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January 11, 2024

Insurance Accounting Tips for Insurance Agencies

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According to forecasts published in a report by BCC Research, the global insurance market will increase from $5.6 trillion in 2022 to $9.8 trillion in 2027, with a compound annual growth rate of approximately 12% between 2022 and 2027. This demonstrates the growing popularity of insurance services and the increase in the number of insurers. To stay afloat in such a competitive environment, you must take a responsible approach to your activities and ensure precise insurance accounting.

Owners of agencies face unique economic challenges and risks not seen in other industries, e.g., the need to adhere to additional bookkeeping guidelines and make claims at all times. Don’t take risks when it comes to money. Carefully study all the features of expenditures and revenue in the insurance area.

Profits of Accounting in the Insurance Field

As an insurance agent, you probably don’t want to spend much time on bookkeeping, but you must stick to basic bookkeeping techniques to succeed in this area and create a thriving business. This way, you’ll always know how well your insurance company performs and can spot issues that need your attention early on. Let’s consider other advantages of bookkeeping for insurance agencies:

  • Knowing the basics of accounting helps you avoid surprises in getting your operations and financial results. You will likely not be happy to find out you have run out of cash or that the cash outflow exceeds its inflow.
  • Sticking to the best bookkeeping practices can help you avoid problems with federal or state tax authorities. Moreover, you can pay all your tax obligations on time.
  • Keeping accounts means you maintain a complete list of all your revenues and expenditures. This will help you evaluate the insurance agency’s financial results and collect the data you need to obtain a business loan.

Accounting assists you in calculating and analyzing essential financial performance indicators like profit, loss, expenses, and combined ratios. This helps you estimate your profitability more effectively.

How to Keep Accounting Records in Insurance?

Insurance agency owners are the ones who understand the importance of asset protection. You protect your clients’ cars, businesses, homes, property, health, and other essentials. Why not do the same with your agency? Proper asset management protects your business from potential bankruptcy.

Understand the kinds of insurance

It is vital to remember that the insurance field is divided into several large groups:

  • Property/casualty: This category of policies protects against liability and covers damages. Property insurance protects the property from damage, theft, or if someone gets injured on the property. Personal accident insurance protects customers from liability if they damage another owner’s property or cause an accident that injures another person.
  • Health/lifestyle: Health insurance and life insurance, e.g., vision, life, and dental insurance, covers the personal requirements of clients, taking into account their lifestyle and medical conditions.

Knowing which category your business falls into is essential, as this impacts specific accounting procedures. These differences can be reflected in different contract lengths, various approaches in predicting claims outcomes, asset types, and other terms.

Insurance Accounting Tips for Insurance Agencies

Selecting an Accounting Method

The system for monitoring inflows and outflows will depend on the accounting method chosen. There are several options for recording transactions:

  • Cash method: All business transactions are recorded based on cash movement in and out. This means that an insurance policy sale should be recorded when a client has paid for it.
  • Accrual accounting: Sales and expenses are recorded at the time they actually happen, regardless of the payments made. In this case, the sale of an insurance policy should be recorded on the date stated in the sales agreement.

The cash algorithm is more straightforward, but accrual accounting creates a comprehensive picture of your insurance policy sales and lets you consider your performance and not just your cash flow.

Working with Sales Income

Individuals have the option to receive invoices in two ways: company bills and agency bills. Individual insurance is typically processed like company invoices: the insurer sends the invoice to the client, and the client makes payment directly to the company. Thus, property insurance bills come from the provider that insures the transport or house of its clients, and the premium is paid by the clients to that insurance company.

In the commercial field, the agency that sells the policy bills the customer directly, and the agency pays the insurance company. Most business areas require insurance agents to create a trust (escrow) account to temporarily hold these funds for the insurance organizations. Consider this example: an agency bills a user for $1,500, which goes into a trust account. If the agency is entitled to a commission of 20% on the bill, then $1,200 will go from the trust account to the insurance company, and another $300 will go to the agency’s operating account as income.

Monitor your costs

Most of the costs insurance companies face are wages and commissions passed on to manufacturers. Such expenditures can range from 30% to 50% of the commission income received by the company. Experts advise keeping payroll and commissions as separate costs, so management can better understand spending connected with sales and services.

