The data gap in the delegated underwriting authority enterprise sector: a challenge for transparency and oversight

The delegated underwriting authority enterprise (DUAE) market again showed strong growth in 2023, but a lack of industry consensus makes it difficult to say by how much exactly.

AM Best puts its figure for US direct premiums written generated by managing general agents (MGAs) at $77 billion for 2023. This estimate comes after we made an update in our annual report on the US DUAE market, as some information was updated to reflect amended company filings. The revised figure is approximately $4 billion lower than the original estimate. Even with the downward revision, the DUAE market still saw substantial near-double-digit growth in 2023 – but the update itself highlights a level of opacity that exists within this sector and the challenge in estimating a market premium total.

This lack of transparency around unreported premiums contributes to a substantial blind spot within the industry. We know premium levels are higher than we’ve reported. National Association of Insurance Commissioners (NAIC) reporting regulations for Note 19 require that companies disclose individual MGA premium data only for those MGAs whose premium constitutes more than 5 percent of the risk-bearing entity’s policyholder surplus. Consequently, our estimate does not represent the entire universe of MGAs since many generate annual premiums for insurers that fall below the 5 percent surplus threshold. This data gap obscures the true volume of insurance underwritten through these entities. The gap is not merely a bureaucratic oversight but a significant loophole that affects risk assessment and regulatory oversight.

Estimates of direct premiums written vary across the DUAE market as well; for example, Conning said in a recent AM Best briefing that its estimate of US MGA premium in 2023 is more than $82 billion. Some of these other market estimates incorporate a 10-15 percent add-on intended to capture the smaller end of the market. For now, AM Best is using only what can be seen in the Note 19 data.

Despite the challenges in determining a solid market estimate, it’s clear that the market growth is unlikely to abate in the coming year. Reinsurers have demonstrated adequate capacity and discipline and this has helped provide additional stability. It also appears that the overall sector has emerged relatively unscathed from the Vesttoo letter of credit fraud. Technology remains a huge opportunity for MGAs as well. The hard market conditions of the past couple years has harmonized the relationship between MGAs and other sectors, notably the surplus lines and reinsurance industries, and these elements have been captured in AM Best’s positive outlooks on all three segments.

Still, the lack of premium transparency hampers effective risk management. Insurers relying on DUAEs to enter new markets or underwrite specific types of risks may find themselves unable to accurately assess the aggregate risk exposure of policies underwritten in the DUAE ecosystem. This situation is further complicated by the varied regulatory standards across different states, where some may require more detailed disclosures than others. The result is an uneven landscape of risk visibility, which can lead to skewed growth rates and trends and increased systemic risk. State insurance regulators depend on comprehensive data to monitor market stability and enforce solvency standards. When premium volumes are underreported, the entire market is deprived of crucial information needed to ensure the general financial health of the industry. This lack of data can delay mitigating responses until financial strains become all too apparent in other areas of an insurer's financial statements, often when corrective action is more costly and disruptive.

Unreported premium volumes can mask competitive disparities in the market. This can distort market dynamics, where lack of transparency can potentially lead to a race to the bottom in terms of pricing and underwriting standards.

To safeguard the industry against unforeseen risks and foster a more stable insurance market, regulators need to address the data gap in premium reporting for managing general agencies and other delegated underwriting authority enterprises. Risk management, regulatory oversight and market fairness are of key importance and tackling these issues ensures a healthy state of the insurance market and maintain a focus on the long-term health of the industry.

Dawn Walker is associate director, industry relations (DUAE) at AM Best.