Search
 

Trust is important in more ways than one

Beware the "expert" who ignores the trust ratio, especially in five situations.

By Chris Burand | Updated on June 01, 2009

Trust is important when building relationships with your clients. But another kind of trust is just as critical to agency health: the trust ratio. If your internally generated financial reports don’t mention trust ratio, then you’re not managing your financials adequately. If your financial adviser has never mentioned your agency’s trust ratio, then the picture of your agency’s health has a huge, gaping hole. The trust ratio measures whether the agency has spent someone else’s money. Once an agency is out of trust, they either have to find cash somewhere else to get back into trust, or continue to pay their carriers with other customers’ money–like a Ponzi scheme. The state and federal governments have laws prohibiting spending money that does not belong to you, especially if you are holding that money in trust. Almost all independent agencies hold money in trust for their clients and carriers, so even if an agency is not required to establish a separate trust account, the agency must still be in trust. Trust ratio is cash plus collectible premiums receivable, minus premiums payable and binder bill or pre-bill. Trust ratio must be 1.0 or greater and a ratio of 1.1 or greater is even better. Based on my experience, at least 40 percent of agencies are out of trust. This means a large proportion of agencies are not managing their balance sheets well. The credit crisis will eliminate many of these agencies, just as it is eliminating banks and firms that have not managed their balance sheets well.

Beware the “expert” who ignores the trust ratio, especially in the following situations:

Want to continue reading?
Become a Free
PropertyCasualty360 Digital Reader.

INCLUDED IN A DIGITAL MEMBERSHIP:

  • All PropertyCasualty360.com news coverage, best practices, and in-depth analysis.
  • Educational webcasts, resources from industry leaders, and informative newsletters.
  • Other award-winning websites including BenefitsPRO.com and ThinkAdvisor.com.

Already have an account?

NOT FOR REPRINT

© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.

Dig Deeper

Recommended Stories

PropertyCasualty360

Join PropertyCasualty360

Don’t miss crucial news and insights you need to make informed decisions for your P&C insurance business. Join PropertyCasualty360.com now!

  • Unlimited access to PropertyCasualty360.com - your roadmap to thriving in a disrupted environment
  • Access to other award-winning ALM websites including BenefitsPRO.com, ThinkAdvisor.com and Law.com
  • Exclusive discounts on PropertyCasualty360, National Underwriter, Claims and ALM events

Already have an account? Sign In Now
Join PropertyCasualty360

Copyright © 2024 ALM Global, LLC. All Rights Reserved.