There was recent news that the Florida Department of Insurance (DOI) wanted all agencies to return to the state all their unearned commissions if they did business with another carrier that the DOI had to take. This system of returning all unearned commissions to the carrier is a good reminder of how to run an organization.
The carrier mentioned above was primarily a homeowner’s insurance company, but up until the last year or so, the number one type of carrier to go insolvent or go bankrupt over the past 10 years has been health insurance carriers – especially the new carriers created under the ACA. instructions. So that until one thing the federal government does not do well, which now includes the implementation of guidelines for a new insurance company needs capital. However, the above tutorial applies to all types of carriers.
Let me make a simple suggestion.
Let’s say there is a successful organization with 1,000 clients who are insured by a particular company. Homeowner’s premiums in Florida are very high and let’s continue to assume that the insured homes are average homes with $500,000 in Coverage A. A good estimate of Florida’s coastline can be calculated by calculating home prices north and south of area of Florida. government. The average price is $5,000 for the basic HO-3 home owner policy. A commission of 12%, which is $600, multiplied by 1,000 customers equals $600,000 in commissions. Let’s also assume that the policy has expiration dates that match the calendar. Also, let’s assume that this is a direct business and the carrier pays in advance, a well-known fact. This means that $300,000 of commissions are not earned and must be returned by the organization.
Would you have $300,000 in the bank to pay back the government?
Do Not Do Business With Weak Carriers
The first lesson is not to do business with weak carriers. The property/casualty industry has grown stronger over the past 25 years, and a large portion of the workforce today has no experience with insolvency and weak carriers. They don’t remember the fiascos of the 90s when the big P/C carriers went insolvent overnight. Insurance companies, regulators and accounting firms all became more critical at that time when it came to carrying costs.
Very low interest rates and a very hot market have helped carriers who might otherwise have failed to sell early. The result is that companies have lost their sense of organization and are not interested.
This combination has made agencies less concerned if the carriers they write with aren’t stable, even if they have good interest rates. (By default, I’m not saying that they don’t have the right money in terms of controls and calculations about the ability to pay – but for many carriers to go out of business soon, one has to look closely) .
Now I find that many people do not know what happens if insurance insolvency occurs and they do not even know that government guarantee funds exist, much less what they cover or how they handle claims. Most people believe that government agencies will take care of them. Keep your fingers crossed that you can continue to ignore the problems that an understaffed, underfunded fund can cause for an organization.
I would also be cautious in thinking that the DOI government can only try and collect enough money to solve the problem quickly. I’m not sure how the DOI can evaluate shipments that have already broken down or are about to break down and ask for receipts. I saw one doing that recently.
And, of course, the DOI may want you to pay back the money you didn’t study.
Keep Accounts Properly
The second lesson is to keep your accounts in order so that if this happens, you have the numbers available to manage your finances. I have written extensively about the extent to which trustees and advisers do not understand trust law.
There are two types of rules. Common to other agents and advisors is a combination of financial law and regulations. These rules prohibit corporations from reimbursing their operating and trust funds. Only about 14 countries have similar laws.
Agents and advisors in other countries declare, “We are not a fiduciary so we don’t have to worry about fiduciary expenses!” This theory is very wrong.
All 50 states and the federal government have trust laws. A deed of trust is not the same as a deed of trust. What these countries don’t have is a law to come, but they have a law of faith.
The trust law states that a corporation cannot use the money it holds on a trust basis. A brokerage business is a good example where an organization collects money up front but does not deliver the money to the carrier. Even though it is handling the money, it is acting fairly and has a responsibility not to use the money. An organization that “lacks confidence” is an organization that has spent fraudulently.
This is why the trust ratio is the MOST IMPORTANT balance sheet factor for insurance brokers.
Failure to act as a fiduciary may result in a clause in most carrier agreements that states that if the agency terminates the trust, the employee will immediately assume ownership of the agency’s assets. There is no information. The fact that you paid your salary on time is a big problem.
Fiduciary fees also include expenses incurred on behalf of carriers, audit fees, and sometimes unearned commissions. The new accounting rule, ASC 606, applies to insurance companies and brokers. Agencies and brokers are now required to account for all commissions in additions. Although the intent of the law was not to facilitate proper accounting, it still does.
Your accountant needs to understand the importance of insurance accounting and how it differs from other types of businesses.
Untrained commissions are a type of trust fund. The freight forwarder paid the commission in advance with the expectation that the agency would carry out its duties throughout the year. In insolvency, that carrier is usually taken over by the government. The state may want, as Florida recently did, the return of commissions that were not attended. Failure to return unearned commissions may result in loss of ownership of the agency.
What do you do when you have no choice but to stand up for weak carriers? First, take a serious look at what you can do.
I have clients writing in the same cities where one says they have nothing to do and the other is convinced they have a choice. In the past, it was often just about making sales, sales and more sales. In their minds, they have no choice because in order to continue trading, they need every carrier available because buyers and sellers sell the price.
If things get really bad and the agency has nothing to do, make sure you inform your clients about the ratings, do your calculations correctly, AND LEAVE ADDITIONAL WEALTH to the agency. Don’t cash out even if your accountant advises otherwise. An accountant needs to have a good understanding of the situation and should not make an opinion on a tax basis. You won’t have to worry about taxes if you go out of business. Protect your organization and leave extra money in it, especially if you are writing with carriers that you think may be weak.