Under the ratings agency spotlight

News this week that AM Best is introducing performance assessments – or Best’s PA – for MGAs, MGUs, program administrators and other so-called delegated underwriting authority enterprises (DUAEs) is likely to meet with a mixed response in the programs sector.

Over the last decade the rapid growth and maturity of the programs sector on both sides of the Atlantic has been accompanied by a growing sophistication at many of the entities that underwrite business on behalf of insurers and reinsurers.

That has helped shake off its past reputation – sometimes fair, sometimes unfair – as a segment viewed in certain quarters as a “problem child” of the commercial insurance industry, where carriers risked handing their pen to a less than scrupulous MGU that could leave them badly scorched.

Risks remain, of course, and in-depth due diligence is required from capacity providers to make sure they are backing the right horse.

There are still examples of carriers retrenching and pulling capacity because of poor performing individual MGAs as opposed to appetite for risk or wider market losses.

But the tools and technology available on both sides to more closely monitor the performance of portfolios and ensure that the underwriting box is not being breached mean that generally relationships tend to be more transparent and with outcomes more immediately measurable.

At the same time, MGAs, MGUs and PAs would argue that their ability to deliver growth and profitability to their carrier partners is key to their own success as a long-term player in the programs sector.

If they fail to deliver that then they will fairly soon find themselves with limited or non-existent availability of capacity.

In other words, they may be of the view that the sector is self-regulating. If the results are not there, then carriers and reinsurers will put their capacity elsewhere.

Although assessing the quality of DUAEs is a fundamental part of due diligence for any capacity provider at the individual deal level, there is currently no independent view that could allow carriers and reinsurers to look across the sector and identify quality performers and relative underperformers.

Market opportunity

AM Best has clearly seen an opportunity to provide that service, and many carriers and reinsurers are likely to welcome a standardized assessment of counterparties beyond their own diligence and the market intelligence they can glean.

The ratings agency says its rationale for launching the performance assessments is the increasing importance of DUAEs in the insurance ecosystem.

That means that their relative performance has become an ever-more meaningful driver of results at the insurers and reinsurers that provide them with capacity.

As we report in detail in the March issue of Program Manager, the Best’s PA for DUAEs currently out for industry comment looks across five key components.

Three components – underwriting capabilities, governance and internal controls, and financial condition – can be scored up to a maximum of 10 points each, while organizational talent and depth and breadth of relationships can receive up to a maximum of five points.

While there is already significant interest among market sources, some have questioned how effective they would be, and whether AM Best analysts will be able to “get in the weeds” of program business to the level needed to pass judgment.

There is also the question of how the Best’s PA will view many of the new kids on the block: the insurtechs or tech-driven MGAs that have entered the market very recently that don’t have the three-year track record the agency will look at as part of its assessment.

Those players offer significant growth potential in the sector, but would AM Best be prepared to put a PA to an unseasoned entity?

The ratings agency has given the market until 3 May to submit comments on the methodology.

We await a final methodology from AM Best and more details on when the framework will come into place. 

We would also be interested in your feedback on the initiative and the value it could bring to participants in the program sector. Contact us here with your views!