It is not a credit rating. It will not impact an insurer’s financial strength rating.
Those were two of the answers that AM Best analysts delivered yesterday in various presentations about the rating agency’s new performance assessment for delegated underwriting authority enterprises. The PAs for DUAEs, including U.S. managing general agencies and Lloyd’s coverholders, are now available—less than a year after AM Best announced that it would develop a methodology around the assessment and opened its preliminary assessment process up to public comment.
AM Best describes a PA as “a forward-looking, independent and objective non-credit opinion indicative of a DUAE’s relative ability to perform services on behalf of its insurance partners.”
Best uses the DUAE term to encompass MGAs, managing general underwriters, coverholders, program administrators, program underwriters, underwriting agencies, direct authorizations and appointed representatives.
“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,” said Matthew Mosher, president and CEO of AM Best Rating Services, in a statement about the official launch of DUAE assessments yesterday. “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,” he said.
That does not mean that the PA for a DUAE will affect the financial strength rating of an insurance carrier partner, said Greg Williams, an AM Best senior director, during a video explaining some of the components of the assessments and responding to frequently asked questions. Noting that the relationship between PAs and carrier FSRs is “the most common question” that AM Best has heard since releasing a first draft of its methodology last March, Williams said, “If an insurance carrier already has a meaningful relationship with the DUAE, the results emanating from that DUAE are already captured in the credit rating of that insurance company—most notably in the operating performance and business profile building blocks” of the financial strength rating.
Andrea Keenan, executive vice president and chief strategy officer, noted that the DUAEs themselves, not insurance carriers, will be the ones who directly request PAs. “Beginning in the first quarter of 2022, we will be able to assess DUAEs under the new methodology,” she said.
Keenan also assured video viewers that AM Best will safeguard the confidential information provided to analysts performing the assessments of their ability to perform services on behalf of carriers. “The information that we handle in assessing a DUAE is used for the performance assessment only,” she stressed.
In a separate “Frequently Asked Questions” document released by AM Best, analysts also made it clear that carriers will not be interviewed as part of the PA process. Performance assessors, however, will expect to review information such as third-party audits and contracts between DUAEs and carriers.
“Another question we’ve been asked is will this replace the due diligence that carriers currently do of DUAEs. And the simple answer to that is no, it will not,” Keenan said. “We expect companies will continue to perform their own due diligence activities based on their unique needs. “This will be additional input “to inform decision-making by carriers,” she said.
Carrier Management’s comparison of the draft released last year with the final methodology and criteria published yesterday reveals the same basic framework with some additions (mainly relating to DUAEs that are part of a group). As described in an article written for Carrier Management by AM Best analysts last year, “Assessing Delegated Underwriting Authorities, MGAs: AM Best Explains,” a PA is based on AM Best’s analysis in five key areas:
DUAEs can receive up to a maximum of 10 points for Underwriting Capabilities, Governance and Controls, and Financial Condition, and up to five points for both Organizational Talent and for Depth and Breadth of Relationships for a high score of 40.
The sum of the points received for each of the components is translated into a PA ranging from PA-1 (Exceptional) to PA-5 (Weak). For a PA-1, the DUAE would have to score between 34 and 40 points, while PA-5 assessments would be assigned to DUAE scoring 12 points or less.
During the video, Williams addressed the fact that AM Best’s DUAE definition is a catch-all term for a lot of different types of entities that are appointed by insurers or reinsurers through contractual agreements to perform underwriting, claims handling and/or administrative functions on behalf of their partners. He conceded that different types of DUAEs have characteristics that are unique. “But at the same time, we believe the methodology that we put forth today is flexible and comprehensive enough to perform performance assessments on any of those entities,” he said. “One commonality that we would be looking for to perform performance assessment would be that these entities have underwriting authority and are principally responsible for underwriting risk,” he stressed.
What Is Different
While the 26-page methodology document released by AM Best yesterday is very similar to a 22-page draft published last year, one notable change is the introduction of language allowing for group ratings. Although, for the most part, PAs are performed at the “legal entity level,” for some DUAEs that have “significant commonalities or strategic rationales,” AM Best will take a group view. The document lists several examples of commonalities, including shared management teams and consistent performance of group members, among others.
Another addition to the document is a section describing an overarching need for analysts to understand a DUAE’s strategy in developing a performance assessment. Aspects of strategy that analysts pay attention to include “the nature and scale of a DUAE’s competitive advantage [and] how new advantages might be generated,” as well as adaptability to market conditions and the viability of business relationship with carriers, agents and intermediaries.
Throughout the document, there is also new language referring to AM Best’s review of contracts between carriers and DUAEs, commission structures and TPA arrangements.
“Subject to the size and complexity of the DUAE, AM Best expects to review a sampling of the contracts,” the document says in a discussion of the review of Underwriting Capabilities.
In a section outlining the key characteristics of a DUAE that would merit a 10-point score (exceptional) for Underwriting Capabilities, the Feb. 1, 2022 methodology now has language about commission structures and claims handling. New characteristics that were not listed in the March 2021 draft document are “commission structures that are mutually beneficial for the insurers and the DUAE” and the demonstration of “timely and accurate reserving practices and exceptional claims management abilities.”
Correspondingly, DUAEs scoring 4 (fair) or 2 (poor) for Underwriting Capabilities don’t have mutually beneficial commission structures or good claims reserving and management practices.
Similarly, in the discussion of governance assessments, new language in the latest methodology document refers to clear “alignment of interests” for the highest-scoring DUAEs. Also new here are references to the presence of a “mission statement that reflects strategic goals” being present for entities that will receive Governance scores of at least 6 (strong).
While both the March 2021 draft and the February 2022 reference the need for DUAEs to demonstrate two or more years to positive net worth in audited financial statements in the discussion of the Financial Condition factor, for the Underwriting Capabilities factor, the latest document states that AM Best will typically want to review five years of premium and loss histories—a time frame not mentioned in the earlier draft.
Unchanged, however, is a discussion of how AM Best will treat new DUAEs, including InsurTech MGAs, that seek assessments. For entities that have been operating as DUAEs for less than two fiscal years, AM Best requires financial statements for any completed fiscal years and a clearly defined two-year go-forward business plan in order to get a PA. The business plan must outline the DUAE’s partnership criteria, describe products offered and pricing standards. Experienced management and appropriate staffing are also required.
Other questions addressed in the documentation released yesterday revolve around the frequency of assessments (annual, unless there’s a significant development that triggers a midterm review), publication of results (DUAEs can choose to have private PAs), requirements for insurance carriers that own MGAs to get PAs (there are no such requirements), duration of review process (8-12 weeks).