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April 4, 2022

AM Best Releases Performance Assessment for MGAs

AM Best, well regarded for its ability to assess the creditworthiness of insurance carriers, released an optional performance assessment for managing general agents and other delegated underwriting authority enterprises (DUAEs) that work in tandem with insurance carriers.

Not familiar with the term DUAE? AM Best defines a DUAE as,  

A third party entity that is appointed by a (re)insurer, through contractual agreements, to perform underwriting, claims handling, and/or administrative functions on behalf of its partners. 

Common examples include:

  • Managing General Agents (MGA)
  • Managing General Underwriters (MGU)
  • Coverholders
  • Program Administrators
  • Program Underwriters
  • Underwriting Agencies

The performance assessment is available from AM Best as of February 1, 2022, and applies to all six of the third party entities listed above.

The Purpose

Why was the performance assessment developed? 

Insurance carriers rely on the completeness and accuracy of premium and loss data from entities that have been delegated underwriting authority. Controls over the information systems used to populate monthly reporting to carriers is critical to the completeness and accuracy of carrier financial reporting. MGAs and other entities with delegated underwriting authority have become a significant slice of the insurance ecosystem. However, there is limited regulatory oversight and third party visibility into the operations of these companies. 

With the recent boom of MGAs and similar entities generating a high volume of premium, the performance assessment by AM Best will allow MGAs to proactively demonstrate the credibility, effectiveness, and performance of their partnerships with insurance carriers at a time of increased scrutiny surrounding these partnerships from both carriers and rating agencies.

The Details

What do MGAs need to know about the assessment?

AM Best describes the performance assessment as,

A forward-looking, independent, and objective non-credit opinion indicative of a DUAE’s relative ability to perform services on behalf of its insurance partners. A third party entity that is appointed by a (re)insurer, through contractual agreements, to perform underwriting, claims handling, and/or administrative functions on behalf of its partners.

The performance assessment methodology encompasses a quantitative and qualitative review of the following five components:

Underwriting CapabilitiesThe long term success of an MGA is dependent on the profitability of its business and this is an essential element of underwriting capabilities along with consideration for competitive advantages, experience of staff and use of technology in the underwriting process.
Governance and Internal ControlsInternal controls are key to accurate and complete financial reporting and elements considered in this area include policies and procedures in place, results of internal audits or carrier audits, existence of disaster recovery plans and key person risk plans. 
Financial ConditionThe financial strength of an MGA can signal it is able to generate profitable business. Elements assessed include a review of three years of audited financial statements*, a cash flow evaluation as well as stability and sources of income.
Organizational TalentMGAs rely on their employees to maintain customer relationships and execute the business plan. Elements assessed include employee tenure, training programs, executive experience and documented organizational structure. 
Depth and Breadth of RelationshipsStakeholder relationships are crucial to MGA success and elements considered in this area include the number of programs, consistency of carrier relationships, geographic reach and policy renewal rates.
* AM Best will also review unaudited financial statements, however to achieve a higher assessment in the Financial Condition component, independent audits are needed.

Each component is assessed separately and assigned a score of up to 10 points (Underwriting Capabilities, Governance and Internal Controls, and Financial Condition), or up to 5 points (Organizational Talent, and Depth and Breadth of Relationships), ranging from “Weak” to “Exceptional”. After each component is assessed, all points are aggregated and the entity receives an overall performance assessment rating of PA-1 Exceptional to PA-5 Weak. 

In addition to the performance assessment rating, AM Best will concurrently assign an assessment outlook of Positive, Stable, or Negative. The outlook signals potential future movement of the performance assessment over a period of up to 36 months. For example an MGA with a PA-3 Strong rating with a Positive outlook, indicates that AM Best expects the rating may increase to a PA-2 Excellent in the near term. Conversely, if the assigned outlook is Negative, it is a signal that AM Best expects the rating may decrease to PA-4 Fair in the near term.

A note for MGAs and Similar Entities Just Getting Started:

AM Best developed a flexible list of minimum requirements in order to proceed with an initial performance assessment for newly formed MGAs and similar entities with less than two fiscal years of existence. However, due to the limited amount of historical data available for start-ups, these entities can expect a lower assessment as AM Best’s approach is conservative.

The Bottom Line

It’s time to consider a performance assessment.

MGAs and similar entities that elect to participate in AM Best’s performance assessment process will benefit from having an independent review performed by a trusted rating agency to share with their insurance carrier partners. The added transparency from a rating has the potential to strengthen existing carrier relationships and open doors to new carrier relationships and diversified revenue sources for MGAs. MGAs have become a significant independent distribution channel for carriers and they continue to grow and evolve to meet the needs of the insurance industry. The performance assessment represents the logical next phase of the evolution.

Johnson Lambert provides financial statement audits, all types of SOC reports, and comprehensive consulting services including helping MGAs document their governance structure and internal controls as well as test the controls on a regular basis. We are well poised to be your business partner, in whatever capacity your organization needs today and into the future.

Need Assistance to Better Understand the Performance Assessment Requirements? Contact Robert Waszak or Tim Nowak today.

