MGAs under AM Best’s microscope
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MGAs under AM Best’s microscope

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What do the rating agency’s performance assessments mean for the controlled distribution market?

The roll-out of a new rating style framework for differentiating between insurance MGAs has received a mixed reception in the London market. While some see the move as a positive for the controlled distribution market and an affirmation of the key role it plays, others fear it could be an unnecessary and costly burden for many MGAs.

AM Best released its new “Performance Assessment (PA) for Delegated Underwriting Authority Enterprises” methodology in February, following a consultation with the industry. 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, it said.

The rater defines DUAEs as a blanket term to capture managing general agents (MGAs), managing general underwriters, coverholders, program administrators, program underwriters, underwriting agencies, direct authorizations and appointed representatives.

AM Best stresses that a PA is not a credit rating, and it is not indicative of, nor related to, any credit rating or future credit rating of an entity.

It defines a PA 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”.

Five key factors

Now that it is live, we already have a few [DUAEs] undergoing assessment and others going through the initial contracting process, which is quite thorough
Andrea Keenan, Chief Strategy Officer & Executive Vice President, AM Best
AM Best EVP & chief strategy officer_Andrea Keenan H Res.jpg

As outlined, the PA includes an assessment of several key components: underwriting capabilities, governance and internal controls, financial condition, organizational talent, and depth and breadth of relationships.

Points are given for these five assessment factors and are added up to determine a PA in the range PA 1 (exceptional) through PA 5 (weak).

DUAEs can opt to have a public PA or retain a private PA. In the former case, Best will publish a press release and issue a report.

AM Best’s chief strategy officer and executive vice president Andrea Keenan told Insider Engage that the initiative has generated a lot of interest in the market since it was first mooted: “I took around 50 calls in the first two months from interested parties who wanted to get assessed or see output from assessments.

“Now that it is live, we already have a few [DUAEs] undergoing assessment and others going through the initial contracting process, which is quite thorough.”

Too expensive?

Not everyone is impressed though. Mike Keating, CEO of the London-based Managing General Agents’ Association (MGAA) is concerned that acquiring a PA could be prohibitively expensive for many of his 170-plus members: “I feel it will need some refining through the launch. The fee structure is aimed at the larger MGAs. My job is to work with Best to ensure it doesn’t create a two-tier society of haves and have nots [through the fee structure].”

AM Best is a supplier member of the MGAA, Keating points out. “We feel, as MGAA supplier members, we can work with them to ensure that the performance management initiative becomes far more inclusive to the whole MGA community.

“My objective is to not allow a two-tier community to develop.”

London market sources share Keating’s view that smaller MGAs could be priced out. “They have said they might be able to limit it to £25,000-£50,000 a year. Only a handful of London MGAs could afford that,” one CEO, who wished to remain anonymous, told Insider Engage. “Only the top 2% of MGAs will be able to afford the additional costs involved.”

AM Best declined to give Insider Engage a number on what a typical PA might cost.

Resources issue

Echoing concerns over resourcing, a recent note on the implications of the PA methodology from US consultant Marshberry said smaller firms could find the governance and internal controls assessments more difficult than bigger firms. “Smaller DUAEs may have invested less in infrastructure compared to a larger entity partly because they may not be as necessary for daily operations of a smaller organization. Larger companies also have more resources to spend on building out these capabilities,” it said.

My objective is to not allow a two-tier community to develop
Mike Keating, CEO of the MGAA
Mike Keating MGAA pic.jpg

AM Best’s Keenan says the PAs are not prohibitively expensive and that the pricing model reflects the size of the organization: “Remember, we’re not doing an audit; we’re not pricing it like we will be sitting with these companies for weeks on end.

“The PAs will be priced according to the work required, and that will be somewhat less than with a rating. It will be less expensive than a rating and the cost will depend on the size and complexity of the analysis.

“We are no stranger to small companies and the challenges they face around proportionality,” she added.

MGAA’s Mike Keating insists that accessibility and affordability for all and the tangible benefits from an insurer point of view are big issues for members: “Will any insurer or capacity provider not continue to do the same level of due diligence they already do on an MGA? I think they will continue to do the same level of due diligence. They won’t outsource any due diligence via a PA.”

The London-based MGA CEO agreed that a further layer of work and expense will be added to due diligence that is already very well managed, as part of insurers onboarding and oversight of their MGA clients: “I do not see the AM Best PA providing any added value to insurers nor MGAs.

Cost/benefit question

Addressing the cost/benefit argument for obtaining a PA, Enrico Bertagna, Global Head of MGA Solutions at Zurich Insurance Group, says that unless there is an industry-driven demand for a consistent approach to assessing MGAs, the motivation to obtain a rating might be different from one MGA to the other.

If this kind of rating became an industry standard like for insurance companies, then start-ups might find it more challenging to access top rated capacity
Enrico Bertagna, Global Head of MGA Solutions at Zurich Insurance Group

“The challenge might be that it is a voluntary choice for MGAs to get themselves rated, rather than a requirement or a market practice. This could lead to inconsistency of standards in the market,” Bertagna said.

“We always welcome quality-based selection that can ensure only MGAs with a sustainable business model operate in the market, no matter how this is achieved. I define sustainability in terms of ability to deliver an underwriting profit, service the customers professionally, being supported by state-of-the-art data tech, and sound finances.

“If this kind of rating became an industry standard like for insurance companies, then start-ups might find it more challenging to access top rated capacity,” Bertagna added.

New generation appeal

The possibility that newer or start-up DUAEs could be at an immediate disadvantage in the PA standings because they lack a track record is rejected by Keenan, however. “Again, as insurance specialists we’re accustomed to new capital entering the market. We have methodologies specifically designed to handle companies entering the market. We would look at a start-up more conservatively than a company with a track record - but they can still fare well in the assessment process.

“We’d look at the management and underwriting talent in the organization, the viability of the business plan, capacity lined up etc. A start-up would actually benefit from an assessment because they are trying to break into a market with large incumbent underwriters. There’s a whole new generation of start-ups coming into the space that we want to appeal to.

“I’ve been told that the PA methodology is a playbook for insurtechs to help them understand what companies are looking for. It could help some companies enter the space sooner than they might otherwise have,” Keenan said.

Consolidation stimulus

A potential, unintended consequence of wide take-up of MGA PAs is that it stimulates merger and acquisition activity in what has become a populous and important market. Around 30% of Lloyd’s business globally is accessed via coverholders today.

Keenan believes that if consolidation does happen as a result of the PA roll-out, it’s an effect of the information that is made available by the process.

“If a company is looking to sell and the PA gives them something to show to a potential acquirer – I can’t see how that serves the market poorly,” she said.

“But I think that once you have more information in the market, things fall where they are meant to fall. It could lead to repositioning of various companies. Certainly, investors have shown interest in the PAs. They want us to penetrate the market quickly and accrue the information.”

Mike Keating says the MGAA will support any initiative that looks to raise the professional standards of MGAs: “AM Best have joined the MGAA and therefore have the opportunity to engage with our large MGA membership and directly present their proposition whilst we will continue to represent all of our membership in an inclusive way.

“The MGAA wants to work with AM Best to help produce a performance programme that is more accessible to those (smaller) members that lack the resources to obtain a PA as they stand.”