The accounting practices of independent insurance agencies are very different from those traditionally used in other small businesses. Below are 10 tips for your agency’s bookkeeping.QuickBooks is a great system for most businesses, but not insurance agencies. Never use QuickBooks unless you have a high level of accounting. And significant accounting expertise for insurance agencies so that you can properly handle agency billing issues.
Insurance agency accounting is unique because agencies are responsible for managing fiduciary funds. Few businesses need to manage money on a fiduciary basis. That’s not to say that a talented enough person couldn’t set up QuickBooks to work. But almost no one in agencies has that talent/education in accounting. I suggest sticking to a standard accounting system.
2. Fiduciary funds
Whatever you think, agencies are responsible for trusts. Responsibility is enshrined in your carrier contracts, and all 50 states, as well as the federal government, require agencies to treat these fiduciary funds appropriately. All states are “trust” states. There are states that allow travel and states that do not, but 100 percent of all states require agencies to remain “in trust” every hour of every day of every month of every year. The general formula is (and some states have detailed formulas): (Unspent cash + payable premiums) / (premiums payable + bill for filing). The resulting ratio must be at least 1.0.
Regardless of what your accountant / CPA says, premiums received are not income and premiums paid are not expenses. These agency awards are fiduciary funds. This means that they are shown on the balance sheet and not in the income statement. An accountant who says otherwise does not know the accounting agency.
4. Cash versus charges
Agencies do not receive 100% cash and do not receive 100% credits. For example, windfall income is efficiently accrued, but since many contracts and carrier behavior make it difficult, if not impossible, to estimate bonuses for a 12-31 period reasonably accurately and definitively, contingencies are usually accounted for on a cash basis without considering how the agency does its insurance agency accounting. Bad debt is another example. The reason that agencies can have bad debts, even on a cash basis, is that bad debt are usually associated with fiduciary money. Since the agency is responsible for other people’s money, it takes on bad debts, even if it is a cash desk. If the bad debt were his own money and the agency used a cash basis, the loss would not be deductible.
There are many other examples. Agencies are likely to be on an earned basis. Earned income is more applicable than cash or accrued income, but since almost no one CPA has heard of earned income and accounting for it in tax forms and other standardized accounting software is impractical, there is no point in discussing it.
5. Agency management systems
Your agency management system settings are very important. Unfortunately, some trainers forget to discuss options in detail with the agencies, or because the agency staff is overwhelmed with so much information when creating a new system that they do not hear the trainer’s message. The agency may not be knowledgeable enough to understand the implications and complexities of choosing the right or wrong setting, or perhaps a combination of these factors.
In any case, choosing the right settings and matching those settings to your procedures will result in more accurate reports, more accurate data, and potentially significantly reduce staff workload. One of the reasons settings are so important is that employees sometimes create workarounds due to inconsistencies between settings and procedures. My company has found that reconciliation can eliminate up to 10 percent of some CSR workloads.
6. Ask your CPA to explain
It’s important to trust your CPA, and it’s important to not just mistake his / her words for evangelism. If you don’t like something, ask until you get a satisfactory answer. Good accounting will make your life easier.