The AM Best Performance Assessment for DUAEs (Part 1)

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:

1. Underwriting Capabilities
2. Governance and Internal Controls
3. Financial Condition
4. Organizational Talent
5. 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:

And AM Best's Scoring scale is as follows:

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The points awarded, and what passes as “Exceptional” as opposed to merely “Fair” is an open question.  Although AM Best has not published a “grading key,” it’s likely that the more compelling the narrative that you can craft around the following items, the better you will fare on the Performance Assessment:

• Tight business processes and their descriptions, especially around Underwriting and Claims
• A strong Balance Sheet and a stable yet growing Income Statement and scenario analyses
• A historical track record of delivering for your partners
• Strong outsourcing partners with detailed contracts, SLAs, etc.
• Leading-edge technology and proprietary analytics that demonstrate insights
• Seasoned executives and operating staff with strong and stable relationships on both the carrier and distribution sides.

‍Is it Mandatory?  

In this “launch phase” of the PA, the choice as to whether to be assessed or not rests entirely with the MGA/MGU.  The elective nature of the PA raises several interesting questions around whether or not it is advantageous to do so, for whom, and when.  

The MGA/MGU has three options regarding the results:  1) make them public, 2) keep them private or 3) withdraw from the process.  In the first two cases, AM Best will also provide ongoing monitoring to ensure that the assessment remains current/accurate.  Note: AM Best has not disclosed the anticipated cost for the ongoing monitoring.

In the next segment of this overview of the AM Best Performance Assessment for DUAEs, we’ll discuss what it means for MGAs and MGUs, and the relative upsides and downsides to engaging in it.

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.

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Sources:

_{(1) MGAs Under AM Best’s Microscope, BYGARRY BOOTH, 22 March 2022}

‍Steven Strickman, LSSMBB is a development partner with Strategic Risk Associates, LLC, as well as a Founding Partner in the Ironwood Consulting Group, LLC, where he specializes in Risk, Operations and Expense Consulting for the Insurance industry.  He can be reached at sstrickman@srawatchtower.com.

Gary Preysner, CPCU, LSSBB Gary Preysner, CPCU, LSSBB, is the Insurance Enterprise Risk Practice Leader with Strategic Risk Associates and President of The Ironwood Consulting Group.  He works with insurance companies across the globe to improve their insurance-specific processes and implement new technologies, while simultaneously strengthening their risk management capabilities.  Contact Gary to discuss how he has developed creative and novel solutions to some of the most difficult process and risk challenges that insurance companies face.  He can be reached at gpreysner@srawatchtower.com.

SRA Watchtower is a technology solutions provider and risk management consulting practice serving the Financial Services, Insurance and Technology Industries. SRA Watchtower's proprietary technology and methodology was designed and built by industry experts to enable clients to navigate risk and drive growth.  SRA Watchtower is an intuitive risk intelligence and performance management platform built to continuously inform, enlighten, and empower executives and boards.  SRA Watchtower has helped hundreds of banks effectively navigate through significant risk events since the 2008 financial crisis.