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Article | Executive Pay Memo North America

Estimated insurance industry incentive funding trends for payouts in 2021

Governance Advisory Services |Executive Compensation|Insurance Consulting and Technology
COVID 19 Coronavirus

By Derek Mordente , Max Fogle , Chris Rogers and Shannon Williams | December 22, 2020

Estimated incentive scores are down across the insurance industry versus recent years, with a greater willingness to use discretion.

Willis Towers Watson recently conducted a pulse survey of insurers to gain insight into estimated funding levels for incentive plans ending in 2020 (annual and long term to be paid in 2021), anticipated or planned application of discretion, and anticipated or planned design changes heading into 2021. Fifty-eight insurers, near equally split between life & annuity (L&A) and property & casualty (P&C), participated in the study.

Incentive funding

Annual incentive plan

Approximately half of all companies in the study expect to be below target for their annual incentive plan funding, while one-third expect to be above target.

For L&A, this contrasts significantly with results observed in prior surveys. Over the past 10 years of Willis Towers Watson conducting this study, the annual plan for L&A has generally funded above target at 110% or more.

Current estimated results for P&C are more broadly consistent with recent history, as P&C has most commonly trended around target over the life span of this study.

Long-term incentive plan

Expectations for long-term incentive funding are generally higher than those for annual plan funding. Anticipated funding for long-term incentive plans is trending slightly above target, with 69% of all companies in the study expecting to be at or above target.

The variation between L&A and P&C may stem from high catastrophe years over the past several years (i.e., two high catastrophe years generally within a three-year performance cycle for most P&C insurers).

Historically (our study of long-term incentive data dates back five years), P&C companies have trended higher above target over time than their L&A counterparts from 2015 to 2019. Further, in 2019, 18% of P&C companies and 21% of L&A companies paid out below target.

Use of discretion

Annual incentive plan

Over a third of respondents anticipate using discretion to adjust their formulaic scores, including half of companies with formulaic scores below 90%. The discretionary increase is expected to be 16.4% points on average but as large as 50% points.

Long-term incentive plan

Due to the nature of long-term incentive plans (longer period for performance to more normalize), significantly fewer companies are considering discretionary adjustments to their long-tern incentive funding (13%).

Changes to expect in 2021

Many respondents are considering or anticipating at least one change in their metrics, metric weighting, target setting or payout curves for their 2021 annual incentive plans. Target setting and payout curves were the most anticipated or considered element change for the overall group.

For long-term incentive plans, nearly half of respondents are considering or anticipating at least one change in their metrics, metric weighting, target setting, payout curves, long-term incentive mix or performance periods. P&C companies indicated less inclination for design changes versus L&A. Forty-eight percent of L&A companies are anticipating or considering a change in target setting, while no P&C companies are. Similarly, 38% of L&A companies are considering or anticipating a change in payout curves, while only 4% of P&C companies are.

Conclusion

The impact of the COVID-19 pandemic is anticipated to extend beyond 2020 and, as our study results show, many organizations are thinking about how this will affect incentive plan design. We will be closely monitoring these developments over the next several months as organizations finalize and formally approve their incentive funding levels. As we have done historically, we will survey final results before the end of the first quarter.

Authors

Director, Executive Compensation (New York)

Senior Associate, Executive Compensation (New York)

Analyst, Executive Compensation (New York)

Analyst, Executive Compensation (New York)

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