Review of AM Best’s DUAE Assessment Criteria Reveals a Range of Outcomes
In February 2022, AM Best published its new methodology and criteria on Performance Assessments for Delegated Underwriting Authority Enterprises (DUAEs). This new assessment is not an evaluation relating to credit quality, but rather an assessment “to provide transparency to the market and inform the industry of a DUAE’s ability to perform services on behalf of its insurance partners”.
DUAEs will have to voluntarily request a Performance Assessment from AM Best. The Performance Assessment analysis encompasses five components: Underwriting Capabilities, Governance and Internal Controls, and Financial Condition will receive a score out of 10 points, whereas Organizational Talent and Relationships will receive a score out of five points. The scores are aggregated and then used to define the DUAEs overall Performance Assessment. Consideration will be given to a DUAE’s size and complexity.
The Performance Assessment process will be interactive between AM Best and the DUAE’s management. The interactive process entails gathering information, engaging with clients through a formal management meeting and assessing key factors, followed by an assessment committee and public dissemination if the client agrees.
In April 2022, AM Best assigned Performance Assessments to three DUAEs. Castel Underwriting Agencies Limited (United Kingdom) and Castel Underwriting Europe B.V. (Netherlands) were assigned a PA-2 (Excellent). Cargo Risk Corporation (US) was assigned a PA-3 (Strong). First Indemnity Insurance Agency, Inc. was assigned a PA-3 (Strong). Some common themes underpinning these initial assessments include underwriting processes and practices, consistency of revenue and earnings, and governance and internal controls. Program growth and opportunities are also a key factor. Scores and rationales for each assessment category, along with the number of active programs and program volume have been disclosed in AM Best’s assessment reports.
The market has a mixed response with some viewing the move to assign Performance Assessments to MGAs as a validation of the MGA model, its growing maturity and sophistication. Others view the move as unnecessary and with many insurers already having existing sophisticated due diligence approaches.
As a result, the overall impact of AM Best’s assessment guidelines on the MGA market and its stakeholders is not clear-cut. As the situation evolves, we will continue to monitor market reactions and review how AM Best’s assessments can be best used for insurers looking to explore further analysis behind growth opportunities.
Moderate to High Impact
Most participants believe some material impact will result from AM Best’s assessment deployment, but there will be gradual uptake.
Large MGAs will have an advantage due to the costs associated with acquiring a Performance Assessment. Some insurers may ultimately require an MGA to have an AM Best Performance Assessment when considering whether to partner with them. However, smaller MGAs may not have the discretionary funds to obtain an assessment and therefore could be excluded from these potential partnerships.
Assessments could present a higher barrier to entry for start-ups. Since start-up MGAs have no performance record on which to base an assessment, they are less likely to be eligible for one regardless of whether they can afford it.
Alternatively, start-ups and NewCo MGAs could gain an immediate advantage within the market if AM Best assigns a favorable assessment. At the same time, these start-up MGAs would be assessed more conservatively, and their assessments will generally be lower. Large established insurers may also not agree with the potential assessment for their organization or the introduction of another annual third-party audit.
For (re)insurers that have less experience working with MGAs, the comfort provided by an assessment would be helpful. More capacity might be drawn to MGAs, creating greater competition for programs.
If insurers rely on AM Best’s Performance Assessments to inform their partnerships, this could lead to a widening pool of MGAs that they decide to partner with. Insurers might incorporate assessment ‘triggers’ into agreements; for example, if a partner MGA’s assessment improves, it may then be eligible to partner with certain insurers. Alternatively, partnerships could be terminated if an MGA’s assessment is lowered. The impact could lead to a greater turnover of programs over time.
Low Impact on the MGA Market
A significant share of MGA interviewees believed that any potential impact will be minimal, highlighting that insurers seeking to enter the MGA space are already active. Additionally, markets that are already active generally have sophisticated due diligence processes and have little need for outside help.
Some interviewees expressed that an overreliance on AM Best’s Performance Assessment to evaluate MGAs could be risky.
AM Best’s Performance Assessment for DUAEs aims “to provide transparency to the market and inform the industry of a DUAE’s ability to perform services on behalf of its insurance partners”. The market has a mixed response to Performance Assessments with some viewing it as a validation of the MGA model and its growth and maturity, and helpful for (re)insurers with less experience working with MGAs, while others view it as unnecessary.
If insurers rely on AM Best’s Performance Assessments to inform their partnerships, they might incorporate ‘triggers’ into agreements, potentially leading to growth in partnership arrangements between insurers and DUAEs.
Markets that are already active in this segment generally have sophisticated due diligence processes and may not see a need for an additional third-party audit or opinion.