Insurance agencies are often required to have active trust accounts as a means of separating and organizing any incoming funds. They’re used to prove to auditors that an agency has been paying agents and carriers appropriately out of the premium payments collected from their customers. But it’s not uncommon for insurance agencies to relax their rules on trust accounts, neglect them, or to discount their importance entirely. See how trust accounts should function in an agency and how they can benefit the agency — especially if you’re thinking of buying or selling anytime soon.
The Perils of Disorganization
Payments and remittances are staples of an insurance agency, but they have a tendency to spin out of control fairly quickly. An agency owner is supposed to treat premium payments as though they were the caretaker of the funds as opposed to the owner. By having a trust account for premiums and return premiums, agencies have the ability to keep their premium funds safe from creditors. It also ensures that there’s no mistaking the operating accounts from the trust accounts, and it gives agency owners more controls on the funds. When no one can take any money out of the trust account without the right documentation, it creates the paper trail the agency will need to stay above water during an audit. It will also impress and alleviate transparency fears if in the process of buying an agency or selling your current one.
Scaling a Trust Fund
Many small or even medium-sized businesses would never think of keeping trust funds separate from their operating accounts. They may instead develop their own system when it comes to tracking and paying for a variety of expenses throughout the year. But an insurance agency is normally dealing with extremely large sums of money, and they often don’t have this luxury. Even a tiny agency may be working with millions on a regular basis. Having a way of monitoring a trust fund by tracking the commission figures isn’t just nice to have, it’s a necessity to properly divide, categorize, and manage earmarked funds. Without accurate reporting, agencies can end up being accused of fraud or insolvency by any of their partners (or the IRS.)
An agency makes their money from numerous clients, all paying premiums at different times and in varying increments. Invoicing not only takes a lot of time, it’s also a breeding ground for employees and customers to make mistakes. Any delinquencies on the accounts will require time-consuming follow-up. The longer the delinquencies go on, the more out of control the trust account will become. This is usually where agencies get into trouble when they’re dealing with a trust account. Decision-makers are unsure of how much commission has been technically earned — they’re only concerned straight operation costs. If commission funds are constantly being changed from the trust account to the operating account, the agency has a major problem on their hands.
Going the Extra Mile
Trust account management to people who aren’t familiar with principles behind it will often look extraordinarily fussy. The amount of detail and precision may even seem like a waste of time. But considering funds are supposed to be tracked at the policy level, agencies can’t afford to take any chances. The balance of the trust account is supposed to be at or above the level of the net premium, or else the agency may be declared insolvent. If one premium payment accidentally gets used to settle another premium from a different carrier, agencies will be liable for these mistakes eventually.
An agency that’s ready to make some major moves has to have their finances in order before they even consider courting buyers or wooing sellers. Whether acquiring or relinquishing, clean financial records will make the due diligence process much easier for everyone involved. Having an intermediary to help you either buy or sell can be the best way to get the advice and help you need to get your trust accounts back to a manageable level. Better trust account management is also one of the best ways to ensure that money is being collected and spent as wisely as possible.