Everyone loves to be paid, and it’s even better when it is the right amount. Insurance agencies don’t always have an accountant on staff but it’s critical to place this task in the right hands. Virginia Bates is this week’s guest and she joins us with years of agency experience. Listen in as she educates us about common, but serious, mistakes agencies can make in their accounting.
Edwin K. Morris (3s):
Welcome to the trusted advisor podcast brought to you by Iroquois group. Iroquois is your trusted advisor on all things insurance. I am Edwin K. Morris. Joining us today is Virginia M. Bates, and she has over 20 years of experience consulting to agencies and carriers, as well as managing insurance operations for both a carrier and a large regional agency. She has a background in all property and casualty lines, experience as a director of a countrywide underwriting school, and direct involvement in many automated systems. Every agency has a different makeup as far as personnel, right?
Edwin K. Morris (43s):
So is it important to have an accountant on staff? Is that normal?
Virginia Bates (48s):
Actually, it’s not very normal, depending on the size of the agency. The predominant situation in very small agencies is either that the principal tries to do his or her own accounting, which very often goes rather badly, or they have someone do it part-time or they vend it out to a contract. None of those seems to me to be ideal for a number of reasons. Once an agency gets beyond 12 to 15 people, they almost always have at least a part-time bookkeeper, but not necessarily fully qualified. You don’t see an agency with the fully qualified appropriate person until you get generally into the 20 – 25 employee range.
Edwin K. Morris (1m 32s):
Are we talking accountants or are we talking bookkeepers because those are two different buckets, right? And small business would love to have a bookkeeper, just help get things rolling or keep things rolling. But the accountant piece is like you say a certified accountant, right?
Virginia Bates (1m 46s):
And I’m not even talking about a certified, maybe someone who’s working on their CPA, someone who’s worked under a CPA for awhile. It’s rare that even very large agencies would have a fully accredited CPA. In many ways, that makes some sense because the insurance accounting is unusual, but it’s not difficult.
Edwin K. Morris (2m 6s):
What’s the first step someone that’s in that growth phase that have now backed up the paperwork, knee high on the desk of the trying to do it all themselves. What do you suggest? Who would be their first person to call?
Virginia Bates (2m 21s):
Probably an accounting service that they could hire for a couple of days a week. And then as the agency grew, they could get a part-time employee and then a full-time employee. Someone under your control, who’s in charge of your money, seems to make more sense.
Edwin K. Morris (2m 34s):
Once you get to that growth to where you’ve gone from as needed to part-time to full-time, what are the things that the agency should be thinking about in that staff relationship?
Virginia Bates (2m 47s):
I like to think of it, of every position in a business, especially in an insurance agency is having deliverable ,a reason they exist. And there are four for the accounting function, and these are very particular to the insurance world, this would not apply to any other business that I can think of. The first one is the most important: making sure that all of the commissions and fees that the agency is owed by its carriers and brokers are paid correctly and also paid on time because carriers are so big and agencies are so small, administrative clerical errors happen at the big end all the time.
Virginia Bates (3m 30s):
And when agencies get serious about number one here, they find they’ve been missing thousands of dollars over the years, money that would have been profit, and isn’t.
Edwin K. Morris (3m 35s):
Right. Because that, that account’s receivable is a heavy lift. And if you don’t have it automated or somebody’s looking at it all the time, you’re going to be missing some dollars.
Virginia Bates (3m 44s):
Right. And we could do a whole separate podcast on the issues involved in making sure that the carriers and brokers pay correctly. Most agencies on the small end don’t even keep a record of what they’re owed, let alone check to make sure they got it. Now you’re laughing, but that’s the case. And I wish more agencies would laugh when I said that they all go, yeah, that’s right.
Edwin K. Morris (4m 6s):
It’s a small business conundrum, you’re either working on making the money or collecting the money. But it’s, it’s hard to do both.
Virginia Bates (4m 13s):
It’s kind of like going to a restaurant. They don’t give you a bill. They just say, pay what you want. Wouldn’t be in business very long.
Edwin K. Morris (4m 20s):
How, how well did you like our food? Pay, pay what you want, right. Yeah. Yeah.
Virginia Bates (4m 24s):
Pay what you want. A restaurant actually in New York tried that and upstate it didn’t work too well from what I understand. The second, the second item is that the agency has to make sure that the bookkeeper or accounting person is paying all the vendors properly and that includes payroll, but it also includes vendors, also paying companies back for what they’re they’re owed and just making sure that the agency stands in good stead because that respectful relationship counts a lot in the agency being successful. But since every company pays different commissions and different lines of business pay different commissions within the same company, a small agency can have 200 different payment schedules with its companies, but all of a sudden done.
Virginia Bates (5m 11s):
Automation makes that very doable. But someone has to understand both the accounting, the relationships, the contractual arrangements and the technology and not everyone has all those talents.
