In our last article, we noted the impact of contingent income on agency profitability. We found that 34.3% of the agencies in our database rely on contingent income to be profitable, and that too many agencies are running their businesses as though contingent commissions are guaranteed each year.
To further emphasize the importance income to the day-to-day operations of an agency, we looked at contingent income through the lens of several key operating metrics. What we found is that many agencies are dependent on contingent income to help cover day-to-day operating expenses. Further, we found that for many agencies, contingent income exceeded pre-tax profits.
Gross Revenue – Contingents as a percentage of gross revenue ranged from 9.6% to 11.3%, depending on the revenue band. The average for all agencies was 10.4%.
Total Commissions & Fees – Contingents as a percentage of total commissions & fees ranged from 11.3% to 13.6%. The average for all agencies was 12.2%.
Pre-Tax Profit – Contingents as a percentage of pre-tax profits ranged from 59.1% to 70.3%. The average for all agencies was 64%.
Agency Owners need to be aware of the financial impact that contingent income has on their business. Best-in-class agency owners do not rely on contingents to support expense loads. Instead, they budget and operate their businesses without a reliance on them.
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By: Craig Niess, CVA, MBA