Being an owner of property and casualty (P&C) insurance agency offering competitive personal and commercial coverage to customers is essential. Therefore, your customers are your crucial assets and fulfilling their demand is priority. But what about your agency? Your administration, paperwork, policy management, accounting, etc.
Well, property and casualty (P&C) insurance agencies often find accounting, their number one enemy. Why? As they lack knowledge of accounting and many experts fail to understand the accounting operations of a P&C agency due to claim adjusters.
For example, an accountant may report that an insurance company has a profit of $10 million and capital of $100 million. Based on these figures, a financial analyst then calculates that the rate of return of this company was 10% ($10 million divided by $100 million).
What if this is not your rate of return?
But, as your books are reflecting that you earn huge profits, you need to pay higher taxes to the government.
So to analyze the financial position of your insurance agency in the market with accurate numbers, it is essential for P&C agencies to adopt best insurance accounting practices for their business:
Here, I am highlighting some effective practices that may help your insurance agency to streamline accounting processes:
Understand Sales Revenues–
Many P&C insurance agencies get confused with sales revenue due to difficulty in billing the clients as there are two common ways, and these are generally defined as direct bill or company bill and agency bill.
In case of car and home insurance, bills directly come from the company that is covering the home or the car and the premium is paid directly to that company by the policyholder, which is known as direct bill or company. Once the payment is done, the company sends a commission payment to the respective agency who sold the policy.
Whereas, in case of commercial or business insurance, the agency that sells the policy is authorized to bill the customer directly and it completely depends upon the agency, when they want to make payment to the insurance company. This is called an agency bill.
But many state law demand insurance agencies to open a trust account to provisionally hold these funds for the insurance company until the company is paid either by electronic transfer or by a check from the agency.
For example, if the agency bills a client for a $1500 premium, then the payment is directly deposited into the agency’s trust account. If the agency is permitted for 15% commission from the account, then $1275 will be paid from the trust account to the company and $225 will be paid to the agency.
Therefore, when you are preparing an income statement for your P&C agency, it is suggested that you should include broker fees, commission payments and other unforeseen income in sales revenue. And whatever amount is paid to the insurance company from the trust accounts should be considered as a pass-through for driving accounting practices efficiently.
This practice will let you know accurate operations of the agency and stamp out common accounting errors.
Consider Cost of Goods Sold–
Usually, businesses that are into wholesale operations maintain COGS in the sheet and these entries include the commission paid to the outside agents. However, P&C agencies do not account for COGS because they don’t purchase any inventory for their agency. But some accountants may prefer to show commission payments made to the agency makers on the COGS route, but they are typically handled as regular expenses.
So, it is good if you maintain COGS account for your P&C agency for analyzing the payment made to insurance producers.
Managing Expenses–
The biggest expenses that sustain for P&C insurance agencies are payroll and commissions paid to the producers. These expenses approximately account for 30% to 50% of the commission incomes received by an agency.
A “best practice” hive off payroll and commissions as distinct expenses so the P&C agency owner can better understand the costs and mug up with sales and services.
Role of Balance Sheet-
Many small business owners and startups don’t maintain a balance sheet for income tax purposes. But for P&C insurance agencies, it is highly endorsed because they may handle funds that generate enormous legal liabilities for the agency owner.
Accountants of P&C should include under Assets both the balance of operating account and the trust account, and these should be kept as separate bank accounts in the balance sheet. Under Liabilities, separate records should be maintained for the amounts due to the insurance companies from the trust account.
By adhering to these practices, the agency owner will have a better knowledge of the trust account and it will also help to eradicate practices that may disdain the regulations.
Common mistakes made by Accountant and Bookkeepers-
Most of the accountants and bookkeepers use the deposits from the monthly bank statements to regulate the sales revenue entries for accounting. In some cases it is good, but it is not appropriate in all cases! As the income of an insurance agency differs considerably from month to month due to the uneven cyclicality of the renewals and new sales.
This makes insurance accounting more complex as there are some peak months wherein the revenue is excess and in slow months it’s not up to the line. Unfortunately, such fluctuations result in errors in insurance business accounting.
In such scenarios, outsourcing accounting services can help you more with accurate numbers. As they have in-house experts who are capable of managing P&C insurance agency’s books accurately, helping you in making a viable business decision.
Verdict
The practices highlighted above are some of the effective practices that I have come up with. Implementing these practices in your insurance agency can help you and your accountants to better understand the accounting statements and analyze financial position in the market. Moreover, good accounting practice can lead to better price and terms for the current owner.
Author Bio – Eliza Davies is a financial advisor at Cogneesol offering accounting services to insurance agencies. She assist startups and small businesses to grow by contributing her writing skills in finance and accounting, insurance, entrepreneurship and small business growth.
