Monday, August 29, 2016



Much is being said about insurance agency automation. Not enough has been said or done to help the agency owners automate premium and return premium transactions. The general perception is P&C agencies are just sales and service operations. Mostly ignored is the fact that the undertaking of trust financial duties makes P&C agencies operate much like financial institutions.

Financial Institution?

Small agencies receive and disburse on the average $3 to $5 million annual premiums. Medium size agencies’ annual premium is close to $15 million or more while large agencies’ financial traffic through their trust bank accounts may exceed $50 million a year. We know mega insurance brokerage houses transact hundreds of million dollars every year. None, regardless of their size, is equipped with financial management tools necessary to handle such an intense financial traffic.

This article is not however about agency financial management. Few recognize insurance agencies as financial institutions. It is the automation question we would like to address in this paper. Known as sale and service operations, insurance agencies are well equipped to manage customers and marketing, rating and claims. The problems they have struggled for more than 40 years remained to this day without solutions.

Automation Shortcomings

The shortcomings of insurance agency’s operation are not in the front office but in its back office. They hinder agency’s organic growth and its profit performance. Here is a sample of them:

1.    The follow-up on delinquent invoices is still manual; this affects primarily the agency’s CSRs (account managers);
2.    Endorsement AP invoices and follow up are still manual; many invoices are easily neglected by CSRs who have much more important things to care for;
3.    Agency “earned” commission is a problem affecting all P&C insurance agencies. Being unable to determine it, agencies incorrectly transfer commission funds to the business operating account based on what they “need” rather than what they “earn”;
4.    Company Statement reconciliation is still manual, although not entirely;
5.    Cancellation endorsement reconciliation is still manual; return premium refunds are simply reduced to “paying negative invoices”;
6.    Direct Bill Commission statement reconciliation is still manual. Many agencies prefer not to do it and therefore lose control over their DB commission income;
7.    The NSF check process is manual; most agencies delay or fail to request policy cancellations for non-payment of premium when payment checks are return for insufficient funds. Losses due to NSF checks can be significant;

All these processes are or should be performed in the agency’s back office. The front office is critical because it develops the agency business but a weak back office will hinder growth and diminish profits. Since trust account operation is highly regulated, the danger of fiduciary violations is not only real but always present. Some details follow.

Invoice Follow-up

Agency receivables are a primary source of trust financial insolvency. Delinquent payments disqualify an agency from timely “earning” its sale commission. In egregious cases, they can be the source of serious “earned premium liabilities”. By signing the Company-Broker agreement, agencies are obligated to remit premiums, net of commission, to insurance companies or MGAs, whether or not they receive such premiums from insureds.

Insurance customers must pay premiums on or before their due dates (as set forth by insurance companies). Despite a well-established standard, agencies continue to have “aged receivables” in excess of 30, 40 or even 60 days and risk earned premium liabilities.  For any $1,000 earned premium liability turned into a $1,000 loss, an agency must sell 8 to 10 times more premium.

Current agency management systems have not automated the invoice follow-up process.

Endorsements AP

Agencies do not maintain records of endorsements AP in the policy database. They just invoice them. Since the endorsement AP invoice is still a manual operation, CSRs may easily neglect it. It is not uncommon to see endorsement papers sitting in a box waiting to be invoiced. Delinquent endorsement payments may cause agencies to advance premiums to companies and risk losses due to non-payments.

Current agency management systems have not automated the endorsement AP invoice and follow-up.

Agency Commission

Agency commission on sales is the very reason insurance agencies are in business. The difficulty of having it easily available is a real nuisance; the sale commission is realized in the agency trust not in the sale and service operation area of business. To transfer it to the business operating account, agencies must determine it and then create an audit trail. Trust funds are regulated to prevent illegal disbursements. The problem is aggravated by the fact that sale commissions are embedded in every payment an agency receives and deposits in the agency trust. 

None of the agency management systems on the market today offers agencies the tools to determine the “earned” commission.  Many agencies use separate spreadsheets to track payments and related commissions. Since this is labor intensive and generally unreliable, most agencies transfer commission funds to the business operating account generally based on what they need to cover operating expenses.

Commission transfer out of the agency trust bank account is the second most important source of trust financial insolvency. If agencies transfer more than they earn, they violate insurance fiduciary duty and risk legal consequences.  If they transfer less, they may understate taxable income and risk IRS audits.

No current agency management system offers insurance agencies help in processing the agency sale commission and its transfer to the agency’s business operating account.

Co Statements

The processing of Co Statements or MGA invoices is only partially automated. Agencies use AMS, Applied Systems or similar agency management software, to manually reconcile the company statements by verifying statement line items against the agency’s invoice payments. Paid invoices are checked for company remittance and included on a computer-generated list (voucher) that is attached to the remittance check along with the Co Statement.

Company Statement premium items that are not paid (remitted) are manually identified on the Statement along with an explanation.

The Co Statement manual reconciliation is tedious and labor intensive.

Cancellation Endorsements

Most cancellation endorsements result in return premium to be refunded to either insureds or premium finance companies. In current practice, the cancellation endorsement process is misunderstood. Interpreted as “returned merchandise”, return premiums are processed as negative invoices neglecting that, before writing a refund check, the agency must receive from the insurance company the return net premium and from the agency’s business operating account the “unearned commission”.

While “unearned” net premium is generally reimbursed on Co Statements as credit, seldom or never agencies return to the agency trust account the “unearned commissions”. Agencies will refund from the trust account return “gross” premiums without returning/reimbursing first the “unearned commissions”. The difference will illegally come from premiums received under different policies.
No agency management software has offered insurance agencies automated procedures to manage cancellation endorsements and related premium refunds.

Direct Bill (DB) Commission

The reconciliation of DB Commission Statements is tedious and time consuming. The DB policy commission may be paid by insurance companies either in full after the down payment is received or gradually as installments are paid by insured. Keeping track of DB commission payments is a real challenge. Many agencies trust the insurance Company. Reconciliation is too expensive and is therefore not done. 

No agency management system today offers insurance agencies an automated reconciliation of DB Commission Statements. Some third party software companies have developed reconciliation software but their integration with AMS, Applied Systems or similar software applications continued to be a real challenge.

NSF Checks

NSF checks do occur and can be quite aggravating, especially if an agency advanced premiums, net of commissions, to insurance companies. To avoid “earned premium” liabilities, agencies should immediately request the policy cancellation for non-payment of premium. If they do not, the policy continues to “earn” premium until it is cancelled. According to the Company-Broker Agreement, all “earned premiums” must be paid by the agency.

Some agencies do request policy cancellations following NSF checks but many do not. No agency management system offers agencies an automated NSF process.
Final Thoughts

The latest research and development effort lead to the development of a massive premium database encompassing all elements of premium and return premium transactions: policy transaction, billing, payments and bank deposits, agency commission, company remittance, return premium credit and refunds, DB policy commission.

Intense programming of premium and return premium transactions has resulted in the achievement of some major automation goals. Here are the agency’s back office functions that are now fully automated: 
  1. Premium invoice and follow-up;
  2. Endorsement AP billing and follow-up;
  3. Agency commission income process;
  4. Company Statement process;
  5. Cancellation endorsement reconciliation and premium refund process;
  6. DB policy commission statement reconciliation;
  7. NSF check processing.
For more information on these achievements, contact Chris at or visit

Article written by Chris Marinescu, President of Paulmar Group LLC.

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