By Chris Morey, Bolton & Company05.01.20
As I work with my clients through this historical period of time, there’s been a lot of conversation surrounding their “estimated annual revenue,” which is required for most insurance policies.
A business must provide this estimate to its insurance provider when it comes time to renew a policy. This assumed revenue is used to determine the pricing of the policy, and often businesses provide these estimates with the assumption of growing in a regular market. So what happens when the market is turned upside down? It’s the reality we are facing as we navigate the COVID-19 pandemic.
Turned Upside Down
The ongoing challenge many businesses face today is the continually dynamic scope and scale of the impact of the pandemic—no one could have predicted it. So let’s take a step back to sometime last year.
If you own a business, when you renewed your policy in 2019 the market was at its peak. For established companies, there were aspirations of growth and increased revenues. For many start-ups, it seemed like the market couldn’t have been more opportune.
Back in 2019, the dietary supplement industry was thriving and CBD was the hottest topic in the market. For many, annual revenue was expected to exponentially increase over the coming months.
At the time, there was more concern surrounding a projected market-wide increase in insurance premium rates.
In less than a few weeks after the start of 2020, everything would be turned upside down. As efforts to contain the coronavirus continue on a global scale, virtually everything has seen disruption—whether directly or from the ripple effect.
The pandemic has slowed importation of raw materials as well as the processing and manufacturing of products. As you move down the supply chain, everything is impacted to a certain degree—and most estimated annual revenue projections are now way off target.
When I work with my clients on their renewal, I like to set aside some time to have a discussion about their estimated annual revenue and try to get a strategic figure down that’s not too aggressive or too conservative.
The reason is this: if your projections are too low and you sell way more than estimated, then you have to pay the difference. Some may figure that’s the price of doing business. On the other end of the spectrum, however, if your projections are too high you essentially overpay for coverage you didn’t need. That’s why this conversation is important.
With a sudden decrease in sales volume, a lot of estimates that were established at the start of a policy will most likely not be reached in time, leaving a business to pay more for a policy than the actual sales would have required.
Last year, this oversight may have been more of a learning lesson, however, as many companies struggle to bring in sales, these kind of financial blows gain increased significance.
Swing Premium Endorsement
So what’s a business to do? Enter, the “Swing” endorsement.
It’s a challenge to secure, however, it can be extremely valuable when it comes to receiving some money back if your estimated sales are not reached.
A Swing Premium Endorsement on a policy will often allow up to a 10% refund depending on where the actual sales fall short against the initial estimates sales.
Here’s an example to better illustrate this idea. (This is just hypothetical and assuming it’s a normal year.) A supplement company that sells CBD estimates it will likely reach an $80 million annual revenue for its upcoming Liability Insurance renewal.
The company has been in business for 12 years and recently decided to introduce CBD to its product line, which led the client to anticipate increased revenue, which determined its estimated revenue.
Mid-year, the company loses a major client that had multiple big box locations around the country and a high demand for its product. This one piece of business lost is a big hit to take.
Toward the end of the Liability Policy period, there is a fairly dramatic difference in revenue, with actual sales accounting for only $72 million.
In the fine print, insurance provides a 10% downside swing. This effectively states that if the insured falls short of its estimated sales, the insurance company will return up to 10% of the paid premium. So how does that math work?
The company paid roughly $126,000 on its insurance. Because it essentially bought more coverage than it would need, it got back $12,600—which is 10% of the insurance cost. So if the exact same business didn’t have this swing policy language in place, that 10% gap—$12,000 worth—would have been lost.
This is especially upsetting for businesses right now, when that money may be needed for emergency reserve as the market continues to react to the pandemic situation. It’s important to discuss how your estimated sales will impact your policy; and it’s crucial if you’re trying to avoid leaving money on the table.
The best advice is to keep in contact with your broker to discuss your policy and if it includes swing endorsement language.What’s the catch? Each and every policy is different. This is not a common feature, however, it’s often achievable when negotiated for properly by your broker.
If there’s one thing to keep in mind, it’s that every business is facing an unprecedented level of challenge, confusion, and concern right now.
With time will come more clarity, resource. and opportunity. Right now it’s crucial to have your business details in order to better equip you for important insurance conversations emerging in the following months.
Chris Morey
Chris Morey is associate vice president at Bolton & Company. He is a Certified Sports Nutritionist who focuses on the needs of clients within Bolton’s Dietary Supplement Practice Group. With more than seven years of customer service experience, Morey looks to find the right insurance solutions for his clients in the health and fitness industries. With a substantial focus on the supplement industry and all parts of the supply chain, he also strives to serve the hemp and CBD product space as the insurance industry continues to fluctuate and evolve. Prior to joining Bolton in 2015, Morey worked for Nutrishop USA. He holds a Bachelors of Arts in Business Administration from Azusa Pacific University. He can be contacted at cmorey@boltonco.com.
