Current Accounting Practice in P&C Insurance Industry
Insurance Trust Accounting Education program is available to independent P&C insurance retailing and wholesaling agencies as all that maintain 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 need 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 and return premiums and maintain them in trust bank accounts, they become legal custodians of such funds until their disbursement to legal owners.
Agencies Become Financial Institutions
Since P&C retailing agencies transact considerable annual premiums, $5 million in small agencies, $100 million or more in large agencies, they logically become financial institutions. No retailing agency sees itself as 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 institutions. First, because they perform only small portions of the trust transactions. For example, they do not determine the agency “earned” commission. They transfer commission based on need. Also, they treat return premiums as “returned merchandise” and record them in the ledger as negative receivables. This practice is an accounting anomaly.
Second, the main reason why they do not consider themselves financial institutions is they lack the necessary 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 current accounting practice is not only confusing but a dangerous as it fails to monitor and report fiduciary compliance. Consultants estimate a great number of retailing agencies, 30% or more, operate out of trust. In California Insurance Code prescribes the loss of business license and potential legal prosecution for theft.
Insurance Trust Accounting
Insurance Trust Accounting is accounting for trust funds. It is new and unique. It was invented and became available. Its logic is different from that of business accounting. It is not intuitive. However, when explained and understood it can be easily practiced. Its use is significantly facilitated automation. No manual journal entries are permitted in trust accounting.