Introduction

Billing is a critical component of the insurance industry, ensuring that payments for policies are accurately processed and collected. While it might not be glamorous and may be seen as lacking any strategic value, it’s the lifeblood of any insurance operation and the most frequent contact point with an insured or distribution partner. Whether you’re an wholesaler, insurer, or MGA, nailing your billing processes can help streamline operations, improve cash flow and keep customers happy. This post covers the basics of billing, common challenges, and the benefits a modern, software driven billing solution can bring to your billing practices. 

Billing Basics

Billing refers to the process of invoicing, processing payments, and collecting payments. Let’s break it down.

1. What to bill
   Determining what to bill starts with an insurer setting the price for a policy. This is defined as the premium of a policy as well as any fees and taxes associated with that policy.
2. How to bill
   Next, a insurer or MGA will often define how the policy is billed and there are many factors that can contribute to this:
   • Pay-in-full v. Installments
     With pay-in-full, an insured or policyholder pays the entire premium amount upfront at the start of the policy term. With installment billing, an insured or policyholder is allowed to pay for the premium in smaller, periodic payments. This can be on any frequency, such as bi-annually, quarterly or monthly. Additionally, some insurers on certain lines of coverage (like auto) may allow for pay-as-you-go terms. This means installments are calculated on data like usage.
   • Premium finance
     Many business owners would prefer to pay in installments, although some insurers require pay-in-full. Bridging this gap is premium finance: lenders pay the full cost of the policy up front in exchange for a down payment and a committed installment schedule. The premium finance provider assumes the risk if the insured defaults on payment.
   • Agency bill v. Direct bill
     In an agency bill model, the insurance agency handles the billing, collecting premiums from the insured, and then remitting it to the insurer. In a direct billing model, the insurance insurer bills the insured directly. Today, the vast majority of personal lines utilize direct bill and most commercial policies are billed utilizing agent bill.
   • Gross v. Net billing
     In gross billing, the full premium amount, without any deductions, is billed to the agent or broker. Then, in a separate transaction, the MGA or insurer is responsible for paying the agent or broker their commission. In net billing, the agent or broker retains their commission and/or fees and remits the net premium to the MGA or insurer. This distinction is important as it affects cash flow management and the financial responsibilities between the parties involved.
   • Group bill
     Group billing is when a single bill is sent to an entity (like an employer) for a group of insureds. This is typical for health and life policies.
   • Third-party bill
     An insurer sends the bill to a third party like a mortgage lender (mortgagee) or trust, who then pays the premium on behalf of the policyholder from the escrow account. This is typical of homeowners insurance policies.
3. The process
   There are typical steps in a billing process:
   • Generate an invoice: An invoice must be generated which details out the premium, due date and policy information.
   • Send an invoice: An invoice is sent via email, accounting portal or checkout link. Oftentimes, an invoice will be sent along with a notification that a bill is due. 
   • Collect payment: Agency, MGA or Insurer receives payment in the form of credit card, ACH, check or wire. Increasingly, customers are looking for greater flexibility in payment options - utilizing new options like digital wallets such as Apple Pay, Venmo, Zelle, or PayPal.‍
   • Reconciliation: After payments are collected, it's crucial to ensure that the amounts received match the amounts invoiced. Reconciliation involves comparing the incoming payments against the invoices to identify any discrepancies, such as underpayments, overpayments, or missing payments. This step is essential for maintaining accurate financial records and ensuring that all transactions are accounted for.

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Common Issues & Solutions in Billing

While billing may feel intuitive and simple, this process can hit a few bumps. These obstacles can disrupt cash flow and strain customer relationships. Here are some of the most common headaches:

1. Late payments
   ‍Insureds can be delayed in payments of their premium which can disrupt cash-flow and strain operating budgets. An effective solution can be sending automated reminders and implementing late fees to encourage prompt payment.
2. Disputes
   ‍Insureds can dispute whether or not they have paid their premium, or if they have paid the correct amount. In the world of digital payments, a payment dispute is also known as a chargeback and is when a cardholder / insured asks their bank to reverse a charge on their debit or credit card. Dealing with disputes can be disruptive on business as usual and eat up a lot of operational bandwidth. An effective solution can be having clear, documented resolution processes as well as the ability to audit payment amounts quickly. 
3. Non-Payment Cancellations
   ‍Non-payment cancellation is when an insurance company cancels a policy due to an insured’s failure to pay premiums. Each state has different rules for how insurers need to handle non payment cancellations and managing this process can be quite onerous as it requires staying on top of state laws and issuing the correct notifications. An effective solution can be having rules based systems that help drive automation of notifications depending on policyholder data.

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How software can help

Technology has revolutionized the billing process and SaaS platforms like Functional Finance automates many aspects of the billing cycle, thereby creating greater efficiency, reducing costly errors and improving the customer experience. 

1. Reduce costs
   Decrease expenses related to billing operations by eliminating manual tasks with automated invoice generation and lowering costs associated with printing and postage by utilizing Functional Finance’s digital payment options.
2. Enhance the customer experience
   Whether you’re direct to customer for distribution or work through the traditional agent / wholesale ecosystem, provide better customer experience to insureds by offering multiple payment options, billing plans and self servicing through our portal.
3. Improve cash-flow management
   Our smart reporting and automated notifications for payments help drive timely payments, ensure more timely and predictable cash flows for business operations.

Mastering billing practices is crucial for the financial health of your insurance business. By understanding the basics, implementing best practices, and leveraging modern software solutions, you can streamline operations and focus on growth.