AM Best’s assessment of delegated underwriting authority enterprises (DUAEs) focuses on five components. The Insurer breaks down the draft methodology…
The ratings agency’s move to assess MGAs, MGUs, program administrators, coverholders and other DUAEs is based on its view that they have become an increasingly important part of the insurance ecosystem.
That means that their relative performance has become an ever-more meaningful driver of the insurers and reinsurers that provide them with capacity.
AM Best explained that it will review qualitative and quantitative factors to determine a DUAE’s relative ability to perform services on behalf of its insurance partners.
The “Best’s Performance Assessment” – or Best’s PA – is effectively an aggregation of its sub-assessments for each of the five key components it looks at.
Typically it will be updated annually but can be reviewed at any time the agency becomes aware of a significant development that could affect the assessment.
A higher overall PA indicates that the DUAE is more likely to achieve long-term stability through effective business underwriting, maintain a strong financial profile, have excellent access to business, provide high-level service, and maintain strong business relationships and governance than another firm that receives a lower PA.
Three components – underwriting capabilities, governance and internal controls, and financial condition – can be scored up to a maximum of ten points each, while organizational talent and depth and breadth of relationships can receive up to a maximum of five points.
With the profitability of business written by an MGA, MGU, program administrator or one of the other DUAE entities key to forming long-lasting relationships with (re)insurers, underwriting capabilities are a core component of the PA process.
AM Best says its analysis will consider a company’s most recent underwriting performance, historical trends, expected future performance, measures of “central tendency”, and volatility of results.
There may be risk-adjusted performance metrics used in the process and audits by the risk-bearing entities the DUAE writes on behalf of may be considered to assess the effectiveness of underwriting controls.
It will look at profitability of portfolios on a gross and net basis, based on both underwriting results and calendar year results. AM Best will also need to understand how the structure of a program benefits all parties in the transaction, including assessing commission, fee and expense structures and reserving approaches.
Its review of underwriting results will include premium and loss histories for the previous three years.
The assessment will also incorporate quantitative analysis of underwriting competitive advantage, including management’s ability to adapt to changes in the operating environment.
AM Best will assess proprietary data and analytics, and the experience of underwriting staff, as well as the use of technology in the underwriting process.
Governance and internal controls
The second core component of the assessment will look at governance and internal controls to ensure risks are managed effectively across a DUAE.
It will consider alignment of interests with brokers, carriers and employees, systems shared between DUAEs and the carriers they partner with, or the compatibility of data if systems are not integrated.
AM Best noted that shared systems tend to increase operational efficiency and the effectiveness of capturing program data in real time.
This component of the assessment will review audits and other management reports, policies and procedures, disaster recovery plans, key person and risk plans.
It will also track service measures such as customer retention percentage, third-party scores, turnaround time on submissions, and quality of claims handling.
It will review binding contracts, broker contracts and partnership with third party administrators.
The third of the components scored with up to ten points considers the financial condition of DUAEs.
AM Best will review the financial strength of firms by assessing audited financial statements, proof of two or more years of positive net worth, opportunities for risk-sharing, E&O coverage to protect (re)insurers and a range of other factors.
Financial metrics will include income, cash flow, capitalization, premium trust account history, leverage and borrowings.
Where a DUAE participates on programs in risk-sharing, AM Best will also assess its capital providers.
AM Best highlighted the importance of personal relationships to the success of DUAEs and said that the organizational talent component of its assessment will gauge the strength or weakness of relationships between a firm and its employees or partnerships and whether these positively or negatively impact its relationships with customers.
“A DUAE with strong talent will have the high-quality and time-tested expertise necessary to ensure the longevity of its customer relationships and program offerings. A DUAE should maintain talent that is appropriate for its size and complexity,” said AM Best.
It will consider tenure – including employee turnover – training programs, executive experience and organizational structure.
Depth and breadth of relationships
The final component that forms part of the draft Best’s PA process is the depth and breadth of relationships.
It will look at the number of programs and markets a DUAE deals with.
“A well-rounded portfolio in a DUAE’s area of expertise spreads the risk and helps ensure that the DUAE can survive well into the future, such as in the case of the termination of key partner(s),” said AM Best.
The number of markets or insurers supporting a DUAE is also key to the review, which will look at how quickly a key relationship can be replaced if one is terminated.
It will assess the consistency of relationships, geographical reach of the programs offered by a firm, and its retention of clients.