsh, Berry & Co., Inc. and MarshBerry Capital, Inc. do not provide tax or legal advice. Tax and legal professionals should be consulted separately before making any decisions with tax or legal ramifications. Any references to tax implications in this presentation should not be interpreted as the provision of tax advice.
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