One in three insurance risk executives world-wide are unhappy with existing links between risk management and their executive pay policies but have no plans to change the current approach, according to the 7th biennial global enterprise risk management (ERM) insurance survey by Towers Watson.
The survey asked chief risk officers, chief financial officers and chief actuaries about the progress and development of ERM activity within their companies. Two thirds of participants indicated 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.
Just over half of companies say they take risk into account in their current executive compensation arrangements. Close to a third of participants indicated that they are not planning to enhance the alignment between pay and risk, even though they view the current approach as unsatisfactory.
Andrew Marshall, Director of Executive Compensation at Towers Watson said: “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."
“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,” said Mike Wilkinson, a director of the insurance management consultancy at Towers Watson.
Additional survey findings on risk culture:
• 80% of insurers rate risk culture as a highly important aspect of their end-state ERM vision
• Nearly 50% of insurers think they are less than half way to developing the risk culture they need to support effective ERM in their businesses
• Nine out of ten of companies that are close to completion of their risk culture programme consider that it has enhanced business performance
Mike Wilkinson 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.”
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