AM Best is maintaining its market segment outlook for the delegated underwriting authority enterprise (DUAE) segment at positive, citing its sustained growth and niche expertise, despite potential issues that could arise from capacity challenges and rapid growth.

The DUAE distribution channel continues to increase its market share, supported by strong and sustained premium growth globally. According to the Best’s Market Segment Report, “Market Segment Outlook: Delegated Underwriting Authority Enterprises,” capacity for the DUAE segment has benefited from ongoing material growth in the excess and surplus (E&S) market, as elevated catastrophe activity and the regulatory environment continue to direct more premiums into surplus line businesses.

“The general optimism among insurers and reinsurers about DUAEs persists, with more strategic partnerships being formed between carriers and DUAEs,” said Yizhou Hong, senior financial analyst, AM Best. “These partnerships are generally longer-term and allow capacity support across lines of business, industries, and geographies, instead of simply by program.”

The DUAE segment’s growing niche expertise is aligned with the insurance industry’s growing demand for specialty products, with investments in technology and talent serving as positive growth drivers. However, the report strikes a cautionary note on the segment’s strengthening ties to E&S and fronting sectors, given the potential for greater dependence on reinsurers and reinsurance.

Reinsurance capacity constraints can negatively affect the DUAE market in the form of capacity tightening, compressed commission income, and narrowing underwriting margins, as well as weakened bottom-line performance. In addition, DUAEs find themselves with rising exposures to reinsurer credit risk and concentration risk.

The report also cites the need for internal governance and controls as part of risk management as the DUAE segment continues its rapid growth.

AM Best defines a DUAE as a third party appointed by a (re)insurer through contractual agreements, to perform underwriting, claims handling and other administrative functions on behalf of its partners. DUAEs comprise entities such as managing general agents, coverholders, program administrators, program underwriters, underwriting agencies and appointed representatives.

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To view current Best’s Market Segment Outlooks, please visit http://www.ambest.com/ratings/RatingOutlook.asp.

AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.

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