US Patent Submitted – Patent Pending for Missing Link in Insurance Industry

After the considerable amount of work undertaken by our patent attorneys, a patent application was filed on October 11, 2016 with the U.S. Patent & Trademark Office for P&C Insurance Trust Automation and Financial Solvency Management technology. Two inventors take credit for the development of this unique product: Chris Marinescu and Emma Hart.

Chris Marinescu, President of Paulmar Software, Inc. stated: this product represents the “missing link” of P&C insurance agency automation. While not competing with current agency management systems, such as: AMS or Applied Systems, this product will easily integrate with them for complete automation of P&C agencies.  By fostering the outsourcing of agency’s trust account management, this product paves the way to rapid organic growth, higher productivity and increased profit performance. A significant advantage for both P&C producing agencies and insurance companies will follow as agencies will be able to focus solely on sales and service.

This product brings to the market a new fiduciary accounting concept for P&C insurance premium and return premium trust funds, fundamentally different from business accounting. A new trust financial solvency reporting system has been developed and included.

The introduction of this product into the marketplace will change the management paradigm of the P&C insurance brokerage industry and help it become leaner and significantly more efficient.    

To learn more about this product, go to www.paulmargroup.com/missinglinkpatent Or contact Emma Hart at emmahart@paulmargroup.com or 949/233-2545.

P&C INSURANCE AGENCY AUTOMATION

PREMIUM TRANSACTIONS ARE STILL MANAGED MANUALLY!

 

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 chris@paulmargroup.com or visit www.paulmargroup.com.

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

INSURANCE TRUST (FIDUCIARY) ACCOUNTING:

WHY IS IT DIFFERENT FROM STANDARD TRUST ACCOUNTING?

For more than 40 years P&C insurance premium accounting has remained an industry problem without solution. Insurance retailing agencies continue to struggle managing premium funds. The attempt to use financial accounting for premium accounting has failed. Finally, the long overdue solution has been found. Insurance Trust Accounting is however not the same as standard trust accounting. This paper explains why.  

1      Financial Accounting for Premium Funds

Financial accounting is used to keep track of a company’s financial transactions. Its concept and rules are well understood by those who practice it. It has been used by professionals in all sectors of the economy.

Many years ago financial accounting was adapted by the Property & Casualty (P&C) insurance industry to keep track of premium and return premium financial transactions.

Standard accounting methods have not been very useful in the P&C industry mainly because, upon deposit in the agency trust bank account, insurance premium and return premium funds become fiduciary funds. As fiduciary funds, insurance premiums are subject to a financial management different from that of business operating funds.   

The difference between the premium fiduciary funds’ economic nature and that of business operating funds has not been well recognized by insurance professionals and, as a result, no effort has been made to this day to develop a suitable accounting method for these funds. It has become apparent the management of P&C insurance premiums has different rules and requires different accounting procedures.

Accounting methods and financial management of fiduciary funds in other industries, such as real estate or legal profession, did not prove to be a good model. The one thing that emerged useful was the need for separation of fiduciary funds from business operating funds. Real estate brokers, for example, employ outside escrow companies to manage real estate trust funds.

2      Insurance Trust Accounting

Little or nothing is known about P&C Insurance Trust Accounting. In current practice trust accounting is generally associated with the escrow or lawyers’ trust accounting. The need for trust accounting in the P&C insurance industry has not been widely recognized likely because P&C insurance agencies are considered merely sales and service operations, not financial institutions. Insurance fiduciary duty is however on the books and is mandatory for all insurance agents and brokers who receive premium payments under insurance policies or premium finance agreements.

Aware of fiduciary duty mandates, P&C insurance agencies have been waiting for an accounting solution that could help them manage the agency’s trust account operation. Current agency management systems, such as AMS or Applied Systems, have not addressed to this day insurance agency’s need for insurance fiduciary accounting.

Insurance Trust Accounting is not taught in college; there are no text books on insurance premium accounting and trust financial management. Insurance agencies are currently required to manage financial traffic varying from a low $5 million in small agencies to $100 million or more in large agencies.  This financial operation would logically qualify them as financial institutions; no one in the industry recognizes them as such.

