Accounting Best Practices for Insurance Agencies

If the agency is entitled to a 15% commission from the account, then $850 will be paid from the trust account to the company and $150 will be paid from the trust account to the agency’s operating account. If you have maxed out contributions to your retirement account, have a cash nest egg saved for emergencies, and you can afford the monthly premiums on a permanent life insurance policy with a cash value benefit, it may be a good choice. However, if you cannot afford a lifetime of high premiums and you are struggling to save for retirement, these accounts are not recommended as a tool for investment.

PE-backed providers of distribution technology—such as performance-marketing and agency-management players—have recorded fast growth while maintaining strong cash flows. Investors have also created value in insurance services by building dominant positions in the relatively mature claims-management space and by consolidating human resource information systems (HRIS) and benefits-administration services on the same platform. The capital markets are increasingly rewarding intermediaries and insurers that use technology to create value, often by augmenting noncumulative preferred stock their internal IT capabilities through third-party vendors. Traditional brokers also seek out tech to support their growth and maximize agent time spent on value-added activities. For example, they are increasingly leveraging customer relationship management in conjunction with intelligent lead matching or dashboards and streamlining the digital experience for agents in small commercial lines. In our experience, this can lead to a reduction of up to five hours a week in the work required for submissions, freeing up valuable time for agents.

What Is a Balance Sheet?

Insurers in all states are required to use a special accounting system when filing annual financial reports with state regulators. The two systems differ principally in matters of timing of expenses, tax accounting, the treatment of capital gains and accounting for surplus. Simply put, SAP recognizes liabilities earlier or at a higher value and recognizes assets later or at a lower value. GAAP accounting focuses on a business as a going concern, while SAP accounting treats insurers as if they were about to be liquidated. SAP accounting is defined by state law according to uniform codes established by the National Association of Insurance Commissioners.

The standard setters made limited changes to the accounting and financial reporting guidance in 2020, so industry participants have focused mainly on adopting or preparing to adopt the major standards issued previously by the FASB. On December 31, the company writes an adjusting entry to record the insurance expense that was used up (expired) and to reduce the amount that remains prepaid. This is accomplished with a debit of $1,000 to Insurance Expense and a credit of $1,000 to Prepaid Insurance. This same adjusting entry will be prepared at the end of each of the next 11 months. The image below is an example of a comparative balance sheet of Apple, Inc. This balance sheet compares the financial position of the company as of September 2020 to the financial position of the company from the year prior.

• Balance sheets provide the basis for computing rates of return for investors and evaluating a company’s capital structure.
• Insurance companies are likely to focus on some combination of these themes based on their ownership type and specific owners.
• While much lies ahead on the road to postpandemic normalization, some of last year’s uncertainty has abated, and opportunities abound for the prepared investor.
• The premium for each policy, or contract, is calculated based in part on historical data aggregated from many similar policies and is paid in advance of the delivery of the protection.

Today, to keep pace with product innovation and online and direct capabilities, more insurers are turning to third-party solutions, which allow insurers to modernize their tech stacks and every step of their processes. Such solutions are sticky, on account of ten-year or longer replacement cycles and stable cash flows. Technology providers are benefiting from a booming ecosystem of start-ups that help insurers automate their businesses. Influenced by the current environment, insurers are using analytics to increase process efficiencies that reduce costs and to evaluate large sets of data to generate other insights.

Life insurance companies, whose liabilities are longer term commitments, have a greater portion of their investments in residential and commercial mortgages. A term which refers to a list of assets, investments and liabilities held by an insurance company. A quick glance over an insurer’s balance sheet offers a good indication of whether or not the company can be classified as financially stable, both presently and in the future. If your company has made other prepayments, such as for accounting support or software licenses, your balance sheet will include a line summarizing these prepayments but not specifically naming prepaid insurance expense. If your insurance prepayment is the only prepayment your business has made, you might include it on your balance sheet on its own line tagged as “insurance prepayment.”

Investors will need to evaluate their portfolios and assess where the greatest risks lie and where they can deploy capital that will help the insurance ecosystem evolve and better serve all of its participants. Specialty insurance, which covers unique risks or special circumstances, and reinsurance have continued to attract investor interest in the face of ongoing market hardening. Some liabilities are considered off the balance sheet, meaning they do not appear on the balance sheet. In this case, we can see Progressive has about $6.5 billion in float, and Mercury has roughly $1.5 billion. We can also see “Other Assets” and “Other Liabilities” are about equal, so we’ll net and ignore these.

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A couple of key metrics can be used to value insurance companies, and these metrics happen to be common to financial firms in general. As small enterprises falter and employers of all sizes lay off employees, benefits administration and HRIS players will also face significant pressure on profits. Furthermore, revenue sharing, another source of income for benefits administration and HRIS players, will also likely decline as employers and employees drop insurance policies. Finally, implementing operational improvements continues to increase in importance relative to capturing structural differences in valuation multiples.

Accounting Best Practices for Property and Casualty Insurance Agencies

Investors can get a sense of a company’s financial well-being by using a number of ratios that can be derived from a balance sheet, including the debt-to-equity ratio and the acid-test ratio, along with many others. The income statement and statement of cash flows also provide valuable context for assessing a company’s finances, as do any notes or addenda in an earnings report that might refer back to the balance sheet. The policies are intended to cover not only its property and products but also to protect its workers. Unexpired premiums should be listed as prepaid insurance, which is listed in an asset account.

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If the current low-interest-rate environment persists, growing pressure could make acquisition candidates of another $2 trillion in liabilities, further accelerating growth in GP insurance capital. A company’s property insurance, liability insurance, business interruption insurance, etc. often covers a one-year period with the cost (insurance premiums) paid in advance. The one-year period for the insurance rarely coincides with the company’s accounting year. Therefore, the insurance payments will likely involve more than one annual financial statement and many interim financial statements.

Examples of Company Liabilities

Insurance stocks recovered, with life insurers and software providers leading the way. A company can use its balance sheet to craft internal decisions, though the information presented is usually not as helpful as an income statement. A company may look at its balance sheet to measure risk, make sure it has enough cash on hand, and evaluate how it wants to raise more capital (through debt or equity).

Capture-divestiture moves amid prolonged low interest rates

Looking at insurance companies, we need to focus on the balance sheets; first, we will analyze the assets, then the liabilities. Most P&C agencies receive monthly commission statements in the mail each month or they can access the commission data online from the insurance company’s website. It is also common for agency owners to ignore these statements and to toss them when they are received. While some states may not require an agency to maintain a separate trust account, it is highly recommended that two separate accounts be maintained. The Internet is filled with stories of agency owners being prosecuted and losing their licenses for improperly using trust funds to make payments in their operating accounts.