The AM Best Performance Assessment for DUAEs Part 2:

This is Part 2 of a three-part series on what the AM Best Performance Assessment means for MGAs/MGUs, as well as carriers and reinsurers. In Part 1, we discussed what the AM Best Performance Assessment for DUAEs is and what it is not, and why MGAs and MGUs should be paying attention.  Furthermore, we described what it is that AM Best assesses for an MGA / MGU, and how they score their assessments.

You can view Part 1 here:

What does the Performance Assessment Mean for MGAs/MGUs?

On the plus side, doing the PA and obtaining strong ratings provides market signaling to carriers and reinsurers that an MGA / MGU has significant strengths that are valued in the market.  It can also help create favorable impressions with banks, private equity companies and potential suitors, which in turn could drive higher valuations.  And if the feedback that AM Best provides to MGAs/MGUs is detailed and has the bases for the determinations, it can provide a set of recommendations on how to improve the business and which areas would yield the “biggest bang for the improvement buck.”

Although AM Best has stated that the PA will be less expensive and time-consuming than its credit rating process (1), both hard and soft costs (borne by the MGA/MGU) will be probably an issue.  

Managing the results may also be problematic and time-consuming.  If an MGA/MGU receives a low grade or disagrees with AM Best, it can opt to keep it private or withdraw from the process, only incurring AM Best’s fees associated with the process.  But what are the market signaling effects?  Will deferring on the assessment carry with it a negative perception? Will carriers perceive either their prospective or current MGAs/MGUs decision to opt out of the process as “what are they hiding?” or “perhaps they’re not as good as we thought?” These perceptions are likely to change and develop over time, but for now they are a big black hole.

What does the Performance Assessment Mean for Carriers and Reinsurers?

At first glance, the PA could certainly provide supplementary data and a structured process to small carriers and reinsurers regarding their critical business partners.  One would assume that larger carriers and reinsurers already have well-developed and rigorous due diligence processes, and thus, although the PA may supplement ongoing MGA/MGU monitoring, it seems quite unlikely that the PA could supplant a carrier’s or reinsurer’s due diligence process altogether.  Unless the carriers or reinsurers are very small or currently lack a structured process, they would probably not choose to “outsource” the process to AM Best.  

However, the PA may take on a greater weighting in the due diligence process as it gains greater acceptance in the market and possibly reaches “de facto standard” status. There is a future scenario where carriers use the PA as a “coarse” or initial filter when paring down a longer list of potential MGA / MGU partners to the shorter list for further consideration.  

Viewed from another angle, the PA provides an initial skills and process roadmap for those contemplating becoming an MGA/MGU.

Stay tuned for Part 3 of this series, where we will discuss which factors MGAs and MGUs should consider when deciding on whether and when to engage in the PA, and the value of doing so.

Strategic Risk Associates (SRA) recently conducted a Webinar with several experts from the MGA and MGU space providing their perspectives on this topic. You can view the Webinar here:

Sources:

(1)     MGAs Under AM Best’s Microscope, BYGARRY BOOTH, 22 March 2022