The aged accounts receivable problem, so prevalent a decade ago in insurance agencies has subsided. While that should be good news, I am afraid that the reason agencies are in a better receivable situation today is because the insurance company’s have taken the billing and collection responsibilities away from the insurance agencies, in an attempt to improve their cash flow and float. Frankly, insurance companies have a much simpler way of handling late payers – they cancel them. So why is it necessary to include an article on collecting receivables if the problem is resolved? Unfortunately, the company activities in direct billing have not eliminated the troublesome receivables that have plagued independent agents. Direct billing was engineered to facilitate the cash flow from your clients who already paid on a timely basis. Agency billed clients and those who counted on their insurance agent “carrying” them are still problems to most independent agents.
These problems are being resolved as well, but not in the way desirable by most agents. While clients who took a full year to pay their premiums. The agencies that had to pay their premiums in 45 days have felt their own economic pressures and are going out of business at a rapid clip. Consider – if one of your “good” clients has to play with insurance premiums in order to maintain his own stability, how stable is he?
The resolution of the problems of old and ongoing receivables by the same clients is difficult. It requires personal visits and education. You must explain that the insurance agency paying the clients premium (borrowing money from the owners or banks to do it) is not feasible for the level of commissions being earned on any insurance policy. The clients may threaten to leave you, but, they will leave to a new agency who will use direct billing or premium financing to alleviate that problem.
How do you judge whether your receivables are out of control? One rule of thumb is to compare your receivables over 45 days (the normal time period required by carriers for payments from agents) to last year’s profits for your agency. If that receivable level is more than last year’s profits, you are in a critical situation. This basically tells you that all of your potential profits remain in the hands of delinquent clients. If you have a way of calculating receivables over 180 days, compare that number against 1% of your gross annual agency revenue. As we value insurance agencies throughout the United States, receivables over 180 days are considered bad debts. Bad debts more than 1% of agency income is considered a problem.
If these bench mark indicators reflect your agency as having collection problems, consider creating an action plan for each client who is traditionally in arrears over 45 days. Whether you use direct billing, premium financing or convert your client into a prompt payer, you should target 15% to 20% improvements in your receivables over 45 days every year. A realistic goal is to eliminate all receivables over 45 days within five years. Many agents have taken much more aggressive actions because of bad prior experiences. Our clients who have requested assistance in the creation and implementation of collection programs usually do so after one of their larger customers (who have always been good for the premium) sells, goes bankrupt or leaves for another agency with many of thousands of dollars in arrears. Don’t let this happen to you.