COLLECTIONS
The purpose of a collection system is to collect money owed to the agency without alienating the insured. In this section, we will answer the following questions:
- Who should do the collecting?
- What are the steps to developing an effective collection system?
- When should you collect?
- Why must every agency set a goal concerning collections?
OVERVIEW
Who Should Do the collecting?
One staff person should be responsible for the collection system. This person should be the bookkeeper, financial manager, or another individual in the accounting department.
Do not involve the producer in collecting unpaid premiums. A producer cannot be the 'good guy' who develops a friendly relationship with the insured and then the 'bad guy' at collection time.
What Are the Steps to Developing an Effective Collection System?
1. Appoint a responsible collection manager.
2. Establish a list of key accounts (the agency's largest and best accounts), which are not subject to automatic collection rules. These accounts receive special attention by telephone from the collection manager.
3. Establish an agreement with CSRs and anyone who processes new and renewal policies that a policy inception date cannot go by without a binder and a billing.
4. Proceed to get payment within 15 days of the renewal date, or issue a notice of cancellation directly to the insured (with the exception of previously agreed-upon key accounts). Use either an automated aged-accounts receivable printout or your manual bookkeeping system.
5. Educate all producers, agency staff people, and insureds regarding the collection policy of the agency.
6. All existing past-due accounts must be called, then followed up by a letter that advises them to pay the balance due within 10 days or pay a substantial deposit and sign an installment notice for the balance. If you have some bad accounts, it's wiser to cancel them and turn the balance over to an attorney immediately for collection. Waiting only makes matters worse from a collection standpoint.
When Should You Collect?
New and Renewal Business. The producer must tell the insured exactly what the collection policy of the agency is, how it works, and that company credit procedures do not allow the agency to make exceptions.
The producer must collect at least 25% or more of the premium with this binder. (Make sure insureds understand what is meant by needing this amount now to 'bind the contract.')
If the binder is mailed with invoice attached, be sure to explain the need for the deposit 'by return mail, to bind the contract. 'You may wish to type on the binder 'If payment is not received within 15 days after effective date, this coverage will be rescinded.'
In the event that the insured cannot pay the full premium within 15 days of the effective date, suggest premium financing.
If the balance is not paid within the time frame given, send a direct notice of cancellation if you have the authority to do so; if not, request that the company send direct notice. (Companies usually ask for a written request.)
Recommend to the insured that a due date on the first of the month might be advantageous because:
- For the insured, this simplifies payroll reporting, and makes for timely installment billings and uniformity of handling.
- For the agency, there's an average of 15 days of additional investment income, it's easier to collect, and it conforms to agency accounting procedures.
Endorsements, Audits, Installments. Since the credit period your agency receives to collect this type of additional premium is usually shorter than that given on a new or renewal premium, it is imperative that the request for payment be stated very clearly when an endorsement, audit, or installment is sent out or delivered to the insured.
Remember:
- Audits are fully earned and often cannot be turned back to the company for direct collection.
- Installments, if not collected when due, can result in an earned premium larger than the deposits when you finally do cancel. These may not be collectible.
- Endorsements, if not collected when charged, may end up being due at the end of the policy period, when it's likely they cannot be collected.
Why Must Every Agency Establish a Goal Concerning Collections?
There are three reasons why this is important:
1. Bad debts are bottom-line losses.
2. Large account receivable balances reduce interest income.
3. Unpaid accounts turned back to the company indicate bad management practices to the company, often resulting in canceled contracts or stricter underwriting attitudes.
Let's look at the steps that occur during a 30-day cycle:
1-31 DAYS: Producer orders invoice
Policy inception date
15 DAYS: Reminder letter sent
Direct notice of cancellation or picks up policies to return company for flat cancellation
15 DAYS: Date agency responsible for paying premium
These letters may be sent to an insured who has not paid within five days after policy inception.