Strategic Management for Independent Insurance Agents & Brokers: Positive Change for Sustained Excellence

Wednesday, February 8, 2012

Contingent Income Rising

Let's talk about what's keeping you up at night.

"Agency Compensation Expected to Rise in 2012: Ward Group"

Well, that's good news. No sleeplessness on account of that. Right? Right!

Unless, of course, you're counting on your contingent income to cover operating costs. It's been a couple of tough years and many agencies are reporting low or no growth. Without those profit sharing checks, profits would be down significantly instead of just a little. And there is a reason it's called "contingent" income. It depends on several factors -- some of which you control and some you don't. Catastrophic losses are not predictable. Premium volume and growth you can predict. And while you can't know exactly how your growth and volume will convert to contingent income, you can predict operating revenue and expense. Making sure the former covers the latter is critical when there are so many negative factors driving the economic forecast. It's enough to keep you restless if not outright sleepless.

In the study referenced above, reported in the Insurance Journal on line, there are also some potential trade-offs to go along with what are expected to be increases in agency compensation. Requirements for premium volume and growth are likely to increase for some of the companies in the study, as are loss caps. So, both the controllable and the uncontrollable may be more challenging to manage.  All the more reason to make sure your contingent income is only used for contingent outgo.

Forecasting and budgeting for the independent agent has become for challenging than ever. If you're not already doing contingent projections, you may want to start. It's a good way to look at your finances, regardless of the economy. Start with a baseline budget and project no change in income or expense. That probably means cutting back on some things just to stay even. Then create a second budget for growth, projecting realistic revenue increases based on realistic but aggressive sales projections. And, last, create a third budget projecting worst-case revenue projections and a worst-case expense budget. You can then look at what you will have to do to make each budget a reality and set your plans accordingly.

While we're on the subject of projections and budgets,  if you're having trouble making ends meet, be sure you distinguish between revenue problems and expense problems. Whether your income projections are positive or negative, if you haven't already addressed your expense problems, the time to do it is now.

How many ways are there to measure profitability? At least four. Check out our Models of Profitability.  And if you would like some objective third party help with projections and budgets, call or email and let's have a conversation.

And if the expected rise in agency compensation predicted for 2012 is great news for you, is there something else keeping you up at night?

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