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Part 1: The AM Best Performance Assessment for DUAEs

How Should MGAs and MGUs React?

AM Best recently launched its Performance Assessment for Delegated Underwriting Authority Enterprises (DUAEs) which includes MGAs and MGUs, among others. The Performance Assessment (PA) is a forward-looking opinion of the DUAE’s capabilities in performing the functions required by its carriers and/or reinsurers.

The Performance Assessment is meant to provide additional data to market participants on DUAE performance. Carriers want to know how established, competent, and financially solvent their partners are. Likewise, investors such as Venture Capitalists and Private Equity firms want to know more about the DUAEs in which they might invest. The PA is not, however, a Credit Rating, and does not (yet) have the kind of “gravity” in the market and amongst the participants that the AM Best Credit Rating has for carriers.

AM Best has already laid out several high-level objectives for the initiative, in “Best’s Performance Assessment for Delegated Underwriting Authority Enterprises” by Williams, Raber and Mistry. SRA Watchtower also conducted a webinar recently on this same topic, the recording can be viewed here.

‍What does AM Best Assess?

AM Best will assess MGAs / MGUs along five major capability components:

Underwriting Capabilities
Governance and Internal Controls
Financial Condition
Organizational Talent
Depth and Breadth of Relationships

Each of the components has between 4 and 10 subcomponents that AM Best rates. Within Underwriting Capabilities, for instance, AM Best will look at 9 subcomponents: Quality of Underwriting, Underwriting Results, Underwriting Competitive Advantage Proprietary Data and Analytics, Commission Structure, Claims Management, Experience of Underwriting Staff, Technology in the Underwriting Process, and Limitations on Exceptions/Risk Appetite. In the Governance and Controls component, the review will consider Alignment of Interests, Binding Contracts, Partnerships with TPAs, etc. Best will grade each sub-component and then roll up a score for the Component.

The assessment contains both quantitative and qualitative subcomponents, e.g., average cycle times from submission to quote delivery or perceived UWG competitive advantage. The major takeaway here is that the Performance Assessment is quite broad and is meant to paint a picture of overall capabilities and vulnerabilities.

Like preparing for a standardized test to get into college or graduate school, you must demonstrate competence across a whole spectrum of subjects – i.e., it’s not enough to be good at just Verbal Reasoning, you must also have a grasp of Mathematics, etc.

‍How do They Score the Assessments?

The five components have the following weightings:

Part 2: The AM Best Performance Assessment for DUAEs

What Does it Mean for MGAs, MGUs, Carriers and Reinsurers?

This is Part 2 of a three-part series on what the AM Best Performance Assessment means for MGAs/MGUs, as well as carriers and reinsurers. In Part 1, we discussed what the AM Best Performance Assessment for DUAEs is and what it is not, and why MGAs and MGUs should be paying attention. Furthermore, we described what it is that AM Best assesses for an MGA / MGU, and how they score their assessments.

You can view Part 1 here:

What does the Performance Assessment Mean for MGAs/MGUs?

On the plus side, doing the PA and obtaining strong ratings provides market signaling to carriers and reinsurers that an MGA / MGU has significant strengths that are valued in the market. It can also help create favorable impressions with banks, private equity companies and potential suitors, which in turn could drive higher valuations. And if the feedback that AM Best provides to MGAs/MGUs is detailed and has the bases for the determinations, it can provide a set of recommendations on how to improve the business and which areas would yield the “biggest bang for the improvement buck.”

Although AM Best has stated that the PA will be less expensive and time-consuming than its credit rating process (1), both hard and soft costs (borne by the MGA/MGU) will be probably an issue.

Managing the results may also be problematic and time-consuming. If an MGA/MGU receives a low grade or disagrees with AM Best, it can opt to keep it private or withdraw from the process, only incurring AM Best’s fees associated with the process. But what are the market signaling effects? Will deferring on the assessment carry with it a negative perception? Will carriers perceive either their prospective or current MGAs/MGUs decision to opt out of the process as “what are they hiding?” or “perhaps they’re not as good as we thought?” These perceptions are likely to change and develop over time, but for now they are a big black hole.

What does the Performance Assessment Mean for Carriers and Reinsurers?

At first glance, the PA could certainly provide supplementary data and a structured process to small carriers and reinsurers regarding their critical business partners. One would assume that larger carriers and reinsurers already have well-developed and rigorous due diligence processes, and thus, although the PA may supplement ongoing MGA/MGU monitoring, it seems quite unlikely that the PA could supplant a carrier’s or reinsurer’s due diligence process altogether. Unless the carriers or reinsurers are very small or currently lack a structured process, they would probably not choose to “outsource” the process to AM Best.

