One in three insurers misfiring over risk adjusted executive pay

Although just over half of the 539 senior insurance risk executives questioned said they take risk management into account when arranging executive pay, that worrying third indicated they are not planning to enhance the alignment between pay and risk, even though they view the current approach as unsatisfactory. Responding to the findings of the 7th biennial global enterprise risk management (ERM) insurance survey by Towers Watson, Andrew Marshall, the company's Director of Executive Compensation, warned that given the current regulatory environmental financial services companies will need to take a long hard look at their compensation structures. "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. 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 behaviours are reflected in performance management and related pay decisions," he said.hideMike Wilkinson, Director of the Insurance Management Consultancy at Towers Watson, added: "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. External stakeholder pressure to ensure employee incentives are better aligned with the long-term health of their companies will only intensify." The survey of primarily chief risk officers, chief financial officers and chief actuaries working for insurers around the world also found that nearly 50% of respondents believe they are less than half way to developing the risk culture needed to support effective ERM in their businesses. 80% rate risk culture as a highly important aspect of their end-state ERM vision with two thirds indicating that risk culture and core risk control techniques have helped to enhance business performance over the last two years. Furthermore, 86% of participants expect that additional investment in their risk culture, such as establishing a more common understanding of risk management throughout the organisation, will bring further benefits. Mr Wilkinson added on the survey's findings: "Insurers firmly believe that a stronger risk culture will add value to their organisations, but achieving full implementation requires a progressive approach over a sustained period. "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." The survey was conducted during the second half of 2012 with respondents primarily coming from risk, finance and actuarial disciplines across all lines of business, including life insurance (41%), property & casualty insurance (25%), multiline insurers (18%) and reinsurance (11%). Geographically, they represented companies in North America (37%), Europe (25%), Asia Pacific (31%), Latin America (5%), and the Middle East and Africa (2%).

One in three insurers misfiring over risk adjusted executive pay

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