3      Insurance Fiduciary Duty

Most commercial insurance products are retailed through the independent agency system, a community of independent insurance agents and brokers appointed/approved by insurance companies and/or general managing agencies. Insurance companies grant insurance agencies the right to receive transacted premiums and maintain them in agency-owned trust bank accounts.

Independent P&C insurance agencies, whether retailing or wholesaling, agree on a voluntary basis to receive transacted premiums from insureds or finance companies and maintain them in trust bank accounts of the so called “pooled” type. The designation refers to the fact that premium funds received under more than one policy or from more than one insured are maintained in a single common trust bank account.

Since premium funds are owned by others, insurance brokers agree to receive them in a fiduciary capacity and become “trustees” or “custodians” of funds until they are disbursed to legal owners.

4      Insurance Trust Financial Management

Trust financial transactions are numerous and complex. In the beginning money flows from insureds to the agency’s trust account, to insurance carriers and to agency business operating account. During the policy term, a policy cancellation may reverse the flow from insurance carriers and agency operating account to the agency trust account and back to the insured.

Keeping track of such flow of money requires good financial management. That is why insurance trust account management may be referred to as “money management” or “trust financial management”.

The ultimate objective of trust financial management is to monitor, control and report trust financial solvency. As in business for profit, trust financial solvency management implies control over the trust assets to prevent disbursements of funds to entities other than those legally entitled to them. In California, misappropriation of premium trust funds for personal use or to cover agency operating expenses is punishable by a loss of business license and/or theft as provided by law. Similar provisions are included in the Insurance Codes adopted by other States.

The Company-Broker Agreement places on insurance brokers the responsibility to remit to the insurance company transacted premiums, net of commissions, whether or not they received such premiums from insureds. The brokers’ legal obligation is referred to as “transacted liability”. Unless the policy incoming premium flow is properly managed, the agency is liable for transacted premiums, net of commissions. For this reason, trust account management may be also understood as “fiduciary liability management”.

5      Daily Financial Transactions

Capturing premium daily transactions in accounting records is fundamental to Insurance Premium Accounting. Such transactions include: policy transaction/sale closing, invoices and payments of premium, bank deposits, agency earned commission and its transfer to the operating account, company premium remittance, net of commission. Everyone is a financial transaction taking place in the insurance trust and, for this reason, they all must be recorded in a trust ledger, separate from the agency general ledger. On the way back to insured, return premiums must be also recorded in the trust ledger: return premium reimbursements, net of commission, agency unearned commission reimbursements and return premium refunds to insureds of finance companies.

Accounting transactions become much more complicated when, after a down payment, the policy premium balance is financed. The financed amount remitted directly to an insurance company is a financial transaction that takes place outside the agency trust account; nevertheless, accounting records of this transaction are necessary because insurance brokers are legally responsible for all policy financial transactions, whether inside or outside the agency trust account. 

6      Financial Accounting Engine

Financial accounting keeps track of a company’s financial transactions, creates accounting records and summarizes them in two financial statements: Balance Sheet and Income Statement. The engine of financial accounting is the sale invoice which creates income and assets, cash or receivables, in the seller’s general ledger.

The business invoice is an instrument of sale, whereby a buyer acquires a merchandize or service in exchange for a sale price. Invoice accounting marks the beginning of financial accounting.

Insurance Trust Accounting is powered by a different engine: the policy. Its objective is similar to that of cost accounting. It does not compute insurance policy cost (this was already established) but in a similar way manages the incoming and outgoing flow of money related to a single insurance product: the policy.

That is why Insurance Trust Accounting may be also understood as Insurance Policy Accounting.

7      Invoice vs. Insurance Policy

Is the business invoice as relevant in the P&C insurance industry as it is in other industries? The answer is an emphatic NO. It cannot be because, in the P&C insurance industry, the invoice is not an instrument of sale; the insurance policy is.

The sale of insurance products is consummated upon the binding of insurance policies. In this industry, premium invoice is just a document that reminds insureds to pay a premium they already agreed to when the policy was signed.

One may want to compare the premium invoice with the loan coupon used in the lending industry to remind borrowers to send a payment.

