Is Your Pay Linked to Risk-Related Return Metrics?

A third of insurance risk executives globally are unhappy with the links between executive compensation and risk management, but have no plans to change the current approach, according to Towers Watson’s “Seventh Biennial Towers Watson Global ERM Survey.” The survey asked 539 senior insurance executives, including chief risk officers, CFOs and chief actuaries, about the progress and development of ERM activity within their companies.

“Insurers firmly believe that a stronger risk culture will add value to their organizations, but achieving full implementation requires a progressive approach over a sustained period,” said Mike Wilkinson, a director of the insurance management consultancy at Towers Watson. “Aligning remuneration to risk can only be introduced once expectations have been established. Underpinning progress through performance management techniques and appropriate incentives is an important part of the process.”

“Responsibility for risk management lies squarely with boards and senior executives: communicating risk appetite and setting expectations on risk-taking. They need to live and breathe the risk culture, so we find it surprising that so many insurers appear to be shying away from taking the next step of linking pay to risk-related return metrics,” Wilkinson said. “External stakeholder pressure to ensure employee incentives are better aligned with the long-term health of their companies will only intensify.”

Highlights from the report:

• Two-thirds said risk culture and core risk-control techniques have helped enhance business performance over the last two years.

• 86 percent said additional investment in their risk culture, such as establishing a common understanding of risk management would bring further benefits.

• Slightly more than half said they account for risk in their current executive compensation arrangements.

• Almost one-third said they are not planning to enhance the alignment between pay and risk, even though they view the current approach as unsatisfactory.

• 80 percent of insurers rate risk culture as a highly important aspect of their end-state ERM vision.

• Nearly half of insurers said they are less-than-half way to developing the risk culture they need to support effective ERM in their businesses.

• Nine-out-of-ten companies that are close to completing their risk-culture program said it has enhanced business performance.

“The introduction of recent European Union Directives applying to the financial services sector tell us that European regulators will be looking for companies to demonstrate a holistic approach to risk management,” said Andrew Marshall, director of executive compensation at Towers Watson. “Companies will need to prove that they operate with a strong pay and risk governance model, that pay structures are compliant with the relevant regulatory rules and guidelines, and to demonstrate that appropriate risk-based values and behaviors are reflected in performance management and related pay decisions.

Survey participants came from risk, finance and actuarial disciplines across all lines of business, including life insurance (41 percent), property & casualty insurance (25 percent), multiline insurers (18 percent) and reinsurance (11 percent). Geographically, they represented companies in North America (37 percent), Europe (25 percent), Asia Pacific (31 percent), Latin America (5 percent), and the Middle East and Africa (2 percent).