What Is an Insurance Broker’s Biggest Pain?

(This article appeared in Agency Equity on May 29, 2013)

The title of this paper is paraphrased from a question recently posted as a topic for discussion on an Insurance Journal forum. Among the sources of pain mentioned by respondents was premium billing, cancellations for non-payment of premium, reinstatement of policies canceled for non-payment and frequent policy premium changes by carriers. It is important to note that all these issues happen to be related to the agency’s back office and insurance trust account daily activities.

With this article I would call attention to other known concerns to most agencies. What I have in mind is a number of trust account management functions currently missing from even the most advanced agency management systems. It suffices mention agency commission management, processing of return premium refunds and trust account financial solvency reporting. The latter is important not only because proof of trust account solvency is required by law but also because insolvency can have serious consequences for agency business. In California, a large number of insurance brokers, possibly one in three, are suspected to operate “out of trust” jeopardizing their business license and potentially risking legal prosecution for theft. 

No Attention to Financial Solvency
The forum discussion’s lack of attention to the broker’s fiduciary duty is not surprising; it is common throughout social media and group discussions.  Recent court cases of trust account insolvency in California should raise the level of brokers’ awareness as they likely caused real pain to some agency owners.

The apparent lack of interest in trust account solvency issues may be explained in different ways. It may be the lack of awareness of the fiduciary position brokers find themselves in when receiving and maintaining transacted premiums in their own “trust” bank accounts. Financial solvency issues are not routinely discussed by industry consultants; they are not included in Continuing Education classes (except for the two CE classes offered by Paulmar Group). Colleges offer degrees in insurance but no classes on trust account financial management. The brokers’ license renewal process requires no proof of fiduciary duty compliance. The Broker-Carrier agreement may be the only document requiring insurance brokers to maintain financially solvent trust accounts.

Causes of Insolvency
Trust account insolvency may be caused by either uncontrolled premium payment delinquency or lack of commission accounting and financial management (cases of intentionally caused insolvency are beyond the scope of this paper).  Payment delinquencies are not caused only by clients’ inattention to writing payment checks but also by the agency’s inability to promptly follow up. 

Endorsement billing is frequently behind because agency’s CSRs’ main job is to reliably support producers and provide quality customer service. The lack of commission accounting and management tools capable of tracking earned commission, policy by policy and payment by payment, is certainly a source of insolvency and pain. Since no current agency management system provides such utilities, some agencies use spreadsheets to determine the agency earned commission. By transferring commission based on needs, agencies may transfer either more or less than they earn. In the first case they violate insurance broker’s fiduciary duty. In the second case they may unintentionally understate taxable income and risk Tax Code violations.

Incorrect Accounting?
With no clear understanding of insurance fiduciary duty, insurance brokers feel comfortable with the use of general ledger accounting for both business operating and premium funds. As fiduciary duty is better understood, insurance brokers will come to realize general ledger accounting is inadequate for premium and return premium transactions. Since agency management systems are not likely to change their premium accounting and CPAs’ practice seems limited to general ledger accounting, insurance brokers will remain unaware of their exposure to daily violations of fiduciary duty. I am sure insurance brokers would like to do everything required to meet their fiduciary obligations but lacking accounting and financial tools they can only rely for advice from industry consultants and CPAs.

An agency’s chances of violating fiduciary duty are ubiquitous. Unquestionably insurance brokers deserve better premium accounting and a reliable financial solvency reporting system. New technology has been developed to help them in this area of agency business. For information on insurance trust account financial solvency management send email to chris@paulmargroup.com.


Chris Marinescu is president of Paulmar Group LLC, a software developer and insurance trust account service provider. Insurance Trust Account Technology, Trust Ledger Accounting and Trust Account Management Outsourcing Technology are trademarks of Paulmar Group LLC.