The financial status of insurance policies is the core objective of premium accounting in the same way a bank depositor’s account is in banking accounting. Banks know and are able to report the account balance of each of its bank depositors.

8      Insurance Trust Accounting Equation

P&C Insurance Trust Accounting cannot be the same as business accounting. The business invoice process does not exist or is very different in policy transactions. There is no income in the P&C Insurance Trust Accounting, only assets and liabilities. The accounting equation is simply reduced to Trust Assets = Trust Liabilities. There is no agency owners’ equity in a P&C insurance trust.

9      Why Agency Owners Need Insurance Trust Accounting

80% or more of the agency accounting effort is related to insurance premium accounting. Absent premium funds, P&C agency financial accounting is relatively simple. P&C agencies have no inventories and few are involved in transactions other than insurance policy transactions.

A fully automated Insurance Premium Accounting will significantly reduce the agency workload while providing the means to fully control and report the agency’s trust financial solvency. Insurance Premium Accounting: 

1. Automates the premium billing and follow up process, currently considered the first most critical source of trust financial insolvency;
2. Eliminates receivables aging as inconsistent with required insurance premium payment on or before the coverage becomes effective. As a result, earned premium liabilities are eliminated;
3. Introduces the concept of “cash on hand” vs. “cash in the bank” to prevent theft in the handling of payment checks;
4. Automatically determines and reports agency “earned” commissions for full control over the commission funds transfer to the operating account. Mismanagement of agency commission income is considered the second most important source of trust financial insolvency;
5. Improves the Company Statement processing through automatic reconciliation and generation of remittance check vouchers;
6. Reconciles cancellation endorsements and automatically processes premium refunds to insureds or finance companies;
7. Reconciles Direct Bill Commission Statements, currently a labor intensive process;
8. Creates a commission reserve account in the agency trust to simplify the reimbursement of unearned commission to the trust account;
9. Reports agency production based on sales along with agency and producer transacted commission income;
10. Reports the agency trust financial solvency of each policy, each insurance company and entire agency trust. 

10   How Insurance Companies Benefit From Insurance Trust Accounting

Insurance companies’ business prospers when producing agencies sell more and are able to minimize the cost of managing premiums. Using Insurance Trust Accounting, producing agencies will offer insurance carriers real benefits:

1.         By controlling receivables and having the Company Statement process fully automated, delinquency of premium remittance can be entirely eliminated;
2.         Company bad debts/write offs will be also eliminated if remittance delinquency is eliminated;
3.         Carrier’s in-house workload will be reduced if producing agencies’ remittance process is automated;
4.         Workload reduction will reduce carriers’ operating costs;
5.         Carriers will be able to directly verify the solvency of premiums maintained by producing agencies.

P&C insurance industry will become more productive and more efficient if both carriers and producing agencies can improve the management of insurance premium funds. Insurance consumers will also benefit from a better service and possibly lower premium rates if the industry can operate more efficiently.

Insurance Trust Accounting is currently being offered to P&C insurance retailers. For more information, visit www.paulmargroup.com or contact chris@paulmargroup.com.  

Article written by Chris Marinescu, President of Paulmar Group. Copyright by Chris Marinescu, July 12, 2016

Groundbreaking Accounting System for the Insurance Industry

Why Creating/Inventing It Was Necessary

In my previously published papers, I repeatedly argued against the improper use of general ledger business accounting for insurance premium and return premium transactions. I reached this conclusion after years of studying the P&C agency trust accounting and its governing standard.

Insurance fiduciary duty and its profound implications upon the P&C insurance agency’s financial operation have apparently received little or no attention from the agency owners or vendors of agency management systems. I presumed this attitude was likely encouraged by a belief that the trust account operation is so complex that no one would have knowledge or skill to capture it in accounting records.

To those unfamiliar with Sections 1733 and 1734 of the CA Insurance Code, P&C insurance agencies must not only maintain premiums and return premiums in separate “trust” bank accounts but also manage them in compliance with fiduciary laws. Due to its inherent limitations to business operations, general ledger accounting has apparently obscured the meaning of “insurance fiduciary compliance” and, as a result, no one has attempted to break outside its conceptual boundaries.