Edwin K. Morris (5m 21s):
Yes, that’s understandable. And that that’s a juggling act that I’m sure changes relatively often, all those terms, all that, all that stuff is like a continuous
Virginia Bates (5m 30s):
They change and they change sometimes without notice. And then you find out about it when the money you’ve gotten is either more or less than you were expecting. If you put in those records of what you were expecting in the first place. So now you see why some of this gets very interesting and someone will call me and say, let’s spend an hour talking about accounting. And three days later, we’re still trying to figure it out.
Edwin K. Morris (5m 54s):
So there’s no clear way ahead, other than you’re going to have to dive in and put some effort into getting to a fine understanding and do it right. And what’s the third point.
Virginia Bates (6m 6s):
The third point is that most agencies have good agency management systems these days that will produce good management reports. The problem is most agencies don’t set them up or don’t look at them or they set them up in a way that is not useful. And so the fourth quality is having a bookkeeping person who is not only adept at report generation, but also flexible with his or her boss to get those reports in a way that’s useful to that senior person. A report that’s not useful is kind of a waste of time. That’s number three,
Edwin K. Morris (6m 42s):
Do a lot of these have automated features to which they give an alert if something changes in the system?
Virginia Bates (6m 49s):
If you set it up to tell the system what you would like to know about. The agency management systems, which again we could do a whole day on is, they’re all very flexible but that means that there’s a lot of setup involved because flexibility means it’s up to you, up to you means you have to do it. Most agencies buy a system thinking it’ll do everything and then forget that they have to actually know what they want and know how to make it happen.
Edwin K. Morris (7m 14s):
A real fine understanding. And that refinement probably doesn’t happen first go around. So what are some of the biggest mistakes have you seen?
Virginia Bates (7m 23s):
The biggest mistakes and, and there, as you have probably caught onto already, there a lot of mistakes that an agency can make very often through omission, more than making a task, an actual mistake. But I jotted down a few because I think they’re important. There are really five of them that if agents paid attention to these, other problems would arise that they could look at, but if they dealt with these five, life would get better. The first one is, and this may sound very strange to you. We find that many agencies will pay an insured’s direct bill for the insured rather than risk losing the client.
Virginia Bates (8m 3s):
This is kind of like a car dealer paying your car payment for you because you got behind on things or went to Las Vegas and don’t have the money anymore to pay for your car loan. But the insurance agent has been known in many cases to pay the carrier for them. Or if the agency has a sweep account in order to pay people’s bills, they will deposit their own agency money in that sweep account, not telling the company whose money it was, the company will sweep out so the insured stays covered, but hasn’t paid for the coverage. And we try to explain to agencies that not only is that not wise, it’s also illegal.
Virginia Bates (8m 44s):
And because they’re really doing it out of what they believe sometimes is just kindness because the insured may have fallen on some very hard times. But the problem with that is next time they fall on hard times, they expect the same thing and the agency can actually go into a financial hole in it’s kindness. That’s rule number one, people have to pay their own bills. Rule number two is very similar, just a little less dramatic. Many agencies still remind their clients to pay their direct bills. So the insurance company will send a bill. The insured will set it aside or wait till he has the money to pay it. It gets a little late.
Virginia Bates (9m 24s):
So the insurance company will send a late notice to the insured and say, please pay your bill. Usually it’s very courteous. Very often, but not always, they’ll send a copy of that to the agency in one form or another, the agency will then pick up the phone or email the customer and say, you probably didn’t pay attention to what the company said, but you will to me, so please pay the company the money. And this works fine until the company stops telling the agency about those cancellation potentials. And so the insured does not get reminded by the agency. The insured gets canceled and then blames the agency because the agency built up an expectation that they can now be legally liable for, to remind them.
Virginia Bates (10m 6s):
And then when the insured has a loss that the insurance has been canceled for, they blame the agent and the agency gets sued. And again, they started out with good intentions, but it all went awry. The principal really can’t be, they have to start out by explaining direct bill and saying, we don’t always get told so we can’t remind you.
Edwin K. Morris (10m 25s):
In that instance, the principal can not get in the middle of that.
Virginia Bates (10m 28s):
Just like the electric company, you got to pay your bill, just like every other bill you get, no one’s going to call you and remind you. You just have to pay your bill. And you know, if someone’s short on money and they have several bills, the one they’re going to get reminded on is probably the one they’re going to pay last because they figure that’s a security feature. And so they’re all, you know, they’re building their own problem by reminding people. It’s better just to say, you got to pay these bills. This is really important. And then it’ll get priority. Now having said that, these are all related, but the company, insurance companies do make mistakes when they send out their bills. So while we don’t want agents to remind clients to pay their bills, we also don’t want agents to ignore those bills.
