IS INSURANCE TRUST ACCOUNTING AN AGENCY CORE BUSINESS?

Insurance trust accounting is premium accounting. It creates accurate accounting records of premium trust transactions and generates trust financial solvency statements. Agency owners can monitor and control trust financial solvency without help from accountants or CPAs. Conscious of the punitive consequences of fiduciary violations, agency owners will feel now safe to run fiduciary-compliant sales and service insurance businesses.

Unlike business accounting, insurance trust accounting offers agency owners for the first time a commission income accounting. Agencies will no longer transfer sales commissions to the operating account based on what they need but rather on what they earn; return premiums will no longer show up in the ledger as “return merchandise” and distort the agency’s financial statements.

Fiduciary Accounting

Trust accounting is fiduciary accounting. Anyone involved in the management of trust funds becomes a “fiduciary” or legal “custodian” of the property entrusted to him/her for financial management. P&C insurance agencies are authorized by insurance companies to receive and maintain transacted premiums in agency-owned trust bank accounts until they are remitted. Happy to have the sale commission available upon the receipt of premiums, agencies agreed to submit themselves to fiduciary regulations, such as: separation of premiums from business operating funds, maintain accurate records and report financial solvency to auditors, whenever necessary. Agencies signed Company-Agency Agreements to officially accept fiduciary positions.

Unlike an attorney’s trust account, insurance trust account is much more dynamic and transaction-intensive. Premium receivable and payable transactions are complex and occur daily. Return premiums must be processed and refunded relatively quickly, either in cash or by credit. They may be also offset from one policy to another. Financial solvency must be reported for each policy, each insurance company and the entire trust account. The beneficiaries of the trust account cash balance must be also reported.

  

Fiduciary Mandates

Trust accounting has been available to users only during the past several years but due to limited advertising, few agencies are using it. Without trust accounting and training, agencies cannot meet Insurance Code fiduciary mandates. One third of P&C agencies in California operates out of trust exposing agency owners to a loss of business license and/or legal prosecution for theft. Violations of fiduciary duty are not consistently audited by the Dept of Insurance and/or insurance companies, which would rather see agencies sell more policies rather than check on agency fiduciary performance. Insurance consultants pay little or no attention to fiduciary compliance as they may not fully understand the difference between business accounting and trust accounting. Very few CPAs have publicly commented on agency fiduciary compliance requirements.

Core Business

Insurance agencies’ core business is to sell and service insurance products. The agency’s back office supports its core business by servicing policies and performing general business accounting. Many agencies use the “direct bill” business model. All transacted premiums are received by insurance companies which process sales commissions and pay them after generally 60 days. Most P&C agencies, however, use the “agency bill” business model, whereby the agency receives transacted premiums and agree to submit itself to fiduciary regulations. Agency-Bill agencies set up trust bank accounts and agree to manage premium funds in accordance with fiduciary mandates.

Financial Management

Managing tens or hundreds of million dollars every year in and out of the trust account, and reporting trust financial solvency is, by any standard, not an easy task. It requires knowledge and financial tools. Automation of trust account transactions is critical. Most small and medium size agencies have no one in their staff with knowledge and training to practice trust accounting. Agency bookkeepers receive premium payment checks, make bank deposits, and write premium remittance checks to insurance companies. Premium invoices are generally CSR’s (Account Manager’s) job. No one in the agency oversees the trust account management.

The receivables accounting routine is not trust-specific. Although payments are deposited in the trust bank account, invoice accounting model is imported from general business accounting. The invoice commission is recorded in the ledger as agency income rather than trust liability. Return premiums are wrongly recorded as negative receivables. Net premium vouchers are manually processed. The agency sales commission is not collected in a separate ledger account. As practiced today, trust accounting is nothing but an extension of agency general business accounting.  This explains why trust balance sheets or statements of trust cash balance beneficiaries are unavailable to agency managers. As an extension of the agency business accounting, the trust accounting practice is indeed a non-core business.

New Technology

With the advent of new technology, trust account premium and return premium transactions are now fully automated.  A new accounting logic is employed to generate trust financial solvency reports. Balance Sheets and Statements of Trust Funds Beneficiaries are standard in trust accounting. Agency owners can monitor and control by themselves the trust account operation as mandated by law. Trust accounting has nothing to do with the agency’s sales or service functions. Its integration in the agency business is the result of agency’s conscious decision to assume fiduciary responsibilities. Trust accounting represents about 85% of the agency accounting effort. Only 15% covers general accounting transactions.

Conclusion

In current modern financial management environment trust accounting becomes an agency’s stand-alone operation organized to manage transacted premiums and supply the agency commission income. Is the trust account operation an agency’s core business? We emphatically say it must be because agencies have opted to become fiduciary-based enterprises functioning alongside the sale and service core business. We suggest that, by accepting fiduciary responsibilities, insurance agencies committed to perform financial duties like any other financial institution, although much more involved. Insurance companies should consider providing agencies financial compensation for this very specialized work.

For additional information on the new trust accounting technology and the US patent obtained in 2017 to protect it, send email to chris@paulmargroup.com  

Chris Marinescu, Inventor and President at Paulmar Group LLC