Episode 094 — The Digital Broker Podcast

Booked vs Estimated Revenue: Which Is More Useful as a Metric?


On this episode of The Digital Broker, Ryan Deeds compares booked revenue to estimated revenue and weighs which metric is more useful for insurance agencies. By listening to this episode, you will learn:

  • Why booked revenue can only give an incomplete idea of a policy’s value, whereas estimated revenue provides a much bigger picture.
  • Why so many agencies remain partial to booked revenue.
  • What you can do to get a better idea of a policy’s estimated revenue.

Estimated revenue is the amount of money you expect to collect over the course of a whole policy, typically calculated on a per-year basis. Booked revenue is what you have collected on a policy so far. Suppose you’re managing a $12,000 policy that begins in January and ends in December; by June, you would be looking at around $5,000 in booked revenue, but the estimated revenue is still $12,000. That’s a very different way of looking at the same policy, which is why the difference between booked and estimated revenue is so worth understanding.

In the past, the distinction mattered less. Insurance agencies used to handle billing on their own (“agency billing”), and when they invoiced the customer, they tended to do so for the total amount of the policy; consequently, booked and estimated revenue tended to be more or less the same thing. But when agencies transitioned to direct billing, whereby carriers invoice the customer whenever they please, agencies gave up control of their own payment process. Today, when many agencies try to calculate how much money is coming in, they don’t have much else to go on except a trail of invoices left behind by the carriers, making booked revenue the only viable revenue metric.

Although it can be good to know how much money has been invoiced, booked revenue is only so useful as a metric. Because of its dependency on invoices, calculating booked revenue can be an operational nightmare, forcing the agency to do lookbacks, pull records, etc., and in the end, there is still no guarantee that the result will be reflective of all policies. Booked revenue can only give an incomplete idea of an agency’s book of business. Sadly, many agencies continue to use it as the basis of their workflows and expectations, with troublesome consequences.

For example, an account manager might be managing five policies that are worth $100,000 each. A book of business like that should be valued at $500,000, but suppose some of those policies began in recent weeks, and only a small number of invoices have come in. A booked revenue estimation could be much less than $500,000, making the book of business appear smaller than it really is. A supervisor might therefore conclude that this book can handle additional policies, even though the account manager’s hands are already full with that whopping $500,000.

Unlike booked revenue, estimated revenue provides a total picture of a policy’s value at any time in the policy term. This makes estimated revenue a much more useful metric. Principals can use it to get a better idea of whether the agency is growing or shrinking, and employees can use it to compare the volume of their book of business today to the volume of their book of business at any point in the past.

So why do so many agencies remain partial to booked revenue? Probably for many reasons, but mainly, many agencies aren’t capable of calculating estimated revenue on all policies, having forfeited that ability a long time ago. Estimated revenue is a tough metric to work with, and it’s very nuanced—furthermore, some policies do not lend themselves well to it. For example, some policies last a couple of years but are paid in full upfront. Ryan suggests splitting such policies into multiple consecutive policies and distributing the estimated revenue accordingly. It can take a while to figure this out, but it might be worth doing in order to get a proper read on the estimated revenue of your agency.

Analytics and data are increasingly relied upon to drive insurance agency growth. But as we’ve said before, merely having data is not enough; you need to have good data, or the data that you have can lead you astray. A lack of insight into your agency’s estimated revenue can limit your agency’s growth. You might not have the operational ability to measure estimated revenue consistently, but you should still try to appreciate its importance.

Which revenue metrics do you find most useful? Can a case be made for booked revenue over estimated? Come and tell us about it in the Digital Broker LinkedIn group, where we take questions from our listeners and post updates about upcoming episodes. Join us and let’s talk.

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