Incentive Compensation and Performance Measurement in the Property and Casualty Insurance Industry

Abstract

Changes in the property and casualty (P&C) insurance industry, and changes in executive compensation in general, have lead to a situation where P&C managers have increased opportunities and motivation to influence earnings. A significant opportunity to influence earnings arises out of establishing and managing insurance claims reserves, which are composed of both case and actuarial reserves. This is significant because many insurance incentive compensation programs are based on yearly reported earnings. This paper presents an alternative insurance executive compensation approach. The approach utilizes a more accurate measure of insurance performance, accident year analysis — in place of the more traditional calendar analysis — and a bonus bank program.

Keywords: Insurance, Incentive Compensation, Economic Profit

JEL Classification: J33, L20, M21