By Chris Munro

Feb 3 - (The Insurer) - Delegated underwriting authority enterprises (DUAEs)’ ability to provide commercial carriers with micro-specialisation means they are increasingly important partners, while insurers believe maintaining and cultivating existing relationships with such entities is more critical than developing new ones, findings from a new AM Best survey show.

According to the study’s results, insurers place a high value on specialisation and the expertise DUAEs provide.

Indeed, 75 percent of the survey’s respondents picked out the DUAE market’s ability to serve niche segments with specialised expertise. Participants also said the DUAE sector’s ability to underwrite for niche or complex risks will be a key factor in its growth.

Among the survey respondents, 31 percent said they found DUAE partnerships appealing because of their access to superior technology and the ability to adapt to emerging trends.

DUAEs’ speed to market is another draw, with 33 percent of respondents citing this factor as another driver of the sector’s appeal.

The niche specialisation that DUAEs offer is one of the main factors in why survey respondents believe the market will continue to grow.

Continued DUAE growth

As AM Best noted, 70 percent of participants expect a further increase in DUAE-sourced premiums, continuing the sustained growth that the sector has recorded in recent years.

Alongside the sector’s specialisation benefits, respondents highlighted the expanding lines of business that DUAEs operate in, as well as the growing trust in the business model, as evidenced by the segment’s success in recent years.

“The model has proven resilient and added value amid external economic, climate, and social challenges,” AM Best said.

The ratings agency also noted that carriers’ growth expectations support its positive outlook on the segment which, AM Best said, is underscored by the market’s stability and insurers’ high level of satisfaction with DUAEs.

“Around 25 percent of respondents expect no significant change in their DUAE-sourced premium, which could indicate a mature relationship with existing DUAE partners whose capacity and premium levels are being optimised,” AM Best suggested.

Limited appetite to back new DUAEs

Despite the recent proliferation of DUAE start-ups, just 13 percent of survey participants plan to partner with new operations. Less than 10 percent said they intend to acquire a DUAE.

“AM Best believes the focus on maintaining current partnerships reflects the belief carriers have in the scalability and performance of their existing DUAE arrangements,” the ratings agency said.

“The survey results suggest a conservative approach to expanding DUAE relationships or establishing new partnerships.

“Maintaining existing relationships appears to be more important than an aggressive expansion strategy,” it added.

The vast majority of carrier respondents – 94 percent - said they did not have plans to reduce the amount of capacity they deploy with DUAEs.

As AM Best found, there may be some targeted reductions in certain lines owing to an insurer’s strategy and its view of the business cycle.

“The ability to address evolving risks, particularly in complex lines such as cyber and commercial auto, is essential to improving profitability and may require supplementing in-house expertise with the technical prowess of a DUAE,” AM Best said.

Carrier size determines partnerships

As the survey findings show, a large number of carriers – 45 percent – provide capacity support to a select few DUAEs.

Less than a fifth of participants – 18 percent – have capacity tie-ups with 10 to 24 DUAEs, while slightly over 10 percent provide support to 25 to 49 DUAEs.

According to AM Best, the number of DUAE capacity partnerships is related to an insurer’s size, along with its history of operating in the segment and its diversification objectives.

Cycle management is also another consideration for a carrier’s interest in the DUAE sector, AM Best said.

“An insurer’s ability to conduct due diligence on its partners and trust their underwriting models is more critical than the number of partnerships they may have,” the agency noted.

P&C dominates partnerships

When it comes to the type of business that carriers are willing to support in the DUAE sector, AM Best said property and casualty dominates.

Within commercial lines, AM Best noted that DUAEs provide coverage in not only niche, specialist sectors, but also more common market segments.

Underserved classes of business are another area where DUAEs play a role.

General liability and commercial property are the two most common lines of commercial business where DUAEs play, with carriers delegating high-volume, standardised risks, particularly as part of commercial multiperil policies, AM Best said.

General liability is the most frequently delegated line at 60 percent, followed by commercial property at 52 percent.

Respondents highlighted the need for regional expertise and local relationships when writing commercial property business to handle evolving climate-related issues.

“Trends are similar for lines such as commercial auto, cyber, D&O [and] flood, where the specialised underwriting expertise DUAEs provide is valued by insurers,” AM Best said.

In personal lines, the most common personal line of business DUAEs write is personal property with 64 percent. AM Best said the percentage for automobile – at 35 percent – “was notable given the widespread demand and need for specialisation catering to regional and high-risk markets such as the non-standard auto market”.

“The “other category” came to more than 28 percent, suggesting a diverse range of personal lines beyond property and auto, including more niche products for lines such as flood risk, specialty personal liability, or recreational vehicles,” the ratings agency said.

Admitted vs E&S

More broadly, AM Best’s survey found that DUAE use is slightly higher in the admitted market at 59 percent, with the remainder in the excess and surplus lines (E&S) segment.

AM Best said that split is consistent with recent research that shows the E&S market offers more flexibility and allows for solutions tailored for unique and high-risk exposures.

While there is plenty of enthusiasm broadly about the DUAE market, some of those who participated in AM Best’s survey also raised concerns, and noted perceived risks.

Of the respondents who do not utilise the DUAE market, 75 percent selected loss of control over underwriting as the primary reason for not doing so.

A small proportion of participants said financial factors were a barrier to using DUAEs, with the cost of commissions possibly deterring organisations with budget constraints, who may not believe the added value justifies the expense.