Robert Waszak

Robert Waszak

Senior Manager

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AM Best Releases Performance Assessment for MGAs

AM Best, well regarded for its ability to assess the creditworthiness of insurance carriers, released an optional performance assessment for managing general agents and other delegated underwriting authority enterprises (DUAEs) that work in tandem with insurance carriers.

Not familiar with the term DUAE? AM Best defines a DUAE as,  

A third party entity that is appointed by a (re)insurer, through contractual agreements, to perform underwriting, claims handling, and/or administrative functions on behalf of its partners. 

Common examples include:

  • Managing General Agents (MGA)
  • Managing General Underwriters (MGU)
  • Coverholders
  • Program Administrators
  • Program Underwriters
  • Underwriting Agencies

The performance assessment is available from AM Best as of February 1, 2022, and applies to all six of the third party entities listed above.

The Purpose

Why was the performance assessment developed? 

Insurance carriers rely on the completeness and accuracy of premium and loss data from entities that have been delegated underwriting authority. Controls over the information systems used to populate monthly reporting to carriers is critical to the completeness and accuracy of carrier financial reporting. MGAs and other entities with delegated underwriting authority have become a significant slice of the insurance ecosystem. However, there is limited regulatory oversight and third party visibility into the operations of these companies. 

With the recent boom of MGAs and similar entities generating a high volume of premium, the performance assessment by AM Best will allow MGAs to proactively demonstrate the credibility, effectiveness, and performance of their partnerships with insurance carriers at a time of increased scrutiny surrounding these partnerships from both carriers and rating agencies.

The Details

What do MGAs need to know about the assessment?

AM Best describes the performance assessment as,

A forward-looking, independent, and objective non-credit opinion indicative of a DUAE’s relative ability to perform services on behalf of its insurance partners. A third party entity that is appointed by a (re)insurer, through contractual agreements, to perform underwriting, claims handling, and/or administrative functions on behalf of its partners.

The performance assessment methodology encompasses a quantitative and qualitative review of the following five components:

Underwriting CapabilitiesThe long term success of an MGA is dependent on the profitability of its business and this is an essential element of underwriting capabilities along with consideration for competitive advantages, experience of staff and use of technology in the underwriting process.
Governance and Internal ControlsInternal controls are key to accurate and complete financial reporting and elements considered in this area include policies and procedures in place, results of internal audits or carrier audits, existence of disaster recovery plans and key person risk plans. 
Financial ConditionThe financial strength of an MGA can signal it is able to generate profitable business. Elements assessed include a review of three years of audited financial statements*, a cash flow evaluation as well as stability and sources of income.
Organizational TalentMGAs rely on their employees to maintain customer relationships and execute the business plan. Elements assessed include employee tenure, training programs, executive experience and documented organizational structure. 
Depth and Breadth of RelationshipsStakeholder relationships are crucial to MGA success and elements considered in this area include the number of programs, consistency of carrier relationships, geographic reach and policy renewal rates.
* AM Best will also review unaudited financial statements, however to achieve a higher assessment in the Financial Condition component, independent audits are needed.

Each component is assessed separately and assigned a score of up to 10 points (Underwriting Capabilities, Governance and Internal Controls, and Financial Condition), or up to 5 points (Organizational Talent, and Depth and Breadth of Relationships), ranging from “Weak” to “Exceptional”. After each component is assessed, all points are aggregated and the entity receives an overall performance assessment rating of PA-1 Exceptional to PA-5 Weak. 

In addition to the performance assessment rating, AM Best will concurrently assign an assessment outlook of Positive, Stable, or Negative. The outlook signals potential future movement of the performance assessment over a period of up to 36 months. For example an MGA with a PA-3 Strong rating with a Positive outlook, indicates that AM Best expects the rating may increase to a PA-2 Excellent in the near term. Conversely, if the assigned outlook is Negative, it is a signal that AM Best expects the rating may decrease to PA-4 Fair in the near term.

A note for MGAs and Similar Entities Just Getting Started:

AM Best developed a flexible list of minimum requirements in order to proceed with an initial performance assessment for newly formed MGAs and similar entities with less than two fiscal years of existence. However, due to the limited amount of historical data available for start-ups, these entities can expect a lower assessment as AM Best’s approach is conservative.

The Bottom Line

It’s time to consider a performance assessment.

MGAs and similar entities that elect to participate in AM Best’s performance assessment process will benefit from having an independent review performed by a trusted rating agency to share with their insurance carrier partners. The added transparency from a rating has the potential to strengthen existing carrier relationships and open doors to new carrier relationships and diversified revenue sources for MGAs. MGAs have become a significant independent distribution channel for carriers and they continue to grow and evolve to meet the needs of the insurance industry. The performance assessment represents the logical next phase of the evolution.

Johnson Lambert provides financial statement audits, all types of SOC reports, and comprehensive consulting services including helping MGAs document their governance structure and internal controls as well as test the controls on a regular basis. We are well poised to be your business partner, in whatever capacity your organization needs today and into the future.

Need Assistance to Better Understand the Performance Assessment Requirements? Contact Robert Waszak or Tim Nowak today.

Robert Waszak

Robert Waszak

Senior Manager