There are two types of accounts in insurance trust accounting: (a) balance sheet accounts and (b) receipts and disbursements accounts.
The format of insurance premium Balance Sheet, also referred to as trust account Balance Sheet, is similar to the balance sheet of operating funds. The premium Balance Sheet includes only premium assets and liability accounts.
The Statement of Premium Receipts and Disbursements is also known as Premium Float (PF) Statement. This is similar to the Profit & Loss (P&L) Statement except that the PF Statement determines the amount of premium float instead of profit or loss. PF Statement is not available in current management practice.
Balance Sheet Accounts
The balance sheet accounts include premium asset and liability accounts. Premium assets may be either “current” or “non-current”. Current premium assets include cash assets in the trust bank account (from payment check deposits) and invoiced (billed) premiums receivable. The unbilled amount of transacted premium is a non-current asset. Before any disbursement is made the total of current and non-current premium assets equals the amount of premium transacted. As disbursements are made this total decreases and becomes zero when all transacted premium is received and disbursed. The total of current and non-current premium assets at any given time represents the amount of premium “in-service”.
Premium liability accounts may also be “current” or “non-current”. They include net premium and commission liabilities. Current premium liabilities are “due and payable”. Non-current premium liabilities are “due but not payable”. For example, commissions on premium receipts that are already in the bank account are “due and payable”. Commissions on invoiced premiums are “due but not payable”. Net premiums on the company statement are “due and payable”. Net premiums on invoiced premiums are “due but not payable”. The net premiums and commissions on un-invoiced premiums represent non-current premium liabilities.
In addition to premium liabilities, the trust account balance sheet includes personal funds liability accounts. They may be either non-fiduciary funds deposited in the trust bank account by the agency principals or commission reserve funds.
No operating funds are included in the trust account balance sheet.
Receipts and Disbursement Accounts
Transacted premiums are found at any given time in either “premium receipts” accounts or “unpaid transacted premium” accounts, also referred to as “outstanding transacted premium” accounts. The sum of premium receipts and unpaid premium always equals the amount of premium transacted. Similar receipts and unpaid premium accounts exist for endorsement premiums.
In addition to premium receipt accounts the Float Statement includes return premium refund accounts. Return premium refunds are subtracted from premium receipts so that the agency’s book of business can be determined from accounting records.
For analysis purposes premium receipts are broken down into down payment receipts, installment premium receipts, audit or financed premium receipts, and endorsement premium receipts.
Transacted premiums are also found either in “premium disbursement” accounts or “un-disbursed premium” accounts. Premium disbursement accounts include “net premium disbursement” and “commission disbursement” accounts. The sum of premium disbursements and un-disbursed premium always equals the amount of transacted premium.
In addition to premium disbursement accounts the Float Statement includes return premium reimbursement accounts. Return premium reimbursements are subtracted from premium disbursements so that the agency’s book of business can be determined from accounting records.
The Float Statement always closes on the transacted premium amount less premium refunds regardless of the premium disbursement status.
In Part III of the Float Statement premium float and trust bank account cash balance are calculated. The solvency of premium funds is determined by comparing the actual cash balance of the trust bank account with the amount shown on the Premium Float Statement.