Scope of Education

Scope of Trust Accounting Education

Unlike other sales and service companies, independent P&C insurance agencies undertake the obligation to maintain a trust account for premium payments they receive from clients (insureds) and/or premium finance companies.

An agency’s annual premium varies depending on its size from $3 to $5 million in small agencies to $100 million or more in large agencies. All agencies, regardless of their size, are mandated by law to maintain trust bank accounts when authorized by insurance companies to receive transacted premiums. They must deposit premium funds in agency-owned trust bank accounts.

Managing premium trust funds is a complicated operation as premium payments come in relatively small amounts. It is also complicated by the industry’s current practice of invoicing each payment that comes due.

Fiduciary Violations

Premium trust funds should not be used for personal needs, acquisitions or to cover agency’s operating expenses. It is a fiduciary violation to do so, punishable with a loss of business license and/or legal prosecution for theft. In terms of financial management, the integrity of premium trust funds is referred to as financial solvency. The law requires agencies to maintain enough funds in the trust account to meet “due and payable” obligations to the funds legal owners. Due to current inadequate accounting practice, no agency can establish its trust account cash solvency.

Current Accounting Practice

Current accounting practice is not trust accounting practice. No agency management system today offers agencies the accounting tools necessary to determine the trust cash financial solvency. Nor do these systems help agencies determine “earned” commissions. Most agencies transfer commission funds to the operating account based on “need” rather than what they “earn”. Return premium accounting is non-existent. Agencies use negative invoices to create return premium accounting records. While distorting the agency’s financial statements, this practice offers little or no management control over premium refunds.

Insurance Trust Accounting

Insurance trust accounting is new. It is different than business accounting. The economic nature of trust funds is fundamentally different from that of business operating funds. They have a different management protocol. Insurance trust accounting is not intuitive. It needs to be explained to be properly practiced.

Trust Accounting Education

It is for this reason this trust accounting education program is offered to P&C insurance professionals. Those interested in the trust accounting education program will learn about:

  • Insurance fiduciary duty
  • Compliance requirements
  • Fiduciary violations
  • Agency personnel obligations
  • Trust account management scope
  • Trust financial solvency reporting
  • Trust financial statements
  • Record keeping requirements
  • Other related topics

Trust Accounting Education program includes two Continuing Education (CE) classes currently available only in California. Other states will be added, as needed.

The program also includes eight non-CE credit classes available nationwide. Their scope is to help agency owners as well as P&C insurance professionals become familiar with fiduciary mandates and consequences of fiduciary violations.