How this ratings agency views the Canadian MGA market

Ratings agency AM Best will likely maintain its positive outlook on the global delegated underwriting authority enterprises (DUAE) market, an executive said Friday during AM Best’s Canada Insurance Market Briefing in Toronto.

“On Dec. 5, 2022, we did assign a positive outlook to the global market,” AM Best senior director Greg Williams said during the Recent Developments in the DUAE sector session. “At that time, that was the only positive outlook we had in any of the markets.

“And really, the outlook was predicated on ongoing growth that’s being driven by technology, talent and diverse sources of capital.”

Ten months later, Williams said the ratings agency doesn’t “see anything at this point that would cause us to revise the outlook on that.”

In Canada and other jurisdictions, DUAE is a blanket term for managing general agents (MGAs), managing general underwriters, coverholders and program administrators, to name a few. They have become a key value distribution chain with the insurance ecosystem, Williams said.

With an estimated 80+ MGAs in Canada, they are one of the fastest-growing segments of the Canadian insurance market.

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“From a commercial lines premium perspective, estimates are that $3.5 billion to $4 billion in premium are flowing through the MGAs, which accounts for approximately 10% of gross written premium,” Williams said. That compares to about 20% in the U.S.

“We do think Canada is moving in the same direction as the U.S,” he said.

An audience member asked about growth projections for the Canadian MGA market.

“It’s difficult in the Canadian marketplace, whereas we can point to specific growth rates in the U.S. market because we have that data,” Williams responded, estimating the U.S. market is between $65 billion and $85 billion in direct written premiums.

“We don’t have a specific growth rate [in Canada]… I would say definitely double digits, probably accelerating past that.”

The reputation of MGAs globally, but also in Canada and the U.S., has been enhanced over the past five to 10 years, and Williams sees this trend continuing.

When AM Best assigned a positive outlook for the global DUAE market last December, it was predicated on:

Ongoing growth driven by technology, talent and diverse sources of capital,
Growing interest in program business by capacity providers, and
Private equity investments in the DUAE market.

Related: What’s on Dec? | Episode 7 | Measuring up

But there were also near-term concerns, such as those related to economical conditions, including inflation, and a potential pull-back of capital and risk-bearing capacity. Another concern was elevated reinsurance costs and compressed MGA commissions — where reinsurance costs could be factored into the commission, resulting in a reduction of commissions due to higher reinsurance costs.

Reinsurance pricing concerns was “probably the biggest consternation that we had” when assigning a positive outlook to the global DUAE market, Williams said. “We felt the strengths of the market far outweighed these near-term concerns.”

Although it hasn’t been conclusively determined, AM Best is not planning to revise its positive outlook on the sector, Williams said, pointing to a more orderly reinsurance market and stubborn, but easing, inflation.

AM Best also released its performance assessment methodology for DUAEs live on Feb. 1, 2022, based on five factors:

Underwriting capabilities — such as quality of underwriting results, experience of underwriting staff and proprietary data and analytics brought to the table
Governance and internal controls — internal and external audits by capacity providers
Financial condition — cash flows, stability and sources of income, financial flexibility, use of captives
Organizational talent — could include management and underwriting talent that has moved into the DUAE sector
Depth and bread of relationships — how many capacity providers the DUAE works with, consistency of relationships, amount and type of programs, client retention