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INSURANCE FIDUCIARY ACCOUNTING

 

Branded as Trust Ledger (TL) Accounting Paulmar’s fiduciary accounting is specifically tailored for P&C insurance transactions. It has been developed to replace general ledger accounting in its current use for insurance premium and return premium transactions. The main reason why General Ledger (GL) accounting is inadequate for insurance transactions is its inability to monitor and report trust financial solvency. Here are several reasons why. GL accounting:

Ø  Places premium funds in the agency general ledger alongside business operating funds, although it is generally known they should be managed to meet a different standard;

Ø  Cannot create accounting records of premium transactions, sole “legal” sale documents of insurance policies. In insurance, premium invoices are not “sale” documents; they are just reminders of upcoming due payments;

Ø  Premium invoice accounting treats the invoice-based commission as “income” when in fact it is only a trust “liability”;

Ø  Return premiums are treated as “returned merchandise” and recorded in the ledger as “negative receivables” distorting the agency balance sheet and hiding premium refund liabilities;

Ø  Cannot distinguish “due & payable” liabilities from “due not payable” liabilities;

Ø  Cannot distinguish “due and payable” premiums from “due not payable” premiums;

Ø  Cannot determine “premium float” and therefore “trust beneficiaries”.

TL accounting addresses and resolves all GL accounting inadequacies when used for premium and return premium transactions. Agencies will continue to use GL accounting for business operating funds and agency’s financial solvency management.

TL accounting is fundamentally different from GL accounting because:

Ø  It places premium funds in a different ledger of accounts, separate from the agency’s business operating funds;

Ø  It uses premium transactions, sole “legal” sale documents, to start the premium accounting process. TL accounting is policy-driven; GL accounting is invoice-driven;

Ø  It recognizes the invoice-based commission as a trust “liability” not “income”. As non-sale documents, premium invoices in insurance are used only to remind clients of a next due payment;

Ø  It creates accounting records of return premiums similar to those of premium transactions: receivables from carrier and agency operating account, payables to insureds;

Ø  It separates “due & payable” liabilities from “due not payable” liabilities;

Ø  It separates “due and payable” premiums from “due not payable” premiums;

Ø  It determines “premium float” of each policy, each carrier and agency as a whole and enables the reporting of “trust beneficiaries”.

TL accounting generates two main financial solvency statements of insurance trust funds (GL accounting does not):

v  Statement of Premium Receipts & Disbursements (R&D Statements)

v  Trust Account (TA) Balance Sheet

The R&D Statement determines and reports premium float at all three required levels: policy, carrier, and agency. R&D Statements are similar to the P&L Statements known in GL accounting.

The TA Balance Sheet is also generated at all three required levels: policy, carrier, and agency. TA Balance Sheet data are used to generate TA Financial Solvency reports, both in the “Cash Solvency” format and “Account Current” format (including invoiced premiums, receivables and payables). Samples of TA financial statement can be viewed by clicking here.

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