Assessing Delegated Underwriting Authorities, MGAs: AM Best Explains

Over the last decade, as insurers and reinsurers have sought profitable opportunities for growth, they increasingly have handed the underwriting pen to managing general agents, managing general underwriters, program administrators and other underwriting agencies. These specialized distribution partners have not only grown in number, but they also have grown in their importance to the insurance value chain.

In the United States alone, there are more than 1,000 managing general agents. And while the United Kingdom market still has a high presence of broker-driven business, underwriting agencies have gained a greater share of the market as the number of brokers has steadily reduced due to merger and acquisition activity and specialist underwriters have moved into the MGA model.

The amount of premium generated by these entities has doubled in the last 10 years across the largest insurance markets. In the U.S., managing general agents generated $44 billion in premiums in 2019. In the U.K., these underwriting enterprises—which include Lloyd’s market “coverholders”—account for a staggering 10 percent, or £5 billion, of P/C business.

AM Best’s role, as a rating agency, is to ensure a strong insurance industry. This new Performance Assessment sits squarely within that objective

The growing influence of this segment—which is also gaining traction across Europe and Asia-Pacific—raises the stakes on these relationships. These distribution partners are empowered to underwrite, price and bind coverage, as well as settle claims, on behalf of their carrier partners.

How do insurers know who to trust with their underwriting pen? How can MGAs, MGUs and the like prove their credibility as a partner?

It is against this backdrop that AM Best sought to develop a performance assessment to help insurers gauge the effectiveness of their existing and prospective underwriting partners. On March 15, we released draft methodology for a Performance Assessment for Delegated Underwriting Authority Enterprises. It is open for comment through May 3.

AM Best’s role, as a rating agency, is to ensure a strong insurance industry. This new Performance Assessment sits squarely within that objective. It aims to help insurers make more informed decisions when choosing underwriting partners.

To be clear, the proposed Performance Assessment is independent and distinctly different from a Financial Strength Rating. While a Financial Strength Rating measures an insurance company’s ability to meet policyholder obligations, the Performance Assessment will measure how effective a delegated underwriting authority enterprise (DUAE) has been in servicing its insurance partners.

The Performance Assessment methodology will include five factors: Underwriting Capabilities; Governance and Internal Controls; Financial Condition; Organizational Talent; and Depth and Breadth of Relationships.

The Underwriting Capabilities component would be similar to AM Best’s evaluation of the technical aspects of an insurance company. Because underwriting companies have authority to write business on behalf of their insurance carrier partners, it is essential that the quality of their underwriting is examined thoroughly.

Writing poor quality business may affect the financial standing of not only the underwriting agency but also its insurance carrier partners. Underwriting, therefore, is fundamental to the stability and longevity of these organizations.

In terms of Governance and Internal Controls, AM Best proposes these elements of consideration: alignment of interests (contractual relationships, mission statement); systems; audit and other management reports; policies and procedures; disaster recovery plan; key person risk plan; service measures; binding contracts; broker contracts; and partnerships with third-party administrators.

Because much of the risk associated with DUAEs is operational, having good governance and controls in place is critical to helping carriers and agents feel comfortable with the relationship.

Financial Condition would be assessed through evaluation of financial statements, sources of income, earnings trends, capital structure and the like. It would also take into account liability protection, premium trust accounts and deposit collateral/guarantees.

AM Best views these three factors as having the greatest importance, because they speak to the stability and longevity of an underwriting organization. As such, these factors would be weighted more heavily than Organizational Talent and Depth and Breadth of Relationships in our methodology.That’s not to say the final two factors aren’t important. They certainly are, which is why enterprises must perform well across all categories in order to achieve a high assessment.

DUAEs can receive up to a maximum of 10 points for Underwriting Capabilities, Governance and Controls, and Financial Condition. They can receive up to five points for both Organizational Talent and for Depth and Breadth of Relationships.

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).

The full methodology for the Performance Assessment for Best’s Delegated Underwriting Authority Enterprises is available on AM Best’s website. We encourage market participants to provide feedback.