AM Best Proposes Offering Assessments of MGAs/MGUs and Program Administrators

Turning its attention to the growing role of managing general agents and similar entities appointed by insurers and reinsurers, independent insurance industry rating company AM Best Company has announced a plan to assess delegated underwriting authority enterprises (“DUAEs”) for the first time. “DUAE” is a broad term encompassing managing general agents (“MGAs”), managing general underwriters (“MGUs”), coverholders, program administrators, program underwriters, underwriting agencies, direct authorizations and appointed representatives. AM Best would be the first rating agency offering ratings for DUAEs.

AM Best published its draft methodology earlier this week and is asking for comments from participants and other interested parties by the beginning of May. In its accompanying press release, AM Best explained that “[t]he 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.”

In assessing DUAEs, AM Best intends to use a methodology unrelated to its credit rating methodology. According to the draft methodology, AM Best’s proposed Performance Assessment for DUAEs will aggregate five sub-assessments. AM Best analysts will:

1. Quantitatively and qualitatively evaluate underwriting performance, valuing expertise, profitability and strong controls.
2. Look at governance and internal controls, considering a variety of factors, including audit and management reporting, customer retention, claims handling processes and system and data sharing relationships with carriers.
3. Rate financial condition based on audited financial statements, risk-sharing and other indicators of financial performance.
4. Qualitatively evaluate organizational talent, looking at the entity’s training programs, organizational structure and executive expertise.
5. Look at depth and breadth of relationships with both partners and clients, highly rating entities with diverse portfolios—and, therefore, not too dependent on any one partner—and with high client retention.

The first three factors will count for 10 points each, and the final two factors will be evaluated on a five-point scale.

AM Best proposes that its process for making its assessment will begin by engaging management and collecting information. This research will inform an initial Performance Assessment, which will be reviewed by an assessment committee before results are disseminated. DUAEs subject to the initial assessment will have the option to make the Performance Assessment public, maintain it privately or cease participating in the process altogether. After an assessment is made, analysts will continue to monitor the condition of the DUAE and the market generally. If the DUAE decides to continue to participate with AM Best, the Performance Assessment will be updated annually and whenever AM Best learns of a significant development that might affect that DUAE’s assessment.

Implicit in AM Best’s proposal is the assumption that the insurance marketplace will embrace this idea and want DUAEs to be rated and that DUAEs will benefit from being so; however, there is an open question as to how much traction any Performance Assessment regime will get and at what pace. This is particularly the case given that DUAEs have generally not struggled to access capital in the current market and a number of new and well-capitalized fronting platforms, each actively looking to partner with DUAEs, have launched in the past 12 months alone. In addition, while the Performance Assessment regime proposed by AM Best has the potential to be an important tool in helping DUAEs at a certain stage in their development (including a number of “unicorns” and other mid- to late-stage privately held startups), the pursuit of a strong Performance Assessment may require a significant and costly change in business model for an indeterminate benefit. For example, AM Best’s focus on the whether the performance of a DUAE is reliant on a small number of key partnerships could drive program managers away from agreeing to exclusive relationships with certain carriers or distributors. More generally, extra care would need to be taken when negotiating key partner contracts to ensure that terms are not too counterparty-favorable. Similarly, AM Best’s proposed focus on governance and internal control assessments could result in privately held DUAEs having to “staff up” their legal and compliance function sooner than would have otherwise been the case. (In some cases, this is left until immediately before an entity plans to be acquired or go public.)

AM Best has asked for all comments to be submitted in writing to methodology.commentary@ambest.com no later than May 3, 2021.

Please do not hesitate to contact the Mayer Brown team should you have any questions regarding the above.