0421-01
AM Best Releases New Methodology for Rating DUAEs By: Nick Dranchak, Executive Vice President, BMS Re & John Speckman, Executive Vice President, BMS Re
As our industry changes, AM Best is seeking to give more transparency into Delegated Underwriting Authority Enterprises (DUAEs). DUEA is a blanket term for third party entities appointed by insurers or reinsurers to perform various functions on their behalf. Typical third party entities are MGAs, MGUs or program administrators who perform functions from soliciting and underwriting risks, binding and administering coverage to settling claims. DUAEs are not new to the industry, however they are becoming increasingly important sources of business and growth. During this year’s Review and Preview Conference, AM Best introduced Best’s Performance Assessment (PA), a new draft methodology to deliver transparency.
DUAEs
Managing General Agents (MGAs)
Managing General Underwriters (MGUs) Program Administrators Underwriting Agencies Appointed Representatives
Coverholders
Program Underwriters Direct Authorizations
Typical Functions Performed by DUAEs
Binding Coverage
Underwriting and Pricing
Settling Claims
Appointing Retail Agents
Access to Niche Markets
What is a PA and How is it Derived? The PA is independent from a credit rating and is not equivalent to a credit rating since DUEAs do not bear insurance risk. The PA is established by using both quantitative and qualitative elements to assess the strengths and weaknesses. This process is done using five key assessment factors. Three factors are assigned a score from 1 to 10 (with 1 being the lowest). They are: underwriting capabilities, governance and internal controls, and financial condition. Two factors are assigned a score from 1 to 5 (with 1 being the lowest.) They are: organizational talent and depth and breadth of relationships. Adding the scores of each key assessment factor will give a maximum point score of forty. The summation of the points will equate to a PA category. The category scores — listed in the chart (below and right) — range from exceptional (34-40) to weak (up to 12). A higher PA score indicates
Key Assessment Factor
Max Points
Underwriting Capabilities
10 (steps of 2)
Governance & Internal controls
10 (steps of 2)
Financial Condition
10 (steps of 2)
Organizational Talent
5
Depth & Breadth of Relationship
5
Maximum total points
40
Source: AM Best DUAE Draft Methodology
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an expectation that the DUAE is more likely to deliver results consistent with their business plans and achieve greater long-term stability through excellence in each of the assessment factors. Common Questions
AM Best will collect all comments on this new methodology until May 3, 2021; analyze them internally and update the proposed methodology as needed. The expected go-live date is sometime in the second half of 2021. We have listed some of the most common questions that we have received from clients and markets and our responses below.
Assessment Categories
Assessment Symbols
Assessment Ranges
Exceptional
PA-1
34-40
Excellent
PA-2
27-33
Strong
PA-3
20-26
Fair
PA-4
13-19
What is the DUAE Rating Process?
Weak
PA-5
Up to 12
The DUAE rating process resembles the current credit ratings process for insurance/reinsurance companies. This is an interactive process requiring submission of data followed by a formal management meeting to assess key factors.
Source: AM Best DUAE Draft Methodology
If I Decide to Seek a Rating, How Often Will I Get Reviewed?
The PA will be updated at least annually, but a review can take place anytime that the analyst becomes aware of any significant developments that may have an impact on the rating.
What Are My Options if I Receive a Poor Review/Assessment?
You will have an option to accept or reject the PA Assessment once the analyst team shares it with you. If you accept the assessment, you can have it made public so anyone looking for your assessment can see it. If you receive what you consider an unwarranted sub-par assessment you can reject the assessment. No public record will be made and no one will know what your assessment was. Who Performs the Assessment? Is it the Same Analysts that Review Insurers and Reinsurers?
Initially AM Best has identified analysts internally who have deep knowledge of the MGA space. They are currently analysts that cover a vast spectrum of the insurance/reinsurance market.
What is the Benefit to a DUAE to Seek a PA?
Since the PA is an independent assessment it is intended to give transparency and validity to the DUAEs business. The PA can give capital markets, insurers and reinsures comfort in forming a new or growing relationship.
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Can a Start-Up DUAE Receive a PA Rating?
AM Best recognizes that new companies with no history are formed every year and rating start-up DUAEs requires a flexible approach. Since there is limited information and historical performance is unknown assessing a start-up DUAE is viewed more conservatively and the PA will generally be lower. In order to proceed with an initial PA for a DUEA that has been in existence for less than two fiscal years AM Best requires certain documentation in order to achieve a valid assessment: • Clearly defined two year business plan that outlines its partnership criteria to ensure the DUAE will generate a profit • Thorough description of products offered, pricing and marketing strategy • Financial statements or reports for the latest year of operation • Experienced management and appropriate staff and infrastructure to support initial activities • Management, Board members, investors, and other advisers available for discussions with the AM Best analyst team • Senior management and underwriters’ track record
What Are the Attributes of a PA-1 DUAE?
A DUAE with a PA-1 would have a diverse OR niche book of business that is profitable with experienced expert underwriters. The DUAE would use technology in every aspect of the business and have exceptional governance and internal controls to effectively manage risks. Financial performance indicators would be exceptional and sustainable with a clear path towards continued growth. The DUAE would partner with a broad range of strong, high profile insurers and relationships with outside parties would be stable and long term. Internal controls are regularly updated and enforced through periodic review of policies, procedures and risk management reviews. Is a Smaller MGA with a Single Niche Specialty Going to be Graded Differently than a Larger MGA with Multiple Programs? An MGA with a niche specialty book of business should not be graded differently than a larger multiline MGA. AM Best recognizes that a DUAE’s value may be derived more from its niche specialty o r access to a niche business rather than the level of diversification. How Will They View Companies that Handle Actuarial and Claims In-House vs. TPA/Broker? This depends on the DUAEs overall focus. Some DUAE’s may have expertise in the area of claims or actuarial and choose to keep them in-house. Other DUAE’s may choose to outsource to another TPA. If they outsource to another TPA the emphasis would be on how the DUAE monitors the TPA that performs the service and how they manage the risk posed by outsourcing certain functions. In Conclusion The BMS team will continue to track the development of the DUAE methodology. If you have questions on moving forward on seeking a PA, please have a discussions with our knowledgable Capital Management team and market-leading MGA team. We have a proven track record in rating agency advisory work and can help you successfully navigate this opportunity moving forward.
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