Back to basics for brokers accounting

In an era of ever-increasing compliance requirements, it is a fact that there will be more pressure on insurance brokers to produce accounts that are both transparent and detailed. Brokers' auditors will be under similar pressure to examine both the numbers and the significance behind these figures.

Perhaps, in a world of complexity, the brokers who pass these rigorous examinations will be those who take the time to draw breath and examine their IT systems and ensure that these will provide the numbers in a way that manages the technique of being both intelligible and informative.

Best practice is often a matter of drawing on the most successful ideas of the past and the starting point may perhaps be a fundamental assessment of the business mix of the broker and having the courage to match the accounting and IT systems to the business. All too often brokers' business operations have had to fit in with systems that do not reflect their real needs. In these situations the financial reports and accounts will never be coaxed easily from the system.

Getting back to basics

If the best advice is to go back to basics, let us examine the fundamental parts of the business, allied to current and likely reporting requirements, and design the IT and accounting functions around the business.

A broker handling corporate business will need to be aware of the need to identify the geographical source of the business and may also have a need to break down premium volumes by different sectors such as direct or reinsurance, motor or commercial combined. A good IT system will reflect the needs of the business accounting and will take much of the work out of analysis. The broker's own funds will be created by a mixture of fees and commission and it may be important to be able to split these types of revenue and, with an increasing requirement for transparency, to be able to demonstrate accurately and quickly that no commission is being taken on an account where the broker has agreed to work on a fee basis.

It is also important for an accounting system to be capable of identifying a broker's revenue that may reflect work to be carried out in future accounting periods and not solely linked to the period of the policy. An example would be on an account where much of the work may relate to handling claims, which will run over several years and where it is unsound accounting practice to book all of the revenue in the current period. Designing or adapting the accounting system to reflect this reality may help to prevent many hours of debate and discord with auditors.

International transactions

The intermediary with an international book of business will need to ensure that the system can cope with booking premium transactions at one provisional rate of exchange but can then adapt to the true exchange rate applicable at the time the funds are received from the client. There should be an agreement with insurers that, on any transaction where convertible currencies are applicable, the premiums will be remitted utilising the rate of exchange at the time of receipt of the premium.

Whatever the political considerations, there will be many broking accountants who bless the day that the euro reduced the number of convertible currencies.

On this subject, insurance carriers and brokers who deal regularly with business, for example, from Australia or Hong Kong, may be well advised to hold accounts in those local currencies. They may well be pleasantly surprised at the beneficial effects of avoiding exchange-rate losses and bank charges created in the chain of conversion.

A broker with a book of predominantly UK-based personal lines of business may have less complex accounting issues but will need to be cognisant of having an accounting system that fits their own needs and is not cluttered by too many unnecessary gimmicks.

Regardless of the business mix, the fundamentals are usually similar.

The accounts must distinguish between money due to or from insurers, clients and third parties and that which is due to or from the broker's own funds.

The premiums payable to insurers should carry a flag or marker to denote when the money is payable to the market. It may be necessary to identify outstanding premiums that are both overdue from the client and have also become 'late paid' to the market.

It is likely that market regulators and, therefore, auditors will have to pay closer attention to the volumes and percentages of overdue premiums, which may indicate that insufficient attention is being given by the broker to credit control. It is safe to say that more businesses have failed through bad cash flow than through a lack of business; failure to devote sufficient resource and management attention to credit control is often a key factor.

The principals of broking businesses should also be considering whether their accounting systems are producing meaningful management information.

While the requirements of regulators and auditors are an unavoidable reality, it is far more important that senior management is able to make key decisions based on good management reports allied to business feel.

Identifying sectors within a mixed business that are profitable has often been dependent on gut instinct, but a system that helps match real costs against revenue earned from different sectors may be a more convincing tool for investors and owners.

In order to achieve the desired quality of management information, there is no substitute for investing some time in ensuring that the IT system is designed or modified to produce a sufficient level of breakdown in costs and expenses. A broker should be able to ascertain if, for example, business handled on behalf of overseas-based clients is producing 30% of his revenue but is eating up 50% of his costs and expenses.

It does not require rocket science to design system codings for revenue and expenses, which can ultimately be translated into useful management information. Through a lack of thought at the stage of designing or enhancing a system, however, the analysis may lack both science and objectivity.

With this in mind, it may be necessary, for example, to divide staff costs and occupancy expenses into product or geographical sectors.

Time and resources

Essential elements of any broker's activities are the time and resources devoted to new business development and marketing. It is good business planning to ensure that this development time is factored into the overall expenses but it is equally prudent to measure this resource against revenue that is ultimately produced. Ineffective utilisation of time and resources is arguably even more costly than sitting still and hoping that new business will flow in as a matter of course. There is no virtue in creating a position of 'paralysis by analysis', but it is wise to have the best information available to support battle tactics. Most brokers would acknowledge that business acquisition and defence is akin to planning a battle.

In some companies, the budget process may be regarded as an annual chore that lacks relevance and is geared less to reality than to satisfying the unrealistic expectations of the chief executive or investors. In order for the budget to be effective, the local management of the business need to buy into its significance and will need to make a full contribution to the planning process if they are to fully support it.

During the course of the year, the financial and other achievements will need to be measured against the budget and planned in addition to updated forecasts. Again, the quality of the IT and management information will play a vital role in helping to identify areas in which the business plan may require revision. Many experts will debate the virtues or failings of three or five-year business plans, with the reality being that any plan will need to be reviewed and updated in the light of experience.

Understanding the numbers is a key requisite for taking the business forward - underlining again the importance of an adequate accounting system that reflects the needs of the business.

Outsourcing

A large broker will generally be able to handle its own accounting and reporting requirements, but smaller or medium-sized companies may well need to address the matter of outsourcing some or all of the accounting functions. Whatever the decisions on these matters, it is important that sufficient attention is given to systems that will produce quality information reports that will - first and foremost - help the business and will also address regulatory requirements.

A successful broking company depends primarily on the talents and abilities of its staff. No accounting or IT systems can replace the need for innovation on products and the requirement to produce a service that matches client expectations. The technology should, however, be supporting the business efforts and no broker can expect to survive or prosper unless the numbers can be accurately portrayed and assessed.

Perhaps the key to success is ensuring that the accountants and systems personnel within a broking firm are encouraged or compelled to develop a firm knowledge of the business and its aspirations. Only then can the company expect to have an IT infrastructure that genuinely reflects its requirements.