The AM Best Performance Assessment for DUAEs, Part 3
Insurance

The AM Best Performance Assessment for DUAEs, Part 3

October 19, 2022

To Assess or Not to Assess, That is The Question (or perhaps Assess Later?)

This is Part 3 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.

In Part 2, we discussed what the Performance Assessment means for not just MGAs and MGUs, but also carriers and reinsurers. You can view Part 2 here.

Some Factors to Consider Regarding to Assess or Not to Assess…

From our perspective, it all depends on timing and market acceptance.

Right now, AM Best is a known entity, but the Performance Assessment (PA) is not.  Thus, the perceptions among all parties involved regarding the PA’s value will vary widely.  There are two pure scenarios:  1) A “push” scenario, where obtaining the assessment with a good “report” could be an early adopter advantage regarding marketing efforts or 2) a “pull” version where carriers, reinsurers or financing sources insist or demand that an MGA / MGU gets the assessment prior to consummating a deal or expanding a relationship.  The actual result will likely be somewhere between the two, but we are uncertain as to the emphasis.

The PA is now optional but opting out will not be a good choice if the PA gains in importance.  Just as with the previous reference to the college admittance process, students could choose to skip the SAT, ACT, etc., and simply rely on the strength of their high school grades, sports accomplishments, work for worthy charities, etc., but most would agree that’s a risky strategy.

The big question here is how steep will the market acceptance and adoption curve be for the PA, and where does it top out?  Will carriers, reinsurers and other market participants start to think of this assessment as not only valid but nearly mandatory?  How long will it take before 50% of the MGAs and MGUs have done an initial assessment? How long to reach 80%?  Will there be a negative reaction to deciding to opt out in 2023, or 2025 or 2028?  How much will the market value of having a previously “unrated” segment of the value chain now being held up to an impartial set of standards administered by one of the most influential, if not the most influential, rating institutions in the industry?

Clearly, there is a cost / benefit analysis that MGAs and MGUs must perform before engaging in this exercise. They must answer questions internally on “how do we think we’ll fare on the assessment?,” “will any of our prospective or current partners value this?,” and “do I want to do this early, or wait for others to go through it and get some intelligence prior to making a decision?”  Like most important business decisions in 2022, this one is not straightforward, and requires careful consideration and a bit of watching and waiting.

Conclusion

At the moment (October 2022), it is our opinion that in the near-term, the PA will be both less valuable to the larger and more established MGAs/MGUs and perceived as such by them. Given that they already have established relationships, track records and financial heft, receiving a stamp of approval likely doesn’t provide much marginal benefit to them.  

For the more aggressive mid-sized MGAs/MGUs looking to establish new carrier and/or reinsurer relationships, receiving a strong PA and making it public would be helpful and potentially accelerate the time-consuming due diligence process, and even provide some overall standardization to the process.  However, newer / fledgling companies have a few additional considerations. The benefits for them would be even greater than those of the mid-sized companies if they received high marks, but attaining those high marks may prove difficult, as many of the sub-components are weighted toward financial strength and established relationships,  which likely wouldn’t favor new entrants or smaller companies.  Those companies will have to find out if AM Best is going to grade them on a curve or on an absolute scale. 

We’d like to point out that there could be real value to “prepping for the exam.” If you’re thinking about participating in the PA or looking to prepare, please feel free to reach out to us to find out how we can help.  SRA’s Watchtower platform is an Enterprise Risk Management tool specifically tailored to the P&C industry, with pre-built P&C Risk Metrics, Key Performance Indicators, and detailed descriptions of risk maturities. Watchtower’s MGA Capability Assessment is built on the same nimble platform that dozens of Insurance companies and Financial Institutions use today to control Enterprise Risk and is specifically designed to help MGA’s prep for the PA process.

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

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