INCREASE YOUR INCOME: FOCUS ON COMMISSION RECONCILIATION!

by Elizabeth Miller

Creating a perfect world of commission reconciliation depends on many factors, not all of which are within your control. At times, it might seem that you're barely keeping your head above the surface in a wild, raging river. Elizabeth Miller explains why it's essential to create and implement a commission reconciliation plan that can keep you from losing income.

• How many readers have your monthly commission statements on the corner of your desk? Is that stack of reports more than three inches thick?
• Do you have a low confidence level that all commissions due are collected on a timely basis and reported accurately?
• Have you had conversations with your producers about confusion over their commissions?
• Do you market any multi-tiered policies? Are the commission rates variable, based on the different tiers of a carrier's product?
• Do you broker business for outside producers?
• Do you use broker markets to place business?

If you answered yes to any of these questions, you're not alone. Many agencies haven't been able to create procedures to reconcile the largest income item on their financial statements: Direct commission revenue.

Many years ago, when agency bill was the most popular method for carriers and agents to collect premiums, the commission component of transferring premium dollars to the carrier from the agent was a push transaction. The agency collected premiums from insurance customers, and then remitted the amount to the carriers, net of the commission earned on the transaction. Although direct-billing streamlined the process of premium collection, it has created a rat's nest for commission revenues on direct-bill policies.

The direct-bill process puts the basic responsibility of collecting premium on the carriers, who then remit commissions to the agents as a calculation against the collected premium. However, most agencies haven't created streamlined, accurate procedures for reconciling this income.

To further complicate the process, carrier product offerings have become more complex. As carriers stratify their products into different rate/risk tiers, the corresponding commission rates have also become more intricate. Carriers have also established service centers, which reduce agents' commissions, due to the lessened service level the agency provides.

THE PERFECT WORLD

In a perfect world, the commission reconciliation process would be streamlined through automation. As electronic commission statements were received, an accountant could match the total with a payment remittance, and then interface the statement into the agency management system, which would match the actual commission received with the “anticipated commission” (a calculation of premiums collected based on the contractual commission rate for that type of policy). Once the system identified the commission as received, it would calculate a commission payable to the producer of record. This process would produce a tool to report discrepancies for correction.

Implementing this automated process would require a support structure with these features:

• An agency management system that allows multi-tiered commissions
• A system that supports downloading of commission statements
• Carriers providing commission statements in a format acceptable to your agency management system that includes such details as policy number, premiums collected, and commission paid
• An agency management system that provides accurate commission schedules and appropriate effective dates
• A system that includes accurate producer commission schedules, in conjunction with your producer contracts
• Accurate, updated basic information in the system

As you can see, creating this perfect world depends on many factors, not all of which are within your control. The predominant external factors are carriers and software vendors. At times, it might seem that you're barely keeping your head above the surface in a wild, raging river. Software vendors have begun to build a bridge on one side, while carriers have started to bridge the gap on the other. Unfortunately, they have yet to develop a plan to meet in the middle.

To integrate commission management with external resources, you must build an in-house foundation that will allow your accounting operation to use its systems more effectively. We often find that agencies will purchase a new system to help streamline processes, when all they need is a redesign of existing processes to maximize the efficiencies of the current system. Most agency administration staff members lack a solid understanding of how the different pieces fit into a much bigger puzzle. A combination of basic staff training, careful management, and setting appropriate goals and objectives should lead to a far more effective use of your systems.

REALITY CHECK

Unfortunately, many agencies have completely ignored the commission reconciliation issue. Some agencies look at commission statements analytically, researching data that don't meet expectations. Others address the issue by reviewing policies over a certain dollar amount or using a rotating schedule to audit different carriers in different months. Still other agencies have decided not to reconcile Personal Lines and to focus on Commercial Lines. Reconciling Employee Benefits business presents even more difficult problems.

Although any action to improve commission reconciliation is better than none, these approaches are far from perfect. It's essential to create and implement a commission reconciliation plan that can keep you from losing income! What's more, errors in calculating producer commissions can create unnecessary strain on your organization that could reduce your production.

Elizabeth Miller, a consultant with Business Management Group (Hartford, CT), has almost 20 years experience as a financial management executive in insurance, investment, and treasury management. She's a team leader with strong planning, organizational and conceptual abilities and an affinity for start-up organizations. Miller has used her financial background to provide practical and creative solutions to difficult business problems. She holds a BS in Accounting and a MBA in organizational behavior. Contact Miller at [email protected].