Given increasing reliance on “managing general agents”, managing general underwriters, program administrators or managers, brokers, agents, coverholders, and other entities delegated insurer underwriting authority (collectively “Delegated Underwriting Authority Enterprises” or “DUAEs”), AM Best is seeking to implement a new “Performance Assessment” to evaluate the ability of DUAEs to provide services to their insurance partners. As these DUAEs grow in significance within the insurance industry landscape, the new Performance Assessment will provide insurers, and the industry at large, a more accurate snapshot of the short-term and long-term health of industry underwriting.
AM Best’s new Performance Assessment includes both qualitative and quantitative factors in connection with an in-depth review of a DUAE’s (1) Underwriting Capabilities, (2) Governance and Internal Controls, (3) Financial Condition, (4) Organizational Talent, and the (5) Depth and Breadth of the Insurer Relationship, each of which is explored briefly below.
Underwriting Capabilities will be evaluated by considering historical trends, projected future performance, measures of “central tendency,” and business volatility. Specific factors such as gross and net profitability of the insurer-DUAE relationship, premium and loss histories, along with the general structure of the insurer-DUAE arrangement, including commissions, fees and expense amounts, will all be factors in informing the Underwriting Capabilities score. Likewise, performance based metrics, such as insurer audits of a DUAE, may have bearing on the overall Underwriting Capabilities score.
Governance and Internal Controls
Governance and internal controls will be evaluated by considering the relationships maintained by the DUAE and its industry partners, including brokers, carriers, employees and others. Strong shared systems between a DUAE and its industry partners is an important aspect of this factor. Exceptional governance and internal controls can be demonstrated where a DUAE maintains efficient disaster recovery plans, appropriately services customer complaints, adheres to all contracts, and enhances its functionality by engaging industry players such as third-party administrators. In connection with this factor, AM Best will review audit reports, management reports, company policies and procedures, risks and recovery plans and plans related to key personal.
Financial Condition will be assessed based on a review of audited financial statements, proof of two or more years of positive net worth, risk-sharing arrangements, and any in-force errors and omissions coverage. Specific factors such as income, cash flow, capitalization, trust account history, and overall borrowing and leverage, will also be considered relevant to the Financial Condition assessment. AM Best will also factor in any arrangements that suggest increased financial protection in connection with the overall DUAE-insurer relationship.
The evaluation of Organizational Talent will include a review and assessment of the DUAEs relationships with its employees and partners, with a specific emphasis on whether these relationships positively or negatively impact consumers. Strong employee talent, rate of employee turnover, appropriate staffing levels, employee experience, and adequacy of training programs will all be factors in determining the Organizational Talent score.
Depth and Breadth of the Insurer Relationship
This final factor in AM Best’s new Performance Assessment will look at the number of geographic and consumer markets and programs the DUAE supports. Varied programs across diverse localities will be a plus factor in evaluating this component. Likewise, reputation, successful initiatives, introduction of innovative approaches, and speed with which a DUAE can replace an industry relationship in the event of termination, will all bear on the likelihood of a positive Depth and Breadth score.
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The overall Performance Assessment score will be an aggregation of each of the above-mentioned criteria, with Underwriting Capabilities, Governance and Internal Controls, and Financial Condition being scored at a maximum of ten points each, and Organizational Talent and Depth and Breadth of the Insurer Relationship being scored at a maximum of five points each. The higher the overall Performance Assessment score, the greater likelihood the DUAE achieves and maintains long-term stability. The Performance Assessment of each DUAE will generally be updated annually; however, AM Best will provide Performance Assessment updates throughout the year should it become aware of any significant development that effects a DUAE.
We will continue to monitor these industry changes and will provide updates accordingly.