4 Informative Case Studies to Help Guide Reputational Risk Management

By: | October 29, 2018 • 4 min read
Nir Kossovsky is the Chief Executive Officer of Steel City Re. He has been developing solutions for measuring, managing, monetizing, and transferring risks to intangible assets since 1997. He is also a published author, and can be reached at nkossovsky@steelcityre.com.

Societal phenomena such as #MeToo, #opioidcrisis, #boycottNRA and #deleteFacebook are exposing inadequacies in risk and governance frameworks, and astute managers recognize the need to seek remedies.


What’s needed are systems and processes helping risk managers prepare to adapt and respond to culturally-linked perils that are outside the usual framework of 1st party, 3rd party and compliance risks. Notwithstanding the implications for mission creep, development of those systems to protect corporate reputation is something enterprise risk managers should embrace.

Confidence in a company’s ability to pursue its strategy is what motivates investors to risk capital, lenders to advance capital and employees to engage. Customers expect to be delighted by product and service experiences.

These stakeholders, implicitly or through covenants, expect risks to their expectations will be managed. In addition, in certain commercial sectors, regulators demand risk management with failures manifesting in fines, criminal charges and loss of business rights. It is therefore obvious that the economic benefits of meeting stakeholders’ expectations is the value of a firm’s reputation; the Economist newspaper crowned risk to that value as the “risk of risks” more than a decade ago.

Most risk management frameworks lump reputation among a firm’s valuable assets. Reputation risk, it would seem, should be managed like other 1st party risks. Actuarial models developed by risk bearers help risk managers allocate resources to mitigate 1st party economic losses. However, until my firm developed actuarial models for reputation risk using synthetic measures of reputation value, the insurance world offered little guidance.

What follows are four case studies on how company’s tried and failed or succeeded in managing this risk.

Example 1: Facebook.

Facebook’s 2017 10K explicitly notes the value of reputation and the potential cost of its loss 14 times. In the spring of 2018, the audit committee was overseeing reputational matters but had no quantitative measure of reputation’s importance and no risk managers working from a framework that linked reputation risk to cash flows or other economic metrics. As a result, few at Facebook seemed to anticipate that the loss of trust precipitated by the Cambridge Analytica disclosures would erase 20 percent of the firm’s market cap when its impact on user growth and engagement became known to investors.

Facebook created the expectation of trust and failed to meet it. Reputation risk is the peril of stakeholders’ disappointment and anger when there is a gap between stakeholder expectations and reality. Noxious media typically amplifies that gap, which it certainly did in Facebook’s case.

Liability risk models, such as the burden-probability-loss formula that was articulated in Judge Learned Hand’s 1947 ruling are failing in the face of cultural issues. Among the most memorably is the case of the exploding Ford Pintos.

Example 2: NiSource

A current example of cultural issues shaping a liability exposure involves NiSource, one of the nation’s largest natural gas distribution companies serving approximately 3.9 million customers in seven states.

Well aware of its reputation risk, which is disclosed in six mentions in the 2017 10K, it also acknowledges that angry disappointed stakeholders lead to “loss of cost recovery and increased litigation.” The board’s nominating and governance committee is charged with “reviewing and evaluating risks to the Company’s reputation and the steps management has taken to monitor and control such risks.”

After a series of gas explosions in the Boston area, and facing a complaint from the Governor of Massachusetts, the company undoubtedly faces costly liabilities and has already experienced a loss in market cap. However, they could in theory be much worse. In my firm’s experience, reputational value losses can exacerbate 3rd-party related liability losses by factors ranging from 2 to 7 times. What is helping to mitigate the reputational damage is that NiSource appears to have a genuine interest in the welfare of both its customers and employees, and such culturally-sensitive goodwill manifests in times like these where competing forces are battling for the mind of the stakeholder.

Reputation risk is the peril of stakeholders’ disappointment and anger when there is a gap between stakeholder expectations and reality. Noxious media typically amplifies that gap, which it certainly did in Facebook’s case.

Financial stakeholders may have been somewhat impressed with the company’s apparent sensitivity to reputation risk. Had they been more impressed, the company may have mitigated the loss in equity value which will trigger the inevitable pile on of litigators. How? Through the conventional practices of risk financing and transfer.


On a pro-forma basis, our firm modeled NiSource’s potential equity loss in a material crisis to be $764 million. Based on its inferred reputation risk management efforts, existing P/E ratios and other actuarial factors, a source of contingent capital from the pooled resources of an insurance captive and insurance markets of about $40 million would have materially dampened the stock market’s negative reaction.