Understanding the risk of failure but confident a solution will be found, I put together a development team and embarked in a long and tedious effort to create/invent a new trust accounting system for the P&C insurance industry.

The natural thought barriers raised by general business accounting were so high that we had to think completely out of the box in tackling the development of a new accounting system. These barriers are briefly reviewed in this paper because their removal became the foundation blocks of the new insurance trust accounting.

Barrier No. 1: Invoice Accounting

Insurance agencies have always used general ledger (business) accounting for premium transactions because they thought they were no different from merchandise or service sales. General business accounting begins with the seller billing the buyer for merchandise or service purchases. The invoice generates “assets” and “income” in the seller’s general ledger.

 The first barrier to overcome was the concept of current premium invoice accounting. In general ledger accounting the “invoice” is a “sale” document. In the P&C insurance the “sale” document is not the premium invoice but the insurance policy. The premium invoice is only a reminder to pay what insured had already agreed to when the policy coverage was bound.

Foundation Block No 1: Insurance premium accounting must begin with the policy transaction, not premium invoice.

Barrier No.2: Assets and Income Accounting

Upon receipt, fiduciary law requires premium payments to be deposited in a fiduciary “trust” bank account. They become fiduciary funds. If payments must be deposited in trust it is only logical that the premium invoice must also originate in trust. In an insurance trust, however, there is no “income”, only assets and liabilities. A premium invoice originated in an insurance trust will therefore generate premium assets, receivable from insured, and premium payables, premiums, net of commission due to insurance carriers, and sales commission due to the agency operating account.

Foundation Block No. 2:  In premium accounting an invoice generates trust assets and trust liabilities. The general ledger invoice model is incompatible with insurance premium accounting.

Barrier No. 3: Different Management Objectives

The main purpose of business accounting is to report profit/loss and help the agency determine its tax liability. An agency Balance Sheet includes business assets and liabilities necessary to establish the agency’s financial solvency.

Premium fiduciary accounting has completely different objectives, all related to the need to monitor and control the trust financial solvency:

• Generate a separate Trust Balance Sheet;
• Balance Sheet data will be utilized to established the Trust Financial Solvency;
• Generate a Premium Float Statement (aka Statement of Premium Receipts and Disbursements);
• Premium Float Statement data will be utilized to report Trust Funds Beneficiaries;
• Generate financial reports at all three levels of trust financial management: policy, carrier and agency.

Foundation Block No. 3: Insurance premium accounting must facilitate the reporting of trust financial solvency. Business accounting is incompatible with insurance premium accounting.

Barrier No. 4: Return Premium Accounting

In general business accounting, returns of merchandise are entered in the general ledger as negative invoices, i.e., creating negative assets and negative income.

Insurance return premiums are not merchandise returns; they are premium transactions in “reverse”, i.e., from insurance companies back to insureds. Return premium transactions generate “receivables” and “payables” in the same way premium transactions do. The only difference is receivables are due from insurance companies and agency, while payables are due to insureds and/or finance companies.

Return premium accounting is as complicated, if not more complicated than premium accounting. 

Foundation Block No. 4: Insurance return premiums generate receivables and payables in the insurance trust, in the same way premium transactions do. The returned merchandise concept is incompatible with insurance premium accounting.

Barrier No. 5: Funds Transacted Outside Agency Trust Account

Premium financing is routinely practiced in the P&C insurance industry. Agencies set up loans to finance an unpaid premium balance after the insured makes a down payment. The financed amount may be either paid to the agency or remitted directly to the insurance company/general managing agency. In the case of policy cancellations, often resulting in return premiums, the insurance company refunds the “unearned premium, net of commission” to the premium finance company, while the agency returns “unearned commission” to the same.

Direct remittance and direct refund transactions bypass the agency trust account. However, insurance fiduciary accounting must include the financial records of both direct remittance and direct refund because, by statue, the insurance agency is ultimately responsible for all policy financial transactions.

Foundation Block No. 5: Insurance premium accounting must include direct remittance and direct refunds.

