Insurance Fiduciary (Trust) Accounting

Despite its rigorous legal requirements, insurance fiduciary accounting is unavailable to users in current practice. P&C insurance retailers and wholesalers are legally mandated to maintain insurance trust accounts but current technology does not even help them determine trust beneficiaries. Nor can they determine agency commission income, an impediment that certainly threatens the agency financial solvency.

Fiduciary accounting is trust accounting. Insurance trust accounting technology has been finally developed and is now available to P&C agent‐brokers as a service. This article purports to clarify its concept and practice. 

American Institute of CPAs

In 2007 American Institute of CPA (AICPA) published a Practice Guide for Fiduciary (Trust)
Accounting (Guide). The Guide was prepared for “accountants who perform fiduciary accounting services”.

Fiduciary accounting is considered “specialty” accounting. Prior to 2007 fiduciary accounting
did not benefit from a “practice guide” developed for use at the national level. The 2007
Guide creates uniformity in the fiduciary accounting practice and empowers both trustees
and trust beneficiaries to better monitor and control the management of fiduciary trusts.

Accountants specializing in fiduciary accounting generally work for “trustees” who retain them on an outsourcing basis. Their services are provided in a fiduciary capacity.

Fiduciary accounting evolved out of the need to outsource complex accounting to specialty
professionals who have the knowledge and technology to perform it reliably.

P&C Insurance Trust

Few outside the P&C insurance industry, and not very many in the industry, know or understand the nature of the P&C insurance trust. Most independent insurance P&C agents‐brokers receive transacted premiums in a fiduciary capacity and maintain them, generally less than 60 days, until they are disbursed to legal owners. Agency owners place premium funds in “trustee bank accounts” consistent with the rules of fiduciary duty.

The 2007 Guide omits any reference to P&C insurance fiduciary duty insurance retailers are
mandated to conform to when receiving premium payments from insureds. True, the P&C insurance trust is more dynamic and much more demanding in its daily management than other trusts, such as estate or real estate trusts. More rules apply to the management of premium funds than to other trust funds.

Although fiduciary duty is universal, not all states recognize the need for insurance agent‐brokers to maintain a trust account. Only 23 states require them to place premium funds in “trust”. Without placing them in trust, separate from business operating funds, premium funds cannot be audited for solvency as fiduciary duty requires.

Insurance Fiduciary Duty

Insurance fiduciary duty is set forth by Insurance Codes. Fiduciary accounting practice as defined by the 2007 Guide equally applies to P&C agent-brokers as they also have a legal mandate for fiduciary duty. The Duty to Manage, Duty to Loyalty, Duty to Account and Duty to Disclose set forth by the Guide apply to P&C insurance trust as much as they apply to a real estate trust or any other type of trust. An insurance trust account is a legally‐mandated financial instrument of insurance premium management.

Insurance Trust Accounting

The Guide‐defined principles of fiduciary accounting apply without question to the P&C
insurance brokerage industry. However, the insurance premium transaction’s unique nature
makes insurance fiduciary accounting practice more encompassing. Its basic requirements
remain the same: report insurance trust beneficiaries and report premium financial solvency. Insurance trust accounting addresses and provides solutions to other important legal
mandates, such as: 

(1) Determine insurance agency commission income so that agencies can transfer it to their
business operating accounts. Insurance trust “income” is embedded in the very bank deposits of premium payments. The latter have a “net” component which is due carriers and a “sales commission” which is due to the agency. Since agencies receive premium payments on a daily basis and in relatively small amounts extraction of the sale commission from bank deposits has proved insurmountable to this very day. General ledger accounting cannot do it. Only insurance trust accounting is able to separate “earned” commission in the agency trust and make it available to the agency for transfer to the business operating account.

(2) Determine premium financial solvency not only at the trust level but also at the policy level and that of carriers underwriting the agency business. This requirement is in the insurance fiduciary law because premium funds are “earmarked” funds. Premiums owned by one carrier cannot be disbursed to another carrier without prior consent.

Trust Accounting Tenets

One major tenet of insurance trust accounting is the starting of accounting process with the policy transaction, the only legal sale document in insurance. Since premium invoice is not a “sale” document, the application of general ledger business accounting to premium transactions is not only inadequate but also detrimental. 

Another important tenet of Insurance Trust Accounting is the placing of premium funds into a “trust” ledger, separated from the agency general ledger (GL) of accounts. Financial management of premium and return premium funds require 65 ledger accounts at minimum. In current practice only four premium accounts are used in the agency general ledger.

Insurance Trust Accounting’s most important tenet is the separation of trust ledger accounts in (a) Balance Sheet accounts and (b) Float Statement account. This division enables
Insurance Trust Accounting to generate trust Balance Sheets and trust Float Statements
(Receipts and Disbursements Statements). The latter are similar to the Income Statements in GL accounting. Both financial statements are used to determine the trust financial solvency at all three law‐mandated levels.

Trust Accounting Practice

The practice of Insurance Trust Accounting requires knowledge of accounting principles,
fiduciary duty and agency daily operations. Rarely do small and/or medium size agencies
have staff with prerequisites to learn them. Larger agencies may have accountants trained to practice it.

The best and most cost effective way for agencies to introduce Insurance Trust Accounting in their daily operation is to outsource it in the same way fiduciary accounting is outsourced in other industries. Trust accounting service is similar to the payroll service: agency provides source docs; the outsourcing partner enters data and performs all trust management functions. The agency will be promptly directed to transfer its “earned” sales commission to the operating account and carriers will receive upon request premiums, net of commission.

Benefits to Agency Owners

The outsourcing of Insurance Trust Accounting offers agency owners significant benefits:

• Full compliance with fiduciary duty;
• Significant reduction of agency workload;
• Potential for profit margin increase by 20% or more;
• Full control over premium and return premium funds;
• Potential for organic growth with no additional payroll;
• Complete and accurate accounting records;
• Reliable reporting of agency production and trust financial solvency;
• Opportunity to use agency resources exclusively for sales and service;
• Reduction of agency E&O risk exposure;
• Peace of mind for agency owners and managers;

For additional information visit Paulmar website: www.paulmargroup.com or send email to
Chris@Paulmargroup.com or contact Paulmar Group at 800.830.9093

Chris Marinescu is President of Paulmar Group LLC, a software developer and trust accounting service provider.