Current Accounting Practice in P&C Insurance Industry
Insurance Trust Accounting Education program is intended for independent P&C insurance retailing and wholesaling agencies that maintain insurance trust accounts. Since captive insurance agents do not receive or maintain premium funds in trust bank accounts they are not a target of this education program. Captive agents may attend these classes if they needed to become familiar with fiduciary mandates.
Insurance retailing agencies are basically sales and service operations, but they are a lot more. Since they receive transacted premiums and maintain them in trust bank accounts, they become legal custodians of premium funds until they are disbursed to legal owners.
Financial Institutions
Since retailing agencies transacted considerable annual premiums, $5 in small agencies to $100 million or more in large agencies, it is only logical to view them as financial institutions. No retailing agency sees itself being a financial institution, although due to the nature and volume financial transactions they can be easily viewed as financial institutions.
There are two main reasons retailing agencies do not view themselves as financial institution. First, they perform only small portion of the required premium trust transactions. For example, they do not determine the agency “earned” commission, so they can properly transfer commission funds to the agency business account. Likewise, return premiums (resulting from policy cancellations) are treated in accounting like “returned merchandise” missing entirely the financial nature of return premiums and altering the values of the agency Balance Sheet.
The second and main reason for not considering themselves financial institutions is the lack of financial management tools. Insurance trust accounting is non-existent in current practice. No agency management system makes it available to agencies. The more sophisticated ones use business general ledger accounting for premium accounting. Most others offer agencies a link to QuickBooks or similar business accounting software.
Current Practice Failure
The consequence of current accounting practice is not only confusion but a dangerous failure to monitor and report fiduciary compliance. Consultants estimate the number of retailing agencies operating out of trust at a whopping 50%. In California Insurance Code prescribes a loss of business license and/or legal prosecution for theft for fiduciary violations.
Insurance Trust Accounting
Insurance Trust Accounting is new. It was invented and became available on November 2017 when a US patent was granted by the US Patent and Trademarks office. Its logic is in different from that of business accounting. It is not intuitive. However, if explained and understood it can be easily practiced. Its use is significantly facilitated by automation. No manual journal entries are necessary in trust accounting.
The purpose of Paulmar education program is twofold. First, enable agency owners demand form insurance consultants and agency management software vendors trust accounting and financial tools. Second, help P&C industry professionals introduce its practice in the retailing industry. There are significant benefits to both retailing agencies and insurance companies.