A business must provide this estimate to its insurance provider when it comes time to renew a policy. This assumed revenue is used to determine the pricing of the policy, and often businesses provide these estimates with the assumption of growing in a regular market. So what happens when the market is turned upside down? It’s the reality we are facing as we navigate the COVID-19 pandemic.
Turned Upside Down
The ongoing challenge many businesses face today is the continually dynamic scope and scale of the impact of the pandemic—no one could have predicted it. So let’s take a step back to sometime last year.
If you own a business, when you renewed your policy in 2019 the market was at its peak. For established companies, there were aspirations of growth and increased revenues. For many start-ups, it seemed like the market couldn’t have been more opportune.
Back in 2019, the dietary supplement industry was thriving and CBD was the hottest topic in the market. For many, annual revenue was expected to exponentially increase over the coming months.
At the time, there was more concern surrounding a projected market-wide increase in insurance premium rates.
In less than a few weeks after the start of 2020, everything would be turned upside down. As efforts to contain the coronavirus continue on a global scale, virtually everything has seen disruption—whether directly or from the ripple effect.
The pandemic has slowed importation of raw materials as well as the processing and manufacturing of products. As you move down the supply chain, everything is impacted to a certain degree—and most estimated annual revenue projections are now way off target.
When I work with my clients on their renewal, I like to set aside some time to have a discussion about their estimated annual revenue and try to get a strategic figure down that’s not too aggressive or too conservative.
The reason is this: if your projections are too low and you sell way more than estimated, then you have to pay the difference. Some may figure that’s the price of doing business. On the other end of the spectrum, however, if your projections are too high you essentially overpay for coverage you didn’t need. That’s why this conversation is important.
With a sudden decrease in sales volume, a lot of estimates that were established at the start of a policy will most likely not be reached in time, leaving a business to pay more for a policy than the actual sales would have required.
Last year, this oversight may have been more of a learning lesson, however, as many companies struggle to bring in sales, these kind of financial blows gain increased significance.
Swing Premium Endorsement
So what’s a business to do? Enter, the “Swing” endorsement.
It’s a challenge to secure, however, it can be extremely valuable when it comes to receiving some money back if your estimated sales are not reached.
A Swing Premium Endorsement on a policy will often allow up to a 10% refund depending on where the actual sales fall short against the initial estimates sales.
Here’s an example to better illustrate this idea. (This is just hypothetical and assuming it’s a normal year.) A supplement company that sells CBD estimates it will likely reach an $80 million annual revenue for its upcoming Liability Insurance renewal.
The company has been in business for 12 years and recently decided to introduce CBD to its product line, which led the client to anticipate increased revenue, which determined its estimated revenue.
Mid-year, the company loses a major client that had multiple big box locations around the country and a high demand for its product. This one piece of business lost is a big hit to take.
Toward the end of the Liability Policy period, there is a fairly dramatic difference in revenue, with actual sales accounting for only $72 million.
In the fine print, insurance provides a 10% downside swing. This effectively states that if the insured falls short of its estimated sales, the insurance company will return up to 10% of the paid premium. So how does that math work?
The company paid roughly $126,000 on its insurance. Because it essentially bought more coverage than it would need, it got back $12,600—which is 10% of the insurance cost. So if the exact same business didn’t have this swing policy language in place, that 10% gap—$12,000 worth—would have been lost.
This is especially upsetting for businesses right now, when that money may be needed for emergency reserve as the market continues to react to the pandemic situation. It’s important to discuss how your estimated sales will impact your policy; and it’s crucial if you’re trying to avoid leaving money on the table.
The best advice is to keep in contact with your broker to discuss your policy and if it includes swing endorsement language.What’s the catch? Each and every policy is different. This is not a common feature, however, it’s often achievable when negotiated for properly by your broker.
If there’s one thing to keep in mind, it’s that every business is facing an unprecedented level of challenge, confusion, and concern right now.
With time will come more clarity, resource. and opportunity. Right now it’s crucial to have your business details in order to better equip you for important insurance conversations emerging in the following months.
Chris Morey
Chris Morey is associate vice president at Bolton & Company. He is a Certified Sports Nutritionist who focuses on the needs of clients within Bolton’s Dietary Supplement Practice Group. With more than seven years of customer service experience, Morey looks to find the right insurance solutions for his clients in the health and fitness industries. With a substantial focus on the supplement industry and all parts of the supply chain, he also strives to serve the hemp and CBD product space as the insurance industry continues to fluctuate and evolve. Prior to joining Bolton in 2015, Morey worked for Nutrishop USA. He holds a Bachelors of Arts in Business Administration from Azusa Pacific University. He can be contacted at cmorey@boltonco.com.
