A peek at performance
Underwriting agencies have come under the spotlight amid regulatory change, ratings group executive Rob Curtis says
By Wendy Pugh
The global rise in underwriting agencies has expanded opportunities for specialist ratings company AM Best as it provides independent views in a changing – and sometimes volatile – insurance landscape.
AM Best Asia-Pacific chief executive Rob Curtis says the company, a long-time credit ratings provider, has more recently offered performance assessments for “delegated underwriting authority enterprises” that provide services with insurance partners.
The assessments were started in the US in 2022 as managing general agencies generated increased premium value, and the company sees Australia and the Asia-Pacific region as key markets as the sector expands.
Locally, regulation is driving heightened scrutiny of service providers including underwriting agencies. The Australian Prudential Regulation Authority’s CPS 230 operational risk management standard took effect last July and AM Best says its assessments examine factors central to that process.
“The last six months we’ve been … knocking on doors, effectively, saying, ‘Look, this is a new service that we’re offering,’ ” Mr Curtis tells Insurance News.
“We think it will really add value, especially in Australia, because of the APRA requirement.”
The prudential standard aims to ensure resilience to operational risks and disruptions, and, given the role of third parties includes a focus on a company’s service provider capabilities.
Mr Curtis, also AM Best’s market development managing director, says CPS 230 makes Australia unique in putting a formal regulatory structure around an insurer’s responsibilities regarding managing general agency partners.
It also provides an incentive for underwriting agencies to have an independent assessment completed, to give confidence to capacity providers considering options under heightened requirements.
“At the end of the day, they’re handing over the pen with the binding authority, so it is in the interests of the insurers to make sure there’s good oversight and good controls and good underwriting performance,” Mr Curtis says.
AM Best began as the Alfred M. Best Company in New York in 1899 and soon after was publishing reports on the losses of fire insurance companies involved in the San Francisco earthquake and blazes of 1906.
The company now does business in more than 100 countries and has regional offices in London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City.
The credit ratings assess an enterprise’s ability to meet claim, debt and other financial obligations in a timely way, with A++ the top financial strength rating.
The performance assessments for delegated underwriting authority enterprises use a numerical scale, with one representing “exceptional” and five “weak”, and focus on the ability to provide services.
Mr Curtis, based in Singapore, has more than three decades’ experience in the insurance industry, including in underwriting, regulation and consulting, and has an actuarial background.
He started with the State Insurance Office in Melbourne, worked with APRA and at the UK Financial Services Authority, now the Prudential Regulation Authority.
He has held positions with insurers in the UK, had senior roles at KPMG and at Hong Kong’s Insurance Authority, and chaired an International Association of Insurance Supervisors working group.
Mr Curtis says regulators have taken a more forward-looking approach since the global financial crisis underscored the need for better and more-up-to-date information, as well as improved risk assessment.
“They’re no longer looking just in the rear-view mirror,” he says. “A lot of the stress testing that the insurance supervisors will do will be on the forward information that is now submitted, so the capability set is better and stronger than it was. It’s more targeted to understanding the true risk profile.”
AM Best’s APAC Insurance Market Report for last year analysed 16 countries, finding that although some countries face challenges, the sector is on a robust growth trajectory, with positive regulatory developments and improving market practices.
In Australia, natural catastrophes and the impacts of climate change are an increasing challenge, but insurers have become more adept in understanding the risks, including through tools such as improved flood mapping, Mr Curtis says. The industry is also driving a focus on resilience measures.
Australia carries AM Best’s top country risk tier ranking, which reflects very low levels of economic, political and financial system risk, with a predictable and transparent legal environment, sophisticated financial system regulation and a mature insurance industry framework.
Mr Curtis says APRA is regarded highly internationally, and Australia has strong capital requirements. The regulator, in fulfilling its role, also collects a wealth of confidential enterprise information that market participants would envy as they consider potential counterparty risks.
“APRA has the inside knowledge, if you like, and understandably it can’t share it, other than the publicly available statutory return information,” he says.
“So, the market says, ‘How else do we get a view on this particular entity or that one, and where they are in terms of their financial strength.’ The ratings agencies provide that independent, objective third-party view.”
AM Best’s assessment process reflects four pillars covering balance sheet strength; operating performance; business profile, strategic outlook and prospects; and enterprise risk management. Country risk also sits over the first three factors.
Mr Curtis says reinsurers, insurers, banks, brokers, other intermediaries and policyholders are among groups relying on ratings, while other parties can also be interested in the financial strength of the sector.
Global upheavals and instability, such as repercussions from the Middle East conflict, further underscore the value of the assessments in uncertain times, with ratings contributing to confidence in counterparty strength.
“Part of our rating assessment brings in all of the stress and scenario testing that we expect insurers are doing, so it’s: how able are they to withstand some of these external shocks on the balance sheet and to their underwriting line?” Mr Curtis says.
He says AM Best is constantly looking at global developments and the potential for flow-on impacts, with inflation, interest rate moves and other macroeconomic factors relevant for country risks.
Uncertainty still surrounds the duration of the Middle East conflict and market repercussions, but insurer ratings are typically reasonably stable rather than reacting immediately to global events, given the ability to manage volatility is factored into considerations.
Mr Curtis says clients can choose whether to make rating and performance assessment reports public, with most doing so. While they hope for good marks, the process and methodology transparency also offer the opportunity for companies to identify where they can improve.
“As a ratings agency, we can’t consult, we can’t advise, but we can nonetheless tell our clients what we think good practice typically looks like, and they’re able to use that and benchmark themselves and do their own gap analysis internally.”
A consultancy model could involve a firm seeking a role in driving improvements recommended in its own initial report, but AM Best is required to maintain separation. It can’t make recommendations and then potentially return later for another assessment.
“It is a bit like you’re marking your own homework,” Mr Curtis says. “There is a very strict, regulatory line in the sand there.”
Mr Curtis, who has the perspective of a former regulator and a commercial ratings company executive, says there are some similarities between the two areas.
“On the ratings side, it’s making sure we have value and that we are contributing to the overall strength of the industry, and we are hopefully contributing to financial stability aims as well.”
