With the volume of premium generated by managing general agents and other delegated underwriting authority enterprises (DUAEs) rocketing skyward in recent years, AM Best has decided it is time to deliver assessments of these entities.
“What we’ve seen is really an explosion of how much premium is generated from these entities,” said Greg Williams, senior director of Ratings, speaking on a video posted on AM Best’s website. Globally, the amount of premium attributed to DUAEs has doubled in the last decade, Williams said.
On the video, and in a media statement, AM Best analysts announced the publication of “Best’s Performance Assessment for Delegated Underwriting Authority Enterprises,” and they are requesting comments from industry market participants and other interested parties on the proposed methodology for assessing MGA-like entities outlined in the draft.
AM Best uses the DUAE acronym to encompass entities other than MGAs, such as managing general underwriters, coverholders, program administrators, program underwriters, underwriting agencies, direct authorizations and appointed representatives.
The common theme, no matter what the title, is that it’s a third-party entity appointed by insurers or reinsurers to perform various functions on their behalf. The functions could include underwriting, claims settlement or administrative tasks, Williams said in the video.
And that’s what a performance assessment is meant to address — the ability of a DUAE to perform services on behalf of an insurer or reinsurer, said Maura McGuigan, director, Credit Rating Criteria, in the video. She distinguished PAs from financial strength ratings of insurers or reinsurers, noting that DUAEs are not risk-bearing entities.
Historically, insurers and reinsurers have used DUAEs to gain access to specialty and niche markets, broaden distribution and take advantage of their specialty underwriting expertise.
“Best’s PA is a forward-looking, independent and objective non-credit opinion,” the rating agency said in its press statement.
Separately, McGuigan and Mahesh Mistry, senior director of Credit Rating Criteria, authored an article providing an overview of the five factors that AM Best plans to evaluate to come up with an overall PA. (See related article, “AM Best Explains DUAE Performance Assessment.”)
The draft document itself anticipates that new DUAEs, including insurtech MGAs, will seek assessments.
“For example, an insurtech that wants to increase its profitability may change its business model to that of a DUAE. In other cases, a new company may be more of a traditional startup venture lacking a financial performance history. Due to this, it is likely that AM Best would assess startup DUAEs more conservatively, and their PAs will generally be lower,” the draft document says.
The document goes on to list potential requirements for those entities that have been operating as DUAEs for less than two fiscal years.
Among other things, the draft talks about the need for AM Best analysts to be able to review financial statement and a two-year go-forward business plan outlining the DUAE’s partnership criteria and describing products offered and pricing standards, as well as need to have experience management, appropriate staffing and operational infrastructure.
Given the limited public disclosure on MGA-like companies, Williams said he believes the PAs can help DUAEs to better promote themselves, while at the same time giving comfort to insurers and brokers, which can use the PAs to make more informed decisions about partnerships.
AM Best said that written comments on the draft should be submitted in writing by email to email@example.com no later than May 3, 2021.
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