Today's Viewpoint: A MarshBerry Publication

Could AM Best’s New Performance Assessment System Put Some DUAEs at a Disadvantage?

The goal of AM Best’s performance assessment system is to measure the success and reliability of DUAEs to help insurers make better decisions when selecting underwriting partners. This new system could pose challenges for certain MGAs and firms.

AM Best Rating System for DUAEs

MarshBerry’s recent article “Analyzing AM Best’s New Performance Assessment (PA) for Delegated Underwriting Authority Enterprises (DUAEs)” showcased how this AM Best rating system aims to bring increased transparency to and information on the effectiveness and trustworthiness of Managing General Agents (MGAs), Managing General Underwriters (MGUs), and other partners of insurance carriers.

AM Best states the goal of the program is “help insurers make more informed decisions when choosing underwriting partners.” However, there may be some unintended consequences for some MGAs, particularly firms with smaller balance sheets and newer firms.

Smaller and Leveraged DUAEs May Receive Lower Ratings for One of the Key Areas of the PA.

One key component of the PA is Financial Condition. This component includes an analysis of financial results and metrics; and one of the three attributes is more heavily weighted than the other two.  The aspects of the DUAE that are assessed here could create a disadvantage for newer or start-up DUAEs.

AM Best is asking for at least two years of audited financial statements. For entities that have been in business for less than two fiscal years, AM Best asks for financial statements for any completed fiscal years and a two-year forward looking business plan to participate in its PA program. AM Best is also testing for stability of income, which a larger, established MGA is more likely to display. 

Additionally, AM Best wants to review debt levels as part of measuring the financial stability of a DUAE. At least with regard to its analysis of carriers, AM Best has not always looked favorably on leverage.  But MGAs are not carriers. Analysts are concerned that AM Best may give a lower score to a reasonably leveraged DUAE (for example 4x Earnings Before Interest, Taxes, Depreciation & Amortization) because it may have different, stricter standards for a firm’s debt levels. Companies wanting to use the new Performance Assessment to evaluate potential clients and partners may want to dig deeper into how AM Best may treat leverage as part of its financial assessment.

Governance and Internal Controls Assessments May be More Difficult for Smaller Firms

Larger MGAs are more likely to have a robust infrastructure which factors into AM Best’s Governance and Internal Controls rating subcategory. AM Best’s requirements for this category include audit and other management reports; policies and procedures; disaster recovery plan; key person risk plan; and service measures. Smaller DUAEs may have invested less in infrastructure compared to a larger entity partly because they may not be as necessary for daily operations of a smaller organization. Larger companies also have more resources to spend on building out these capabilities.

The Organizational Talent Sub-Category May also be Challenging for Start-Ups

Within Organizational Talent a tenure metric is analyzed which AM Best will compare with “prevailing industry standards.” A higher tenure metric would be positive for a DUAE’s performance assessment as AM Best considers a longer tenured employee someone who can establish a trusting relationship with a client and provide a better customer experience. This tenure metric will also evaluate the number of employees at the DUAE. Smaller, newer DUAEs will likely rate less favorably than more established competitors given the shorter operating history.

While AM Best’s new performance assessments may provide more information to carriers and other partners and clients of DUAEs, there is the risk that some participating DUAEs may be at a competitive disadvantage. Smaller and newer MGAs may be efficient and have excellent financials and operations, but be awarded a lower PA for multiple reasons, including having a shorter track record of historical performance and financials. Companies who are looking to use the PAs to evaluate a potential partner or client may want to adjust their understanding of a PA score to take into consideration these potential shortcomings.

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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