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Executive Compensation and Risk Taking in the Property and Casualty Insurance Industry

Executive Compensation and Risk Taking in the Property and Casualty Insurance Industry. Mark Browne (U Wisconsin) Yu- Luen Ma (Illinois State U) Ping Wang ( St John’s U, presenter) on CICIRM 2011 in Beijing, China. Stock-Based Executive Compensation. Stock grants

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Executive Compensation and Risk Taking in the Property and Casualty Insurance Industry

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  1. Executive Compensation and Risk Taking in the Property and Casualty Insurance Industry Mark Browne (U Wisconsin) Yu-LuenMa (Illinois State U) Ping Wang (St John’s U, presenter) on CICIRM 2011 in Beijing, China

  2. Stock-Based Executive Compensation • Stock grants • Restricted stocks • Stock options

  3. Stock-Based Compensation and Risk Taking • Payoff of stock is linear • Payoff of stock option isn’t.

  4. Research Question Are executives’ stock-based compensation portfolio related to insurance companies’ risk taking behavior?

  5. Literature Review • Convex compensation scheme may induce risk taking: • Marcus 1982, Lambert 1986 • Incentive compensation positively related to risk measures: • Agrawal and Mandelker (1987), Mehran(1992) • Incentive compensation negatively related to risk measures or insignificant: • Core et al (1999), Geczyet al. (1997), Gay and Nam (1998), Knopf et al. (2002), Mehran (1995) • The effects maybe complex: • Ross (2004)

  6. Data • Data source: • Executive compensation: ExecuCompdatabase and SEC filings • Firm operation performance data: SEC • Publicly traded property-casualty groups • Data period: 2006-2008

  7. Risk Measures (Dependent variables) • % of commercial lines premium • Coefficient of variation of daily stock price (calculated by SD/mean) • Leverage • Liquidity Risk • Market risk • Credit risk • Capital Adequacy Ratio • Coefficient of earning per share • Standard deviation of earning per share • Standard deviation of return on assets

  8. Independent Variables

  9. Empirical Models • Two forms of compensation variables – dollar amount; standardized by cash compensation (salary + bonus) • Fixed effects model (dummies for both Years and firms)

  10. Preliminary Results • Insurers whose executive compensation is more sensitive to stock price • underwrite more commercial lines business. • Experience more volatility in daily stock price.

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