Obviously, most agencies who have adopted direct bill programs for personal lines have no receivables problem in this area. Customers either pay their premiums or are cancelled by the companies with no earned premium accruing to the agent. The few agents who still use agency bill programs for personal lines should follow the same program suggested below for commercial lines to eliminate the potential loss of earned premium for non-payers. A warning to agents who are direct billed but continue to advance money on behalf of personal lines clients - Stop Now! You have two very dangerous problems, one that will lose you money and the other, more dangerously, can put you in Errors & Omissions peril. When you advance money on a direct billed personal lines policy you have no recourse if the insured does not pay. He has not paid the company according to their billing. They have (or would have) sent legal notice of cancellation. By interfering with the process your agency has loaned him money (usually without a signed note) to satisfy the carrier. The carrier no longer has legal reason to cancel the policy even if the customer does not pay you. The time that you or your staff spends on collection is much more expensive than the returns. If you establish a procedure, written or implied, that suggests that payment will be made by the agency if the insured does not pay a direct billing, legal precedent exists for an assumption of the same expectation in the future. In other words, if you paid his premium in the past and he assumes that you will continue to do so in the future, a claim after a legal non-pay cancellation could bounce back against your Errors & Omissions carrier. Either way, paying your clients direct bill premiums is a bad idea.
The advent of commercial direct bill has offered time and effort savings for agencies all over the country. Some agents still resist direct billing, citing the same reasons (lack of personal and loss of cash flow) as they did when they resisted personal lines direct billing. Commercial direct billing, however makes as much sense for small commercial accounts as it did for personal accounts. The collection personnel and time is more expensive than the cash flow income generated. Any agent who counts on the delivery of bills as the mainstay of his 'positive' customer contact is fooling himself. Basically, small commercial accounts, especially those simple one-bill-per-year accounts, should be direct billed as soon as possible.
Larger commercial accounts (having may transactions during the year) are payment sensitive or on company payment plans and still require collection attention by the agency. However, an agency billing and collection program must be established that is concise and standard and will also monitor and take action against clients who cause the agency to use its own funds to pay companies on behalf of the customers. The Agency Consulting Group's program is a 'mock' direct bill program that is implemented by your staff.
No new business can be processed by the agency without full premium payment, down payment with signed finance agreement, or sufficient down payment to offset any earned premium until the policy can be prepared or delivered (usually 25% of annual premium).
Endorsements should be billed when calculated (either when requested or when received from the carrier). Payment is requested within two weeks of the effective date of the endorsement. Should payment not be received a second 'late billing' is sent requesting payment within two weeks "in order to avoid cancellation of the policy by the company". The agency has the latitude to eliminate the cancellation threat wording if sufficient premium has been paid on the policy to cover the earned premium (including the endorsement ) in the event of default by the customer. If all earned premium has been used, the second notice must include cancellation advice and, if not paid, Cancellation Notice is sent ( see note on Cancellation Notice is sent in the Renewal section of this article).
Audits are quite straightforward. They normally must be paid within thirty days, be returned to the carrier for collection, or the amount of the audit is assumed by the agency. Two glitches occur frequently with respect to audits; 1)The agency's procedures are not tight enough to assure immediate billing, diary and collection within the prescribed thirty days, and 2) The audit amount is questionable. The answer to the first problem is simple. Establish an Audit Procedure that bills the audit within 24 hours of receipt, diary the bill for twenty days for expected payment, calls or writes the customer one more time if payment is not received (diary for an additional seven days for response) and returning the audit to company if not paid. The second problem is more complex. Some agents carefully analyze audits before billing and attempt to correct problems within the thirty day period (a difficult task since the company has no reason to hurry - after all, it's money is guaranteed by the agency). Others bill the audit requesting payment and, if incorrect , a revised endorsement will be issued after the fact. Still other agents have constructed agreements with certain carriers avoiding automatic debiting of audits if they are legitimately in dispute. However, companies have labeled disputed audits as "Producer Excuse Programs", assuming that the audits are generally correct and the agents are using disputes as delaying tactics on behalf of their clients. Obviously, audits of cancelled policies should follow the
cut-and-dried procedure outlined above. No exceptions are made in this case.
Renewal billing and collection is the heart of the Receivables Program. If followed properly, this program will virtually eliminate Aged Receivables over 45 days old.
The program begins when a new customer is written by the agency. A written Statement of Billing Principles (Statement of Billing Principles in article titled The Agency Statement of Billing Practices) should be given and explained to each customer outlining how his bills will be delivered and when the premiums are due.
The renewal cycle begins with a renewal bill (with or without binder, as necessary) sent twenty days prior to expiration. The due date of the bill is the effective date of coverage. Two days after the effective date ( an allowance for mailing time) a second bill is sent containing the following wording:
In order to avoid cancellation process by the insurance
company, premium must be in our office within 10 days.
Twelve days after the second bill is sent, a cancellation notice is sent or requested from the company. Non-Pay cancellation usually requires 10 or 12 days notice, bringing the contract to its 29th day after renewal, still within the 30 day flat cancellation period allowed by most companies.
Note: If your company permits the agency to send formal Cancellation Notices, it is preferable for the agency to process cancellation instead of the company. Most clients who intend to pay at all will pay on the cancellation notice. Once paid, the company's copies need no longer be sent to the company, avoiding the administrative problems in both agency and company of cancellation and reinstatement. The company may not move as quickly on the cancellation request as the agency would desire. If the Notice is delayed and the result is an earned premium, the agency must pay it if it is not collected from the client. Many companies are reluctant to permit agents to issue formal notice because they fear that a slip-up in procedure could continue the company on the risk after they thought that it was cancelled.