Example 3: Weinstein and Company

Two other recent cases also illustrate weaknesses in the third pillar of a risk management framework: compliance-centricity.

In the matter of Weinstein and Company, the board was too close to the alleged perpetrator to be able to distance itself from the ethical breach. Stakeholders expect that, even with a strong CEO, a company’s board will be able to exercise appropriate oversight. As a result, found culpable in the court of public opinion, the firm was not salvageable.

Example 4: Wynn Resorts

On the other hand, at Wynn Resorts, the board successfully jettisoned the alleged perpetrator, Steve Wynn, protected itself from the opprobrium of gaming regulators and recovered all of its lost

The former Wynn Commons at the University of Pennsylvania. Photo by Natasha A. Kossovsky

equity value in under 20 weeks. The American Law Institute, in its upcoming publication Principles of the Law, Compliance, Enforcement, and Risk Management for Corporations, Nonprofits, and Other Organizations, is expected to address the timing discrepancy between courts of law and public opinion.

When it comes to mitigating enterprise-wide threats, reputation risk appears to be challenging existing risk management frameworks.

Risk managers must understand that the work involves mitigating not only negative media coverage but also anger and disappointment of stakeholders whose expectations have not been met.

In this mix, reputation insurances provide indemnifications that affirm trust and reduce economic losses. &


Kiss Your Annual Renewal Goodbye; On-Demand Insurance Challenges the Traditional Policy

Gig workers' unique insurance needs drive delivery of on-demand coverage.
By: | September 14, 2018 • 6 min read

The gig economy is growing. Nearly six million Americans, or 3.8 percent of the U.S. workforce, now have “contingent” work arrangements, with a further 10.6 million in categories such as independent contractors, on-call workers or temporary help agency staff and for-contract firms, often with well-known names such as Uber, Lyft and Airbnb.

Scott Walchek, founding chairman and CEO, Trōv

The number of Americans owning a drone is also increasing — one recent survey suggested as much as one in 12 of the population — sparking vigorous debate on how regulation should apply to where and when the devices operate.

Add to this other 21st century societal changes, such as consumers’ appetite for other electronic gadgets and the advent of autonomous vehicles. It’s clear that the cover offered by the annually renewable traditional insurance policy is often not fit for purpose. Helped by the sophistication of insurance technology, the response has been an expanding range of ‘on-demand’ covers.

The term ‘on-demand’ is open to various interpretations. For Scott Walchek, founding chairman and CEO of pioneering on-demand insurance platform Trōv, it’s about “giving people agency over the items they own and enabling them to turn on insurance cover whenever they want for whatever they want — often for just a single item.”


“On-demand represents a whole new behavior and attitude towards insurance, which for years has very much been a case of ‘get it and forget it,’ ” said Walchek.

Trōv’s mobile app enables users to insure just a single item, such as a laptop, whenever they wish and to also select the period of cover required. When ready to buy insurance, they then snap a picture of the sales receipt or product code of the item they want covered.

Welcoming Trōv: A New On-Demand Arrival

While Walchek, who set up Trōv in 2012, stressed it’s a technology company and not an insurance company, it has attracted industry giants such as AXA and Munich Re as partners. Trōv began the U.S. roll-out of its on-demand personal property products this summer by launching in Arizona, having already established itself in Australia and the United Kingdom.

“Australia and the UK were great testing grounds, thanks to their single regulatory authorities,” said Walchek. “Trōv is already approved in 45 states, and we expect to complete the process in all by November.

“On-demand products have a particular appeal to millennials who love the idea of having control via their smart devices and have embraced the concept of an unbundling of experiences: 75 percent of our users are in the 18 to 35 age group.” – Scott Walchek, founding chairman and CEO, Trōv

“On-demand products have a particular appeal to millennials who love the idea of having control via their smart devices and have embraced the concept of an unbundling of experiences: 75 percent of our users are in the 18 to 35 age group,” he added.

“But a mass of tectonic societal shifts is also impacting older generations — on-demand cover fits the new ways in which they work, particularly the ‘untethered’ who aren’t always in the same workplace or using the same device. So we see on-demand going into societal lifestyle changes.”

Wooing Baby Boomers

In addition to its backing for Trōv, across the Atlantic, AXA has partnered with Insurtech start-up By Miles, launching a pay-as-you-go car insurance policy in the UK. The product is promoted as low-cost car insurance for drivers who travel no more than 140 miles per week, or 7,000 miles annually.

