Accounting Best Practices for Insurance Agencies

Historical numbers are easy to calculate and measure, but valuation is about making a reasonable estimate of what the future holds. In the insurance space, accurate predictions of metrics such as ROE are important, and paying a low P/B can help put the odds in investors’ favor. Customer expectations are increasing when it comes to level of service, including the desire to integrate digital technology with conventional products.

Many purchase agency management software and assume it does everything they need. However, their accountants are usually small practitioners doing a little of everything so they know nothing about insurance agency accounting requirements. Balance sheet reserves are required of insurance companies by law to guarantee that an insurance company can pay any claims, losses, or benefits promised to claimants. Instead, an insurance company will collect money in premiums, invest the money, and pay out claims as needed in the future. We are all familiar with the terms premiums and claims; they are the money we pay yearly for an insurance policy and the money paid back to us when we have an accident, medical incident, or other circumstances. Whole, universal, variable universal, and indexed universal life insurance often have a cash value component to them.

The financial statement only captures the financial position of a company on a specific day. Looking at a single balance sheet by itself may make it difficult to extract whether a company is performing well. For example, imagine a company reports $1,000,000 of cash on hand at the end of the month. Without context, a comparative point, knowledge of its previous cash balance, and an understanding of industry operating demands, knowing how much cash on hand a company has yields limited value. 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.

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This balance sheet also reports Apple’s liabilities and equity, each with its own section in the lower half of the report. The liabilities section is broken out similarly as the assets section, with current liabilities and non-current liabilities reporting balances by account. The total shareholder’s equity section reports common stock value, retained earnings, and accumulated other comprehensive income.

  • A large increase in surplus for auto insurers in one state, for example, cannot be used by commercial lines companies to provide coverage to corporations against terrorism attacks in another.
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  • 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.
  • This means using off the shelf software like QuickBooks is a bad idea because without considerable customization and lots of hard work, generic systems cannot produce a proper independent insurance agency balance sheet.
  • They also need to keep up with the pace of digital transformation seen in the private sector, all while balancing these large investments with their solvency position.
  • Its liabilities (specifically, the long-term debt account) will also increase by $4,000, balancing the two sides of the equation.

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. Different accounting systems and ways of dealing with depreciation and inventories will also change the figures posted to a balance sheet.

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Profits arise from insurance company operations (underwriting results) and investment results. Carrier contracts generally stipulate that if an agency is out of trust, the carrier owns the expirations. If the balance turbo tax and form 8606 sheet is poor or does not exist, it is impossible to ascertain if the agency is in trust. Before you know it, you will be speaking insurance financials and able to value any insurance company that comes your way.

Operating Accounts and Trust Accounts

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. While consolidation opportunities remain, in a competitive market a business-as-usual approach is increasingly insufficient to acquire attractive targets and achieve multiples arbitrage. Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities.

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It is also known as net assets since it is equivalent to the total assets of a company minus its liabilities or the debt it owes to non-shareholders. As noted above, you can find information about assets, liabilities, and shareholder equity on a company’s balance sheet. If they don’t balance, there may be some problems, including incorrect or misplaced data, inventory or exchange rate errors, or miscalculations.

Beyond the above core insurance operations, insurers run and manage investment portfolios. The funds for these portfolios come from reinvesting profits (such as earned premiums, where the premium is kept because no claim occurred during the policy’s duration) and from premiums before they get paid out as claims. Life insurers have responded to broader trends and industry shifts by reevaluating their traditional business models. The industry will face persistent challenges in the coming years, such as returns after cost of capital and geopolitical risks, as well as new challenges and uncertainty, such as high inflation and volatile macroeconomic environments.

Insurance Expense

Some permanent life insurance policies build cash value as you pay premiums. If you cancel your life insurance policy, known as a surrender, the insurance company will send you a check for your cash value. Cash surrender value is money a life insurance policyholder receives for canceling their policy before it matures or they pass away. This cash value is the savings component of most permanent life insurance policies, such as whole life and universal life. The insurance company could deduct a fee before paying out the cash value, known as a surrender charge.

Because of this, managers have some ability to game the numbers to look more favorable. Pay attention to the balance sheet’s footnotes in order to determine which systems are being used in their accounting and to look out for red flags. Some companies issue preferred stock, which will be listed separately from common stock under this section.

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