Global credit ratings agency AM Best is maintaining a positive outlook on the delegated underwriting authority enterprise (DUAE) market, citing sustained global growth and momentum, as well as the market’s ability to cater to underserved and emerging risks.
However, while the agency’s outlook on the DUAEs market segment remains positive, Best is cautious of the risk managing general agents (MGAs) bring to insurers with which they do business.
As a result, Best is monitoring developments in terms of the business MGAs are placing and the impact on rated insurers.
According to the agency, premium growth within the U.S. DUAE segment grew at a double-digit rate for a third consecutive year in 2023, climbing by 14.9% to reach $81.4 billion.
From what we understand, the growth was prompted by rising DUAE collaborations with insurers to write specialty business, resulting in a larger share of industry premium shifting to the MGA space.
For some lines of coverage, in particular, catastrophe-exposed property, commercial auto, and umbrella and excess coverage, hardening market conditions over the past several years have driven business to the surplus lines market, with MGAs serving as an “important distribution channel.”
Greg Williams, senior director, AM Best, commented: “While softer pricing on other commercial casualty lines have placed downward pressure on total market premiums, MGAs working with recent start-up specialty commercial carriers have offset that impact and fueled top-line revenue growth for these insurers.”
Looking back at 2022, five MGAs generated more than $1.0 billion in top-line premium revenue.
Fast forward to 2023, the number of MGAs in that category increased to seven, which has generated increased investor interest.
It is important to highlight that private equity investment firms have been drawn by the potential returns offered by MGAs.
Best also explained that these private equity firms view MGAs as lucrative, given their ability to generate stable cash flows through commissions and fees on insurance policies.
But, the agency also implies a cautionary note towards this growing DUAE segment, particuarly when MGAs, managing general underwriters (MGUs), and program managers gain authority over underwriting, pricing, and binding decision-making without any effective risk controls.
Best notes that a number of MGAs have abused their authority, writing unprofitable business to increase commissions, and according to the agency’s latest report, an analysis of the U.S. property/casualty market for the years 2000 to 2022 shows that the third leading cause of impairments was due to affiliated programs.
Dawn Walker, associate director, AM Best, said: “Insurers must structure their relationships with these DUAEs with appropriate checks and balances.”
Furthermore, in response to this segment’s growth, AM Best introduced its Best’s Performance Assessment in 2022, providing an industry-first tool providing an objective, independent opinion of a DUAE’s ability to perform services on behalf of its insurance partners.
If you recall, the agency also affirmed its positive outlook for the DUAE market segment in November 2023.
Given the continued evolution of the DUAE segment, Best noted that it has become a relied-upon distribution channel for all types of insurers under all sorts of market conditions.
“The segment has weathered many challenges, showing its ability to sustain growth and stability. DUAEs are taking full advantage of the many opportunities to expand and innovate in the industry,” the agency said.