“Due to the growing need for these products, companies such as Marmalade — cover for learner drivers — and Cuvva — cover for part-time drivers — have also increased in popularity, and we expect to see more enter the market in the near future,” said AXA UK’s head of telematics, Katy Simpson.

Simpson confirmed that the new products’ initial appeal is to younger motorists, who are more regular users of new technology, while older drivers are warier about sharing too much personal information. However, she expects this to change as on-demand products become more prevalent.

“Looking at mileage-based insurance, such as By Miles specifically, it’s actually older generations who are most likely to save money, as the use of their vehicles tends to decline. Our job is therefore to not only create more customer-centric products but also highlight their benefits to everyone.”

Another Insurtech ready to partner with long-established names is New York-based Slice Labs, which in the UK is working with Legal & General to enter the homeshare insurance market, recently announcing that XL Catlin will use its insurance cloud services platform to create the world’s first on-demand cyber insurance solution.

“For our cyber product, we were looking for a partner on the fintech side, which dovetailed perfectly with what Slice was trying to do,” said John Coletti, head of XL Catlin’s cyber insurance team.

“The premise of selling cyber insurance to small businesses needs a platform such as that provided by Slice — we can get to customers in a discrete, seamless manner, and the partnership offers potential to open up other products.”

Slice Labs’ CEO Tim Attia added: “You can roll up on-demand cover in many different areas, ranging from contract workers to vacation rentals.

“The next leap forward will be provided by the new economy, which will create a range of new risks for on-demand insurance to respond to. McKinsey forecasts that by 2025, ecosystems will account for 30 percent of global premium revenue.


“When you’re a start-up, you can innovate and question long-held assumptions, but you don’t have the scale that an insurer can provide,” said Attia. “Our platform works well in getting new products out to the market and is scalable.”

Slice Labs is now reviewing the emerging markets, which aren’t hampered by “old, outdated infrastructures,” and plans to test the water via a hackathon in southeast Asia.

Collaboration Vs Competition

Insurtech-insurer collaborations suggest that the industry noted the banking sector’s experience, which names the tech disruptors before deciding partnerships, made greater sense commercially.

“It’s an interesting correlation,” said Slice’s managing director for marketing, Emily Kosick.

“I believe the trend worth calling out is that the window for insurers to innovate is much shorter, thanks to the banking sector’s efforts to offer omni-channel banking, incorporating mobile devices and, more recently, intelligent assistants like Alexa for personal banking.

“Banks have bought into the value of these technology partnerships but had the benefit of consumer expectations changing slowly with them. This compares to insurers who are in an ever-increasing on-demand world where the risk is high for laggards to be left behind.”

As with fintechs in banking, Insurtechs initially focused on the retail segment, with 75 percent of business in personal lines and the remainder in the commercial segment.

“Banks have bought into the value of these technology partnerships but had the benefit of consumer expectations changing slowly with them. This compares to insurers who are in an ever-increasing on-demand world where the risk is high for laggards to be left behind.” — Emily Kosick, managing director, marketing, Slice

Those proportions may be set to change, with innovations such as digital commercial insurance brokerage Embroker’s recent launch of the first digital D&O liability insurance policy, designed for venture capital-backed tech start-ups and reinsured by Munich Re.

Embroker said coverage that formerly took weeks to obtain is now available instantly.

“We focus on three main issues in developing new digital business — what is the customer’s pain point, what is the expense ratio and does it lend itself to algorithmic underwriting?” said CEO Matt Miller. “Workers’ compensation is another obvious class of insurance that can benefit from this approach.”

Jason Griswold, co-founder and chief operating officer of Insurtech REIN, highlighted further opportunities: “I’d add a third category to personal and business lines and that’s business-to-business-to-consumer. It’s there we see the biggest opportunities for partnering with major ecosystems generating large numbers of insureds and also big volumes of data.”

For now, insurers are accommodating Insurtech disruption. Will that change?


“Insurtechs have focused on products that regulators can understand easily and for which there is clear existing legislation, with consumer protection and insurer solvency the two issues of paramount importance,” noted Shawn Hanson, litigation partner at law firm Akin Gump.

“In time, we could see the disruptors partner with reinsurers rather than primary carriers. Another possibility is the likes of Amazon, Alphabet, Facebook and Apple, with their massive balance sheets, deciding to link up with a reinsurer,” he said.

“You can imagine one of them finding a good Insurtech and buying it, much as Amazon’s purchase of Whole Foods gave it entry into the retail sector.” &

Graham Buck is a UK-based writer and has contributed to Risk & Insurance® since 1998. He can be reached at riskletters.com.