Understanding SAP or Statutory Accounting Principles

The Statutory Accounting Principles (SAP) are a set of accounting principles issued by the National Association of Insurance Commissioners (NAIC) to govern insurance accounting and reporting procedures. The main task of SAP is to support government institutions in tracking the solvency of agencies. NAIC implemented SAP to ensure its core values:

  • Prudence: All assessments must be carried out using a conservative method, which guarantees the protection of clients of insurance services from any adverse changes in the organization’s financial position to influence solvency.
  • Acknowledgement: Insurance accounting is focused on the quick liquid assets to ensure the agency is able to pay the insurer its liabilities when they fall due. Any non-liquid resources that cannot be used due to other obligations are not considered. Such assets belong to the against-surplus category.
  • Coherence: SAP should be applied by each insurance company in the required and consistent way to ensure their financial results are comparable in relation to all insurance businesses.

All insurers must stick to SAP when creating their financial statements due to the high-risk nature of the field.

Comparison of SAP and GAAP

The primary difference between the Statutory Accounting Principles (SAP) and Generally Accepted Accounting Principles (GAAP) lies in their distinct objectives. If SAP concentrates on compliance with laws and safeguarding financial stability, GAAP serves as an all-embracing basis for reporting to stakeholders and partners on the company’s results and current financial position. Let’s look at other distinctions among the structures:

  • Bookkeeping norms: SAP is based on industry rules created by the NAIC. At the same time, GAAP operates according to the directives created by the Financial Accounting Standards Board (FASB), which are suitable for various domains.
  • Valuation systems: SAP stipulates that assets are generally recorded at their market value, while liabilities are recorded at a higher value to create a reserve to meet legal requirements. On the other hand, GAAP offers heightened flexibility in the choice of valuation techniques, considering management plans and the classification of financial tools.
  • Disclosure features: SAP provides greater disclosure of information regarding sectoral rules, contract holder interests, credit losses, etc., than GAAP, which deals with transparent decision-making.

Each area has its own characteristics that require additional guarantees against insolvency risks and violations of industry laws, which leads to such differences. Financial professionals should be good at applying both SAP and GAAP to ensure compliance with the full set of requirements.

Insurance Accounting Tips for Insurance Agencies

Some Recommendations on How to Do Bookkeeping in the Insurance Field

Having in-depth accounting knowledge is not necessary to engage in insurance sales successfully.

Nevertheless, adopting fundamental bookkeeping practices will assist you in efficiently managing your business, preventing prolonged crises:

  • Record all revenue and expenditures: it is necessary to record all inflows and outflows to accurately assess a business’s profitability. Moreover, it can help develop tactics to eliminate unnecessary expenditures and increase income.
  • Create a clear budget: any business is an investment of capital with the goal of making a profit. However, some operational expenditures cannot be avoided, so costs should be minimized. Setting a budget in advance is essential to ensuring expenses do not exceed the expected amounts.
  • Separate business and individual finances: one of the first tasks of insurance agents is to create a business account and utilize it to cover all business-related spending. It is vital to deal with mandatory payments because when tax season comes, you will need to study your bank account statement for deductions and expenses, check the items on your account, and use this information to report the costs for your business.
  • Use modern technology: besides adding financial tools to control revenues and expenditures, consider using some digital apps to track receipts, store financial reports, etc.

Often, in insurance agencies, accounting responsibilities are performed by employees who need to get more business specific expertise. Sometimes, agency owners perform such procedures by themselves. If this approach is not effective for your company, we suggest you contacting a professional bookkeeper.

Final Words

When discussing small and medium firms in the insurance field, keeping business finances status up-to-date is a must. BooksTime provides the seasoned specialists to do bookkeeping for insurance firms.

We offer virtual bookkeeping services, overcoming the barriers of location, time, and infrastructure. BooksTime experts provide a full range of services, including accounting reconciliations, document preparation, and financial consulting. With the most modern bookkeeping programs and practices, we are able to optimize your finances!

This article is not intended to provide tax, legal, or investment advice, and BooksTime does not provide any services in these areas. This material has been prepared for informational purposes only, and should not be relied upon for tax, legal, or investment purposes. These topics are complex and constantly changing. The information presented here may be incomplete or out of date. Be sure to consult a relevant professional. BooksTime is not responsible for your compliance or noncompliance with any laws or regulations.

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Author: Charles Lutwidge

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