1. 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

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), Geczy et al. (1997), Gay and Nam (1998), Knopf et al. (2002), Mehran (1995) The effects maybe complex: Ross (2004)

6. Data Data source: Executive compensation: ExecuComp database 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.