Summary
Insurance claims can take years to resolve, which makes insurance performance measurement-and incentive compensation based on such measurement-challenging. The insurance industry utilizes a method of analysis called accident year analysis to manage the temporal challenge inherent in insurance claims. Despite the managerial and economic utility of this method of analysis, it has generally not been applied to incentive compensation programs for insurance company executives and employees. This article will explain accident year analysis, and will show how it can be merged with the bonus bank concept and the Insurance Performance Measure, which is an insurance economic profit metric, to construct an economically consistent insurance incentive compensation program.
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Extract
Accident Year Development, Bonus Banks, and Insurance Incentive Compensation
INTRODUCTION
Insurance claims can take years to resolve, which makes insurance performance measurement-and compensation based on such measurement-challenging. For example, assume an insurance company underwrote an insurance policy in the year 2000. If no claims were filed in that year the policy sale can appear profitable by the amount of premium collected (less all incurred expenses). However, assume now that a claim was filed against the policy in the following year, 2001, and that the insurance company retained an outside investigative firm to adjust the claim on its behalf. The effective profitability of the policy would erode by the amount of expenses being incurred despite the profitable appearance the year before. If we assume further that a lawsuit was filed on this claim in the year 2002, it can be seen that the in...See the full content of this document
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