Virginia Bates (11m 12s):
We’d like them to make sure those bills are accurate. Okay. So for instance, if the insured has just taken off a car off his policy and the insurance company hasn’t yet done that and the bill still reflects that car, the insured doesn’t want to pay that bill because they got rid of that car. I understand that, the agent should be working with the company to get that bill revised manually so that the insured can pay what he legitimately owes and doesn’t get canceled for something he doesn’t owe. And so the agents does have a role in all of this. It just can’t be as mommy. It has to be as advocate. And there’s a big difference between advocate and mommy. Not all billing is done by the insurance companies.
Virginia Bates (11m 54s):
Sometimes the agency bills for the premium and then pays the company for that premium. And that’s called agency billing because the agency is doing the billing for the insurance company. What happens there is the contract that the agency and the carrier have requires that that premium be paid to the company quickly. The company wants their money. Usually it’s 30 to 60 days, depending on the carrier. If the insured hasn’t paid the agency, they will again send their own money. And very often they’ll tell me, well, he’s good for it to which I respond well, if he’s good for it, why hasn’t he paid it? Usually when people are good for it, they pay. If they don’t pay, it usually means they’re not good for it.
Virginia Bates (12m 36s):
Two things happen then. Number one, the insured just expects forever that somebody else will pay their bills for them because they did it once, I would. I’ve actually thought about switching my agent, my insurance, to some of these agencies. But if the agency finally gives up and realize it’s a faction, golly, the insured really isn’t going to pay me. They cannot cancel the policy. The company has been paid, so it can’t be canceled. So the agency can never get its money back. And that very much distresses the agency because they said but I did this as a favor and now I’m hurt. And the response is, yup, that’s right. You really shouldn’t have done that. You should have let people pay their own bill.
Virginia Bates (13m 17s):
That also is illegal. The agencies don’t know it’s illegal. They consider it just charity. Or I love this one: they’re trying to save the client. They, they said, but I’ll lose the client if I don’t pay for them. This is the client who’s not paying you. That’s the one you’re going to lose. That would be so terrible. So we encourage agencies not to pay people’s bills for them, whether it’s direct bill or agency bill. Okay. The last one, number five is a little bit of a conundrum for most people. When an insured has a very high premium. And very often, this is a business account rather than a family account, but it can happen with a family account too. If the premium is very large and they just don’t have the money to pay, they can finance it just like you’d finance the purchase of a automobile.
Virginia Bates (14m 3s):
So the finance company has them sign some very important legal documents that basically say you will pay us. Right? And then the finance company pays the insurance company upfront. It’s all very friendly and nice. If the insured decides or can’t pay the finance company, the finance company will try to stop the policy so that they don’t lose more money on this deal. Because remember they sent the entire premium upfront. Very often what happens is the cancellation notices go out and the agency gets a copy of those cancellation notices. It’s very important for the agency to look at those cancellation notices.
Virginia Bates (14m 43s):
And the reason for that is if the reason for cancellation is nonpayment of premium, the policy is still enforced because it’s not legitimate to cancel a policy for non-pay if the company has already been paid, it doesn’t matter that it was by the finance company. So there’s a, a more appropriate way to cancel those policies and the agency who gets a notice like that should seek some counsel, because if there is a loss, following that cancellation, there’s going to be a big amount of confusion and the agency will be dragged into it. So anytime the agency gets a notice it doesn’t quite understand, it should seek counsel automatically because these are unusual circumstances and it’s not normally that it would be normal things to get you in trouble.
Virginia Bates (15m 30s):
It’s the once in a while things that may get you in trouble. So we strongly suggest that if an agency is financing premiums, and by the way, the agency is normally getting a percentage cut from the finance company, doing a referral. And that just drags in, drags them into court more because they definitely had a financial interest in the transaction. So seeking counsel for something that’s a little unusual is always a good idea.
Edwin K. Morris (15m 55s):
Well what is the final word you want to give these agencies on all these points that you’ve just laid out. What’s the one thing you want them to remember?
Virginia Bates (16m 3s):
The one thing I’d like them to remember is that the agency principal, if they don’t have accounting background, should find a community college or a local business association that has an accounting course and learn something about the rudimentary elements of accounting. If they already know accounting or took courses, they should grab out that book. Cause one thing about accounting is it really doesn’t change. Money is still money and just refresh themselves and then put some of that academia into practice.
Edwin K. Morris (16m 31s):
Well, that’s great advice. Well, thank you very much for joining us today, Virginia. Thanks for listening to this edition of the trusted advisor podcast brought to you by Iroquois group. Iroquois is your trusted advisor for all things insurance, and remember get out of the office and sell. I am Edwin K. Morris, and I invite you to join me for the next edition of the trusted advisor podcast.