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How to Protect Your Agency’s Trust Account

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Mar62025
trust account
trust account

Insurance agencies move significant amounts of funds through their accounts, particularly when they keep premium deposits in trust accounts before transferring them to insurers.

Like any business that has significant cash flow, it’s vitally important for insurance brokerages to have their operations buttoned up tightly to protect against financial fraud. This is especially so due to the unique nature of insurance agencies, which sit at the nexus of the relationship between policyholders and insurers.

And the larger an agency’s premium volume is, the greater the risk rises for fraud. Risk is present whether transactions are conducted by check, deposit, wire or ACH (automated clearing house).

There are a number of financial steps in an insurance agency’s operations that pose the risk of intrusion and fraud:

  • Collecting premiums,
  • Holding premium deposits in trust accounts before they are transferred to the carrier,
  • Administering payroll and benefits,
  • Receiving and paying commissions to agents, and
  • Paying vendors with checks.

 

Each of these steps needs its own set of procedures, fraud-prevention protocols and regular monitoring to ensure there is no leakage.

There are two types of fraud that pose a threat to insurance brokerages: internal fraud by company employees or managers, and external fraud, these days mostly consisting of cyber actors attacking companies with e-mail compromise scams to access financial databases.

In this article, we’ll look at the internal threat to agencies, particularly to their most sacred of holdings: the premium trust account.

The biggest area of concern for insurance brokerages is a rogue employee skimming money from the trust account or creating bogus invoices for premiums that are collected and posted in the trust account and not paid to the insurer.

It’s important that you have protocols in place to reduce the chances of this type of fraud. If your agency suddenly finds itself out of trust, the burden of trying to catch up on insurance premium payments on behalf of your clients can severely hamper the viability of your operations.

On top of that, and fodder for an added incentive to keep your trust accounts secure: Many insurance brokers have gone to jail for collecting premiums and not paying their insurers.

It goes without saying that brokerages need to separate insurance premiums from their operating bank account to avoid co-mingling the funds. The trust account should be maintained in a federally insured financial institution.

Withdrawals from a trust account should be limited to:

  • Payment of premiums to insurers;
  • Payment of return premiums to insureds; or
  • Transfer of commissions to an operating account.

 

You can ensure that the premiums you receive in your capacity as a fiduciary are recorded correctly, deposited promptly and not easily misappropriated, by:

  • Recording premium funds received in a pre-numbered receipt book in duplicate.
  • Recording checks and cash payments on a deposit slip that specifies deposit date, payment method, check number, and amount. This way, you can quickly reconcile any differences between the total on the deposit slip and the grand total in the receipt
  • After making a deposit, comparing the bank receipt to the total on the deposit slip, and reconciling any differences. You should segregate staff duties, meaning that one of your staff deals with receipts and another deposit process.
  • Securing blank check stocks and signature stamps and auditing them regularly.
  • Establishing best accounting practices by limiting check-signing authority to designated individuals. For checks and wire transfers over a certain value, you should require dual signatures.
  • Conducting comprehensive audits that specifically look for fraud. Surprise audits are particularly effective because an employee who may be stealing will not have time to alter, destroy or misplace records and other evidence.
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