AM Best is seeking market feedback on a draft for a new methodology that will support a “Best’s Performance Assessment” (Best’s PA) for MGAs, MGUs, program administrators and other delegated underwriting authority enterprises (DUAEs).

Best's PA for DUAE's

  • Best’s PA includes MGAs, MGUs, PAs, coverholders, program underwriters
  • Ratings agency seeks market feedback on methodology
  • Assesses UW capabilities, governance, internal controls and financial condition
  • Will also look at organizational talent and DUAE relationships
  • Combines qualitative and quantitative factors 
  • Annually updated PA aggregates scores from different components

The ratings agency said it was introducing the assessments because of the increasingly important role of DUAEs in the industry, and the financial impact their decisions can have on insurance partners.

Written comments have been requested no later than 3 May.

The ratings agency said the Best’s PA provides a framework for differentiating among DUAEs in the insurance industry and is a “forward-looking, independent and objective non-credit opinion”.

As well as MGAs, MGUs and program administrators, the assessments will include other coverholders, program underwriters, underwriting agencies, direct authorizations and appointed representatives.

It will review qualitative and quantitative factors to determine a DUAE’s relative ability to perform services on behalf of its insurance partners.

What goes into AM Best'sPA for DUAEs

The PA includes an in-depth assessment of underwriting capabilities, governance and internal controls, financial condition, organizational talent, and depth and breadth of the DUAE’s relationships.

The final PA will be an aggregation of the sub-assessments assigned to each of those components.

In a statement, the firm said: “AM Best believes that DUAEs are an increasingly important part of the insurance ecosystem, with a higher proportion of insurance revenue being generated through DUAEs in many global regions.

“The presence and significance of DUAEs continue to rise and their decisions could financially impact their insurance partners. Assessing DUAEs will provide transparency to the market and will inform the industry of a DUAE’s ability to perform services on behalf of its insurance partners.”

The ratings agency said its performance assessment methodology for DUAEs has no relation to the credit rating methodology.

It said that while globally the function of a DUAE and its relationship with insurers and reinsurers varies, there are key assessment factors that indicate such an entity’s ability to perform services on behalf of its insurance partners, regardless of geographic location.

“The presence and significance of DUAEs continue to rise and their decisions could financially impact their insurance partners. Assessing DUAEs will provide transparency to the market and will inform the industry of a DUAE’s ability to perform services on behalf of its insurance partners”

AM Best explains the rationale for its move to assess DUAEs

“The role of a DUAE to generate growth, provide specialized market expertise, and undertake administrative functions is consistent worldwide,” said AM Best.

It highlighted MGAs as one of the most common vehicles among DUAEs.

“The decision to partner with an MGA presents a series of benefits and risks to a (re)insurer. AM Best realizes that the value of the MGA as a distribution partner could greatly impact the (re)insurer’s financial strength and reputation, given that underwriting authority is often granted to the MGA,” said the firm.

“Equally, the brokers, wholesalers, and retail agents that interact with an MGA look to the MGA to provide competitive products. In many cases, MGAs have special expertise or distribution capabilities that the (re)insurer may not always have available or that would otherwise be expensive to develop in house.”

AM Best's process fordeveloping a DUAE PA

AM Best also pointed to the use of emerging technology by MGAs, including in partnership with insurtech start-ups, or incorporating insurtech into their underwriting, claims, marketing and compliance functions.

In its draft methodology, the ratings agency said the Best’s PA would require ongoing dialogue with management, facilitated by an analyst, who will monitor the financial condition of the DUAE as well as any market and company developments that could impact the assessment.

The PA will typically be updated on an annual basis, but a review could take place at any time AM Best becomes aware of a significant development that could affect the assessment.

Similar to carrier ratings, PAs will be assigned positive, stable or negative outlooks indicating potential future movement of an assessment typically over a 36 months period.

DUAEs subject to an initial assessment will have the option to make the Best’s PA public, maintain it on a private basis, or no longer participate in the process.