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A look at the pros and cons of direct bill reconciliation
One of the most prevalent accounting-related discussion and training topics is direct bill reconciliation. While most agency automation systems have several ways to approach the task, there is still a wide range of opinions as to whether this process is really necessary.
First, the basics. What does direct bill reconciliation really mean? In the purest sense, it means that the agency has some method for recording a transaction at the point of policy or endorsement issuance. When commission statements arrive from the carriers, each item is compared and "checked off" as paid by the carrier in the agency automation system.
The primary reason for doing this activity is to make sure the agency is receiving the money from the carrier. It also helps identify and correct "internal" transaction errors, The process should also provide a means to identify open or unpaid items from the carrier, much the same way an agency bill receivables report would identify what clients owe the agency in uncollected premium billed.
Sounds reasonable and simple, doesn't it? Yet as an industry, we're not quite ready to embrace the practice universally. Objections range from, "It takes too much time," to "You don't catch enough mistakes to make it worth your time," to "That's why we use direct bill, so we wouldn't have to track payments."
Not seeing the forest for the trees
"It takes too much time" is the most common objection that agencies have to direct bill reconciliation. If the agency has never formally reconciled its direct bill statements, or the previous management system did not have the capability, it is easy to look at the process superficially and decide that it's more daunting than it actually is. Yet, if you look at all the other issues surrounding the reconciliation process, it's surprising how much time is lost dealing with matters that wouldn't arise if the agency reconciled its direct bill statements.
One agency I know of does a significant amount of direct bill business, yet the decision makers believe it's a waste of time to reconcile the direct bill statement.
However, the agency also did not want to pay its producers direct bill commission until the carrier...