Barrier No. 6: Financial Solvency Reporting

There is no concept of trust financial solvency in current practice. This is because general ledger accounting does not report it. Agency owners are unable to verify the trust financial solvency for which they are personally responsible. Because the general ledger accounting does not support trust financial solvency reporting, CPAs use formulas. No formula has been proposed for establishing the trust cash financial solvency.

Foundation Block No. 6: Insurance premium accounting must report the trust financial solvency at all three levels required by fiduciary laws: policy, carrier, and agency.

Final Thoughts

The development effort of more than 12 years has resulted in the creation/invention of a new and long overdue insurance premium accounting. Referred to as Insurance Fiduciary (Trust) Accounting or Trust Ledger (TL) Accounting, this unique accounting system will assist agencies in managing both daily trust operations and trust financial solvency.

The current lack of premium and return premium accounting has been a major cause of financial insolvency of agency P&C trust funds. In California, violations of insurance fiduciary duty expose agency owners to a loss of business license and/or potential prosecution for theft.  Similar provisions are included in the statutes of other states. 

Insurance agency owners will be now able to fulfill their fiduciary obligations as legal “custodians” of premium and return premium funds.

Article written by Chris Marinescu, President of Paulmar Group LLC

Chris Marinescu has Master Degrees in Civil/Structural Engineering and Engineering Economics. Chris has published 15 articles on P&C insurance agency fiduciary duty and trust financial solvency management and teaches two CE classes on insurance fiduciary duty. Chris also maintains a structural engineering consulting practice which is currently limited to the seismic performance assessment of existing buildings and structures.

 For more information on Insurance Fiduciary (Trust) Accounting, visit Paulmar  Group at www.paulmargroup.com or contact the author/inventor at chris@paulmargroup.com.

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. 

Insurance Trust Accounting

Current Premium Accounting

Insurance Trust Accounting has been long overdue in the P&C brokerage industry. Its recent development was prompted by the need to manage premium financial solvency and enable agency to manage its commission income. For the longest time, premium and return premium accounting has been an adaptation of general business accounting to insurance premium transactions.

All agency management systems on the market today have sold general ledger (GL) accounting as sufficient for premium and return premium transactions. Accountants and CPAs struggle finding ways to report trust funds solvency. Using formulas rather than accounting, they confirm the GL accounting’s inadequacy for premium and return premium transactions.

As adapted for premium transactions,GL accounting proved unable to process the agency “earned” commission. The current practice of transferring commission funds to the agency business account based on “need”,is the second most important cause of insurance trust financial insolvency.

Insurance Trust Accounting

Following the development of Insurance Trust Accounting, Paulmar Group has offered it to P&C independent agents and brokers for more than two years. Uniquely conceptualized, Insurance Trust Accounting is a mirror of premium and premium business transactions. It uses a different ledger of accounts, separate from the agency general ledger, and recognizes the policy transaction as the sole insurance “sales” document. Premium invoice function is reduced to the status of “reminder” of payments.Premium invoice is not an insurance “sales” document (as it is in GL accounting) and therefore its journal entry no longer creates “income” records in the agency general ledger.

Insurance Trust Accounting is branded Trust Ledger (TL) Accounting^TM and is commercially distributed as NOBL Technology^TM. The TL accounting software application fully automates insurance trust daily operations and reliably reports both production and trust financial solvency. It is offered to insurance agencies on outsourcing basis. Agencies will provide source documents, Paulmar Group(outsourcing partner), will create data records and perform trust management functions, such as: billing and follow-up, bank deposits, commission funds transfer, company remittance, return premium refunds, DB Commission Statement, personal (non-fiduciary) funds maintained in the insurance trust bank account. NOBL automatically converts premium and commission data records into accounting records. No manual journal entries are used in TL accounting.

Benefits

The benefits to insurance agency owners are significant:

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

For additional information visit Paulmar website: www.paulmargroup.com or contact Paulmar Group at 800.830.9093

Insurance Trust Account Service To Independent P&C Insurance Agencies

Paulmar Group offers P&C insurance agents and brokers a unique Trust Account Service similar to the ADP payroll service. Agency provides source documents, Paulmar manages premiums and commissions from the time they are transacted until they are disbursed to their owners. Trust Account Service offers outstanding operational and economic advantages to its users. Learn more about Trust Account Service on my website.