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:

1 Agency buy-sell agreements: If an agency is out of trust, its value is diminished, a critical distinction to consider in agency buy-sell agreements. Most agreements ignore the impact of the trust ratio and many agencies with poorly written agreements have a huge problem–they just don't know it yet. The issue will come to light when an out-of-trust agency's buy-sell is triggered and one partner must pay the other partner more than the agency is worth. The situation for the buying partner is exacerbated because not only is he short on his trust ratio, but now he has to make payments (over-payments, actually) to his ex-partner. Many agents in this situation discover they don't have enough money to pay their carriers, their partners and their employees in the same month.