Insurance Billing 101
The insurance market is huge and growing. But when it comes to collecting those payments, insurance is a lot more complicated than most goods or services. We’ll take a look at the factors that go into calculating an insurance bill, and what options companies have for billing methods.
What Makes Insurance Billing Complicated?
The reason why insurance billing is so complicated can be boiled down to one thing: state-by-state differences. Since every state makes its own rules for insurance, the requirements to stay compliant can vary significantly. Businesses that sell insurance in multiple states need to pay close attention to each state’s rules (or work with a partner that can help).
Here are 5 things that can make billing for insurance complicated:
1. Taxes and fees
Every state imposes its own taxes and fees, sometimes with different guidelines for how they should be collected. This means that if you sell insurance in fifty states, you need to stay up to date with fifty sets of rules for when and how to add taxes to your customer’s bill.
Different insurance products can also have their own rules, depending on both the type of product and its regulatory status. Admitted products, which are products that have met regulations set by the state’s Department of Insurance, have most (but not all) taxes and fees included in the premium. For non-admitted products, however, taxes and fees are billed separately.
Taxes and fees can cause complexity for more than just the policyholder’s bill. Some are commissioned on, meaning that they’re included in the amount calculated for an insurance seller’s commission, and others are not. This is yet another set of rules an insurance organization needs to track in their billing.
2. Installment variations
Besides just having different rules about how taxes can be charged, different states may have differing rules about how to charge for the premium itself.
As we saw earlier, the premium is the cost of insurance for the entire coverage period, frequently six months or a year. Going back to our earlier example: say an insurance policy covers a 12-month period for a premium of $600, with an additional $120 in taxes and fees. Depending on the state, the premium might be billed a number of different ways:
In installments, with all taxes and fees paid upfront. For our example, this would mean the first month's payment would be $170 ($50 for the premium, $120 for the taxes and fees). The subsequent 11 installments would be $50 each (premium only).
In installments, evenly divided throughout the term. For our example, this would mean twelve payments of $60 ($50 for the premium, plus $10 for taxes and fees).
In installments, skipping taxes and fees for the first month. For our example, this would mean a payment of $50 for the first month, then around $60.90 for each month after (with a few pennies’ variation between months, since $120 does not divide evenly by 11 months).
3. Non-payment cancellations
If the insured doesn’t pay their premium, what happens? The answer depends on the state. Usually you’ll send a notice that their policy will be canceled on a certain date unless they pay their bill, but the way that notice is sent may be dictated by state requirements. Some states mandate much longer notice periods before a policy can be canceled for non-payment. States may also have specific requirements around the language used in the notice, and how it’s delivered to the policyholder.
If the policyholder cancels their policy partway through the term, they may be entitled to a refund. The amount of that refund, however, can be complicated to compute.
If the entire premium was paid upfront, how much of the term has passed? The appropriate amount to refund might vary if the policyholder cancels near the beginning of the month, versus near the end. Refunds might also be prorated to account for the part of the term that’s already over, in which case the amount refunded might vary based on the day of cancellation. Even the time remaining in the term may not be straightforward to calculate - different insurance products use different calendar types, and the number of days in a “year” or “month” can vary.
Separate from the premium are the taxes and fees. Depending on the situation, these may or may not be part of the refund. Some taxes and fees are considered fully “earned” at the beginning of the installment period or at payment - which means this amount would not be returned to a policyholder who cancels early. Determining which taxes and fees are included (and which aren’t) is an important part of any insurance refund calculation.
5. Midterm endorsements, and reconciliations
Any time an insurance policy’s coverages change, the premium amount changes too. If it comes time to renew a policy and the insured decides to add or remove coverages, the billing is fairly straightforward - the premium for the next period will reflect the new coverages.
If the policyholder wants to add new coverages before their policy term ends, however, it’s called a midterm endorsement. This is where things can get complicated, especially if the policyholder has already made payments toward the old premium amount. The difference between the old and new premium will need to be charged or refunded to the policyholder as a reconciliation. This isn’t as simple as just charging the difference between the old and new premium. The amount required for the reconciliation will depend on the time left in the policy, the amount already paid, and more.
Insurance Billing Methods: Direct Billing vs Agency Billing
We’ve looked at some of the factors that add complexity to calculating an insurance bill. However, determining the amount owed by the insured isn’t the end of it. There are multiple methods for how the policyholder’s premium can be collected.
The main reason for this relates to how insurance is sold. Many companies that sell insurance, like insurtechs, don’t build their own insurance product in-house. Instead, they partner with another company that’s already done that work to offer their product, whether that's an insurance carrier or a white-label insurance-as-a-service provider.
These companies then have two options for choosing a billing method: direct billing, or agency billing.
What is direct billing?
In direct billing, the policyholder pays the insurance carrier directly. With this form of billing, the company that sells the insurance is paid a commission after the carrier has received the premium.
With direct billing, the insurance carrier is responsible for all the billing issues we discussed previously, from taxes and fees to refunds, cancellations, and premiums. This can make it significantly easier for the company selling the insurance to get started, as they don’t have to build their own billing function around the product.
Because the carrier or insurance-as-a-service partner already has a functional billing system for the specific insurance product being offered, all the distributing company would need to do is build an integration to their partner. This can mean a substantial increase in time-to-market with a new insurance product.
What is agency billing?
With agency billing, the policyholder makes payments to the insurance distributor (i.e., the company selling the insurance product). With this form of billing, the distributor collects the commission upfront and makes retroactive, monthly payments to the insurance carrier. With agency billing, the company selling the insurance is responsible for calculating the amount owed, including taxes, fees, and any refund issues. The distributor is also responsible for the actual collection of money, which means they either need to integrate with a payment platform or build one from scratch.
This isn’t necessarily a hurdle; businesses that sell goods or services online likely already have integrated billing capabilities that allow them to accept digital payments. For example, a business that sells pet products online would already have online payment infrastructure, which could likely be used for embedded pet insurance. This has the added benefit of keeping all of the company’s business data in one place. However, some payment platforms can present user experience challenges, like policyholders having to re-enter personal information on the payment platform, after already providing it on the insurance application.
For businesses that aren’t yet set up to take payments, this is a function that would need to be built out before offering insurance with the agency billing method. In almost all cases, integrating with a best-in-class payment platform will be faster and more cost-effective than trying to build a proprietary billing system in-house.
Learn more about how Boost's platform can help you manage insurance billing complexity, or dive into building your insurance program with our comprehensive guide.