Yesterday, we offered the perspective of why the insurance brokerage industry is a strong and resilient one. Today is a look at “What’s the Downside?”
Insurance distribution is a great business. But it is likely most businesses are suffering in the fallout from COVID-19-related shutdowns and social distancing. Where are the risks to your insurance brokerage firm and what’s the potential downside? What we are hearing from brokers, carriers and others in the marketplace is a sobering dose of reality.
Over the past decade plus, the industry has put an emphasis on niches and specialization; “generalist” has become somewhat of a derogatory term, synonymous with “unsophisticated.” However, the brokers who built and depend upon specialty practice areas such as retail, restaurants, hospitality, travel, transportation and oil & gas, to name a few, are now finding themselves on the wrong end of the conversation. Bankruptcies and significant reductions in exposure are likely to hit these firms harder. Generalists are expected to fare better in the current environment.
Several states are proposing guidelines to safeguard insureds in the event that they cannot pay premiums and to allow insurers more time to handle claims. Insurers have announced their own measures as well. For example, both The Hartford and GEICO (among several others) have agreed to suspend cancellations for nonpayment until the end of April, and this may even extend further with each extension of social distancing guidance. With state insurance departments and carriers announcing premium forbearance arrangements, what will the impact be to the broker?
While this is a win for the insured, a delay in premium payments means a delay in commissions (i.e. income) to the brokerage. Yesterday, we highlighted why insurance distribution was a great industry. Among the reasons are predictable and steady cash flows with low need for capital expenditures. As a result, many firms are left flat-footed in a situation where their revenue stream may take a significant hit for a number of months. Most have operated their businesses with minimal cash on their balance sheets and are ill prepared to fund operations for longer than a few weeks if revenues shrink, or worse dry up, due to insurers providing extended payment terms to insureds.
Often, insurance brokerage firms are run as “lifestyle businesses” or personal piggy banks for owners who have grown accustomed to the reliable income stream. Some firms with lines of credit that were established for emergency or opportunistic reasons are making the decision to draw on those lines to preserve additional cash to ride out the short-term cash flow pinch. Others are making decisions to cut back wherever possible (e.g. benefits, non-essential expenses, etc.) to manage the short term. However, there will be cancellation of coverage for nonpayment at some point. If that happens, exposure bases for all firms will likely take a significant hit, generalists included.
Not only do insurers have nonpayment issues that will impact their own cash flows to worry about, but several states have proposed legislation that will retroactively provide coverage for business interruption claims related to COVID-19 that would not have been covered under the insured’s policy as written. Ethical considerations aside, this would have huge implications for insurers and would almost certainly bankrupt some. Although these bills and proposals are backed by “funds” that will reimburse insurers in some way, those pools will be established through income assessments on the insurers themselves.
What can you do about it? This is not the time to sit on the fence. Tune in tomorrow to learn more about actions you should be taking and opportunities that this type of crisis can create for brokerages that are willing to make hard decisions now.
If you have questions about Today’s ViewPoint or would like to learn more about potential risks to your business, please email or call Gerard Vecchio, Senior Vice President at or 212.972.4886.
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