MGMT 611 Final Assignment Essay

Submitted By heshamb
Words: 2746
Pages: 11

Part I
Argo is an international specialty insurance underwriter with operations in 9 countries and $2 Billion in global revenue. Like its peers in the industry, Argo distributes its insurance products, including product lines for coal mines, cab drivers, medical professionals and commercial properties, through independent agents who act as intermediaries between the client and Argo.
Argo relies on a large staff of underwriters and risk analysts to execute its strategy for an insurance portfolio that is within an acceptable risk threshold. Underwriters drive Argo’s profitability by maximizing underwriting income and minimizing cost associated with losses on underwritten policies. Profitability is also driven in part by income from investments; therefore, Argo’s actuarial staff is constantly evaluating the insurance portfolio risk factor to determine the appropriate level of cash reserve, to pay potential insurance losses, and excess cash that can be invested.
The specialty insurance industry is highly competitive, with many underwriters of various sizes competing head-to-head. The industry is fragmented with over 100 small to medium size companies who directly compete on very similar product mixes. Companies also compete directly with much larger general diversified insurance companies, such as AIG and Travelers, and other non-insurance entities offering risk alternatives. Given the parity that exists in the industry, employee loyalty is low. Underwriters, actuaries and other professionals are constantly seeking employment by the highest bidder. Furthermore, independent agents build relationships with underwriters and are usually more loyal to them than to the Company and its brand (assuming credit rating is equal). When key employees leave to work for a competitor, so does the business that they have developed. Therefore, employee retention and incentives are a constant concern for Argo and other specialty insurance underwriters
The simplified profit formula for the insurance industry is:
Profit = Income [Insurance Premiums + Investments] – Costs [underwriting Loss + other expenses]
Argo has a unified incentive structure for all employees, including corporate staff, that is based on a profit share formula:
Profit Share = Individual Profit Share Target X +/-200% Underwriting Income Modifier X +/- 30% modifier based on subjective individual goal achievement
The underwriting income modifier for employees who are in production jobs, such as underwriting and actuary, is based on a blend of 70% specific business unit result (controlled by the individual or a small team of 5-15 employees) and 30% overall group income results. The income modifier for corporate and support staff is based on overall group results only.
The annual profit share payment for employees in production jobs is paid on a deferral basis; 60% in the year it was earned and 40% ratably over 2 years. The deferral structure is intended as a retention tool.
This structure has several issues:
Like any business, Argo aims to maximize profits; however, the profit share scheme, despite its name, is not based on profitability. Instead, it is based on gross underwriting income. This is due to complexities and limitations in establishing a profit target for each producer role. This incentive program was designed when Argo was just a $300 million company; Argo’s current complex international business has outgrown this simple design.
Ideally, each individual producer should have an individual target that is consistent with his job type (underwriting, actuary, investments, etc.) and aligned with the appropriate financial metric; however, the complexity of the business prevents Argo from establishing financial goals at individual levels. Also, monitoring and reporting individual performance would require the costly installation of performance management and reporting systems.
The current structure incentivizes underwriters to maximize underwriting income, which will in turn…