AM Best officially launched its Performance Assessment (PA) methodology for assessing Delegated Underwriting Authority Enterprises (DUAEs), with the intent to provide greater transparency for the insurance industry. DUAEs, categorized as managing general agents (MGAs), managing general underwriters, coverholders, program administrators, program underwriters, underwriting agencies, direct authorizations and appointed representatives, can provide the PA information for interested entities, including investors, venture capitalists, and carriers who may use the PA to help evaluate potential partners and clients.
AM Best describes its new concept as “forward-looking, independent and objective non-credit opinion indicative of a DUAE’s relative ability to perform services on behalf of its insurance partners.” AM Best commented that the new assessment will not impact an insurer’s financial strength rating and is not a credit rating. There is no requirement for a DUAE to obtain a PA, and participation is voluntary. Furthermore, there is no company size threshold to receive a PA.
While the new AM Best PA may be a resource for companies seeking to get more information about an DUAE, some carriers and MGAs have concerns and questions about the new offering. For example, some carriers are concerned that the PA may differ strongly from the carrier’s view of an MGA. Additionally, they also question “If AM Best ranks MGAs as poor, will that affect a carrier’s rating that supports them?” Some MGAs that are smaller and newer may also be nervous that AM Best’s new PA system could give them lower scores compared to larger, more well-funded competitors, given what the PA measures.
What Does a Performance Assessment (PA) Measure?
AM Best believes the key assessment indicators show how well a DUAE is able to perform services on behalf of its insurance partners. A higher PA correlates with a DUAE having better long-term stability and prospects, driven by a strong financial profile, effective underwriting, provide high-level, quality service, and maintain strong business and partner relationships.
To come up with the total score, AM Best totals the scores given in five categories. Three of them – underwriting capabilities, financial condition, and governance and internal controls – are more heavily weighted and will be assigned a score of two to ten, with ten being the top or “excellent” score. The remaining two categories, organizational talent and depth and breadth of relationships are assigned a score of one through five with five being the top score.
What are the Five Sub-Categories as Determined by AM Best?
- Financial Condition: Determined by analyzing audited financial statements, opportunities for risk-sharing, Errors & Omissions coverage to protect insurers, and proof of two or more years of positive net worth. A firm’s capitalization, cash flow, income, premium trust history, and leverage and debt are also considered.
- Underwriting Capabilities: This assessment may include risk-adjusted performance metrics and audits by the risk-bearing organizations the DUAE writes business on behalf of. Factors include a company’s most recent underwriting performance, expected future performance, historical trends, measures of “central tendency,” and volatility of results. The AM Best rating scale also looks at a DUAE’s proprietary data and analytics; commission structure, claims management, and technology in the underwriting process.
- Governance and Internal Controls: Aims to check whether risks are managed well across a DUAE. It takes into account the alignment of interest with carriers, brokers and employees. It also assesses the systems shared between DUAEs and their carrier partners, or compatibility of data systems.
- Organizational Talent: Measures the strength of a company’s relationships with its staff and partnerships which may impact the company’s client relationships. Metrics analyzed include tenure, training programs, executive experience, and organizational structure for the organizational talent component of the assessment.
- Depth and Breadth of Relationships: A well-rounded portfolio in its area of expertise helps to spread risk and ensure the DUAE’s longevity as it hedges against termination of major partners. Areas taken into account include the number of markets or insurers supporting a DUAE, the consistency of relationships, retention of clients, and geographical reach of programs offered by the DUAE.
AM Best continues to provide more details around the frequency of assessments, time duration of the review process (8-12 weeks) and options to keep PAs private and unpublished.
Overall, the AM Best PA may help some entities in the insurance space. However, some DUAEs and carriers are asking questions about it and have concerns that it may have unintended impacts on existing businesses of both carriers and MGAs. Look for Part 2 later this week where we discuss potential unintended consequences for some MGAs.
If you have questions about Today’s ViewPoint or would like to learn more about activity in the specialty markets, please email or call Gerard Vecchio, Managing Director, at 212.972.4886.
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