04 July 2012

Risk.net: Insurers' remuneration will become more risk-sensitive, says incoming Bupa finance chief

Risk management will become an increasingly important factor in determining insurance executives' remuneration, the incoming chief financial officer of healthcare giant Bupa has said.

Evelyn Bourke, who last month quit as chief executive of insurer Friends Life's heritage division, said that the discussion over executives' incentives and the risk controls at organisations would increase the weight given to risk when determining compensation.

Since the financial crisis of 2007, there has been a drive by policy-makers and regulators to increase the risk-sensitivity of compensation packages, particularly in the banking sector.

The Financial Services Authority (FSA) has said that when considering their risk profile for Own Risk and Solvency Assessment (ORSA) for Solvency II, insurers should factor in the outputs of this analysis into their remuneration policies.

"Firms need to think about the risks that are difficult to quantify, such as operational risk, and risks that cannot be supported by capital, such as reputational risk and liquidity risk, and that these risks are linked to remuneration", said Kathryn Morgan, a manager in the prudential insurance policy team at the FSA.

But Bourke warned that the risk function still needed to develop at many insurance companies. "Risk management is a function that has a key role to play. But it needs to have more maturity in many organisations – it needs to have more authority, more grey hairs", she said.

Bourke also highlighted the challenge that insurers will face in dealing with the volatility introduced by Solvency II's market consistent approach to valuing assets and liabilities. "Investors and analysts will get a shock when we move into a Solvency II world and capital will be volatile. Investors and analysts don't want insurers holding on to their money, but companies will need to hold additional capital to smooth the volatility [under Solvency II]", she said.

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