Problems with Agency Management Systems

[mclureins]

Shortcomings of Agency Management Systems

Your opinions are apreciated! Thank you.

Current agency management systems have been developed starting in the early 1970s to help insurance brokers manage their agency business. An insurance agency carries out two different types of business: (1) agency core business, i.e., sale and service of insurance products, and (2) management of multimillion premium dollar traffic through its trust bank account. The latter is a non-core business that uses resources without giving the agency a competitive advantage in the marketplace. The financial management of premium funds is important because, while they are owned by others, premium funds are maintained in a trust bank account owned by the agency. While the ultimate objective of an agency’s core business is to realize a profit, the scope of premium funds management is to monitor and control the trust account financial solvency. The two types of business are governed by very different laws and standards.

Agency management systems are offered to users as software applications agencies can either purchase or outsource. The most notable ones provide both core business and accounting functions while others limit their functionality to the agency core business: insurance form management, marketing & sales, coverage and rating, policy submittal, claims, etc. The systems providing accounting functions are all based on general ledger (GL) accounting.
Common to all agency management applications is the fact that none reports trust account solvency. In current practice agencies perceive the trust account management as a process of routinely making bank deposits of payment checks received from insureds and writing remittance checks to insurance carriers. Since no agency management system generates earned commission reports, agencies transfer commission funds out of the trust account either based on need or relying on spreadsheets maintained outside of GL accounting. A similar situation exists with commission losses due to cancellations.
Published information alludes to the fact that one in three P&C independent insurance agencies in California experiences trust account insolvency, a condition which jeopardizes agency’s business license and exposes brokers to the risk of legal prosecution.

Trust Account (TA) Services Advantage

Trust account technology was developed to make up for the shortcomings of agency management systems in matters related to premium financial solvency. Based on new premium accounting procedures and uniform solvency reporting system, this technology has accomplished not only a complete automation of the daily premium and return premium transactions but also monitor, control and report on a daily basis, the agency trust account solvency.

TA Services are very similar to the payroll service: agencies provide source documents, the service provider creates data and accounting records of premium and return premiums and manages trust account activities until premiums and endorsements are received from insureds or premium financing companies and then disbursed to legal owners. Four different groups of legal owners may claim ownership to the trust account funds at any given time:

• Insurance carriers (net premiums)
• Agency (earned commissions)
• Insureds (return premiums)
• Premium finance companies (return premiums)

TA Services include a complete line of products: (1) premium receivables and bank deposits, (2) agency commission income, (3) company remittance, (4) return premium refunds, and (5) direct bill commission income. They are also adequately equipped to manage agency producer commissions and report the agency production and trust account financial solvency.