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Experts Revealing the Insurance Accounting Issues and Solutions

Last updated: 13 Nov, 2019 By | 6 Minutes Read

Accounting for insurance companies can be a challenging task as it involves heaps of figures and calculations. Hence, adequate diligence must go into this process. To maintain the accuracy of insurance accounting, interest rates and chargebacks are some of the critical factors. Here, we have gathered the opinions of experts on some of the accounting issues.

Basic Accounting Issues and Solutions from Pioneers

Issue 1. “Implementing Section 831b and Traditional Responsibilities”

Matthew | MRIA Group

There are a number of accounting issues for insurance companies. Most insurance companies fall under two sections of the Internal Revenue Code, either 831a or 831b.

831a have unearned premium haircuts and reserved is counts, among other issues. 831b, however, have numerous other hurdles to jump over, including ownership issues, premium limits established long ago and amended by the PATH Act, and now self-disclosure forms for the IRS as a result of Notice 2016-66.

Aside from those issues, there are the traditional housekeeping responsibilities, such as proper premium pricing, amending their risk profiles (think Cyber Riskor recent devastation from hurricanes), and ensuring all the policies written are correct, and in force for the period it is intended, and all claims are allocated properly.

The solutions required for accounting issues for insurance companies vary greatly, depending on the specific issue. Claims management and claims allocation can be one of the biggest accounting burdens an insurance company can undertake.

I have seen multiple solutions work for this issue. Sometimes a company can build an allocation spreadsheet that is dynamic enough to pull data, whether it be underwriting period, claim date, quota share allocation, etc., and apply the right calculations for claims allocation and claims management.

However, this in house solution on an excel spreadsheet is often only feasible with a small insurance company or one that has very few claims. Perhaps a low frequency, high severity type of insurer. Should the insurance company require a more robust solution they will often times seek guidance from a Third Party Administrator (TPA) who is well versed in the claims management and claims allocation space.

Solution

As these are just the tip of the iceberg when it comes to insurance accounting related issues, it is always best to consult an experienced insurance expert in the field required, whether it be an attorney, an accountant, an actuary, or any other expert in the area that may affect your insurance company.

Issue 2. “Charge-Back Policy”

Dominick Yates | SimpLegacy

We’re an independent insurance agency that sells whole life insurance. Our primary accounting challenge is managing chargebacks. When we sell an insurance policy to a customer for say $100 a month or $1200 annually, the insurance carrier pays us 75% of our annual commission once the customer makes their *first monthly payment*.

If for any reason, the customer cancels their policy within the first year, the insurance carrier will “chargeback” the difference based on when the client canceled. Currently, the industry standard is a 15-20% cancellation rate within the first year of policy; therefore, we deal with chargebacks for up to 20% of the policies we issue.

Solution

Our strategy has been to take a more proactive approach at the forefront with the customer to ensure the policy fits their budget for the long term before they commit.

Issue 3. “Difficulty in Assessing Investment Risks”

Darren Gallaway | TRC Financial

Insurers often face problems in managing investment assets and it becomes challenging for them to evaluate risks related to capital.

Solution

Our clients are using COLI for two accounting reasons. First, the COLI allows the carrier to retitle their investment assets in a way that allows the earning of those assets to be tax-deferred.

The second is that the underlying risk profile of those assets is improved from a regulatory capital perspective (improved Risk-Based Capital or RBC). The net accounting results are:

1) Lower taxes which translates into improved earnings; and

2) Lower RBC charges which improve the health of the carrier to regulators, investors, and potential customers. Both should lead to a healthy carrier with improved performance.

Issue 4. “Interest- Rate Fluctuations”

Joel S. Salomon, CFA, FSA | SaLaurMor

For me, the biggest issue is the implicit mismatch between true cash flows and generally accepted accounting principles. Let’s take the current interest rate environment’s impact on the earnings, cash flow, and balance sheet (shareholders’ equity) of an insurer.

When interest rates drop significantly and quickly – as they have in the last 3-4 months, the earnings of an insurer are negatively impacted since they are investing in securities that generate much lower investment income.

Similarly, on the balance sheet, when interest rates drop significantly and quickly, the value of the existing assets are worth more (think of a bond earning 6% with interest rates at 6% and then a bond earning 6% with interest rates at 4%, isn’t the 6% bond much more valuable now?).

So, the biggest problem faced by insurers is that the earnings impact of low-interest rates is not commensurate with the true cash impact of low-interest rates.

Solution

Solutions would include ensuring matching of assets and liabilities but either MtM liabilities or not MtM assets. Both would eliminate the volatility in equity that now is adjusted by analysts globally by backing out unrealized gains and losses each quarter.

Issue 5. “Attain Flexibility with Documents Backdating”

Ayse Basak Incekas | Megaventory

Backdating is one of the issues faced by insurance companies. There are many cases when documents need to be given a date different than when they happened.

Sometimes, an already issued document can be canceled, and a new one can take its place on a previous date. When it comes to legal documents such as contracts, this not allowed or even legal to give a different date.

Solution

Megaventory has a backdating feature for documents. It helps your company to reach maximum flexibility and enables better mapping of what happened with what’s in Megaventory.

Issue 6. “Unmonitored Business Spendings”

Michelle | AppZen

Insurance companies like any other company only audit 10% of its business spend — this, unfortunately, creates a high risk for fraud, uncorrected mistakes, and missteps and other problems that could bring the organization into non-compliance.

Solution

For highly regulated industries like insurance companies, artificial intelligence auditing tools can be transformation. AppZen, the leading artificial intelligence platform for modern financial teams, enables enterprises — including insurance companies — to audit 100% of every dollar spent and inspect for mistakes, waste, and fraud.

Issue 7.  “Keep Compliance of your Tax Implications with Tax Amendments”

Zhaneta Gechev | One Stop Life Insurance Agency

In some lines of insurance, companies will advance commissions to their agents. While this is great for cash flow, it could pose some tax consequences, since the commission is not yet earned. A major tax bill could be devastating to a smaller agency.

Another problem smaller agencies are facing is not understanding accounting standards and tax implications. They try to file their taxes themselves and could be leaving money on the table. There is not enough guidance out there for smaller agencies on what accounting tools to use.

On the other side, larger agencies that have incorporated may be faced with double taxation, once on a company level, and again on a personal level.

To sum up, the biggest accounting issues insurance agencies face are poor cash flow management and not enough knowledge when it comes to accounting.

Solution

If you are working with a large premium policy, always anticipate the possibility of a chargeback. When it comes to insurance, it is just the nature of the business. Although many agents would not want to hear it, it will be best to get in touch with the carrier directly and ask them to pay commissions as earn.

Even though you won’t get a large sum deposited in your bank account, you also won’t get a big tax bill. It is beyond crucial for agencies to manage cash flow. In my business, I have many policies that are advanced. However, in many instances, I prefer to be paid as earned to avoid such complications.

For smaller agencies, it is really important to keep detailed records of your expenses. For example, you can purchase a software program such as QuickBooks and log in everything in there. At the end of the year, present this information to a tax preparation professional and let him or her do your taxes the right way.

For larger agencies, I would advise them to consider hiring an accounting firm that handles their taxes. There are many techniques they can use, to minimize the tax implications that you might be faced on personal and company level.

Conclusion

By the above article, we get an understanding that insurance accounting is an intricate task, and hence, any discrepancies can lead to a considerable loss.
If you are looking for an expert solution to your insurance accounting issues, contact Cognessol at +1 646 688 2821. Professionals at Cognessol make sure that you always stay on top of your accounting tasks.

Related: Accounting for Insurance Businesses– Can DIY Approach Work?

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