However, the PA may take on a greater weighting in the due diligence process as it gains greater acceptance in the market and possibly reaches “de facto standard” status. There is a future scenario where carriers use the PA as a “coarse” or initial filter when paring down a longer list of potential MGA / MGU partners to the shorter list for further consideration.

Viewed from another angle, the PA provides an initial skills and process roadmap for those contemplating becoming an MGA/MGU.

Stay tuned for Part 3 of this series, where we will discuss which factors MGAs and MGUs should consider when deciding on whether and when to engage in the PA, and the value of doing so.

SRA Watchtower recently conducted a Webinar with several experts from the MGA and MGU space providing their perspectives on this topic. You can view the Webinar here:

Sources:

(1) MGAs Under AM Best’s Microscope, BY GARRY BOOTH, 22 March 2022

Part 3: The AM Best Performance Assessment for DUAEs

To Assess or Not to Assess, That is The Question (or perhaps Assess Later?)

This is Part 3 of a three-part series on what the AM Best Performance Assessment means for MGAs/MGUs, as well as carriers and reinsurers.

In Part 1, we discussed what the AM Best Performance Assessment for DUAEs is and what it is not, and why MGAs and MGUs should be paying attention. Furthermore, we described what it is that AM Best assesses for an MGA / MGU, and how they score their assessments. You can view Part 1 here.

In Part 2, we discussed what the Performance Assessment means for not just MGAs and MGUs, but also carriers and reinsurers. You can view Part 2 here.

‍

Some Factors to Consider Regarding to Assess or Not to Assess…

From our perspective, it all depends on timing and market acceptance.

Right now, AM Best is a known entity, but the Performance Assessment (PA) is not. Thus, the perceptions among all parties involved regarding the PA’s value will vary widely. There are two pure scenarios: 1) A “push” scenario, where obtaining the assessment with a good “report” could be an early adopter advantage regarding marketing efforts or 2) a “pull” version where carriers, reinsurers or financing sources insist or demand that an MGA / MGU gets the assessment prior to consummating a deal or expanding a relationship. The actual result will likely be somewhere between the two, but we are uncertain as to the emphasis.

The PA is now optional but opting out will not be a good choice if the PA gains in importance. Just as with the previous reference to the college admittance process, students could choose to skip the SAT, ACT, etc., and simply rely on the strength of their high school grades, sports accomplishments, work for worthy charities, etc., but most would agree that’s a risky strategy.

The big question here is how steep will the market acceptance and adoption curve be for the PA, and where does it top out? Will carriers, reinsurers and other market participants start to think of this assessment as not only valid but nearly mandatory? How long will it take before 50% of the MGAs and MGUs have done an initial assessment? How long to reach 80%? Will there be a negative reaction to deciding to opt out in 2023, or 2025 or 2028? How much will the market value of having a previously “unrated” segment of the value chain now being held up to an impartial set of standards administered by one of the most influential, if not the most influential, rating institutions in the industry?

Clearly, there is a cost / benefit analysis that MGAs and MGUs must perform before engaging in this exercise. They must answer questions internally on “how do we think we’ll fare on the assessment?,” “will any of our prospective or current partners value this?,” and “do I want to do this early, or wait for others to go through it and get some intelligence prior to making a decision?” Like most important business decisions in 2022, this one is not straightforward, and requires careful consideration and a bit of watching and waiting.

Conclusion

At the moment (October 2022), it is our opinion that in the near-term, the PA will be both less valuable to the larger and more established MGAs/MGUs and perceived as such by them. Given that they already have established relationships, track records and financial heft, receiving a stamp of approval likely doesn’t provide much marginal benefit to them.

For the more aggressive mid-sized MGAs/MGUs looking to establish new carrier and/or reinsurer relationships, receiving a strong PA and making it public would be helpful and potentially accelerate the time-consuming due diligence process, and even provide some overall standardization to the process. However, newer / fledgling companies have a few additional considerations. The benefits for them would be even greater than those of the mid-sized companies if they received high marks, but attaining those high marks may prove difficult, as many of the sub-components are weighted toward financial strength and established relationships, which likely wouldn’t favor new entrants or smaller companies. Those companies will have to find out if AM Best is going to grade them on a curve or on an absolute scale.

We’d like to point out that there could be real value to “prepping for the exam.” If you’re thinking about participating in the PA or looking to prepare, please feel free to reach out to us to find out how we can help. SRA’s Watchtower platform is an Enterprise Risk Management tool specifically tailored to the P&C industry, with pre-built P&C Risk Metrics, Key Performance Indicators, and detailed descriptions of risk maturities. Watchtower’s MGA Capability Assessment is built on the same nimble platform that dozens of Insurance companies and Financial Institutions use today to control Enterprise Risk and is specifically designed to help MGA’s prep for the PA process.

SRA Watchtower recently conducted a Webinar with several experts from the MGA and MGU space providing their perspectives on this topic. You can view the Webinar here.