Standards & Guidelines For Appraising Insurance Agencies / Brokerages 2015
Valuation of Contingencies, Profit-Sharing and Growth & Retention Bonuses
Although it is normally less certain that Contingencies will be received than policy renewal commissions, in many instances, over time, they do develop a realistic, appraisable income stream.
It is the general consensus among contributors that Contingencies . . .
Should be considered when appraising the agency’s income stream.
Have value if they have been received consistently for a period of several years.
Because the income stream from Contingencies is less reliable than the receipt of policy renewal commissions, contributors consistently stated that the appraisal of Contingencies should consider the following factors:
Consistency of receipt of the commissions over the past three to five years
Deviation from the mean Contingency received during the look back period
Trend of the Contingencies received
- Knowledge of future changes to the existing book of business as well as changes to carrier contingency calculation formulas.
Application of an informed judgment discount factor that addresses the reliability of this adjusted income stream.
- Consideration of a) changes to contingency contracts and their effect on future contingency potentials, and b) volume trends with the carrier as they would affect contingencies (i.e. growth into higher contingency levels).
Computing an average of the ratio of Contingency Income received by an agency in one year compared to property and casualty insurance commissions earned in the prior year, and then repeating this calculation over a period of five to ten years, will assist the appraiser in determining the potential trends in Contingency Income for future years.