Reputation Risk

Fake News, Real Threat

Far more than a prank, the spread of fictitious news is wreaking havoc on businesses and institutions.
By: | February 20, 2017 • 5 min read

The phenomenon of fake news has been around for many years, making it hard for us to separate fact from fiction. One of the earliest examples was the “New York Sun” claiming to have discovered a civilization on the moon in 1835.

But it wasn’t until “Pizzagate” last December that the potential severity of its impact on individuals and companies really hit home.

On Dec. 4, Edgar M. Welch, a father of two from North Carolina, was arrested and charged with firing an assault rifle in the Comet Ping Pong pizzeria in Washington D.C.

Welch read online that the restaurant was harboring young children as sex slaves as part of a child-abuse ring led by Hillary Clinton.  Alarmed, he drove six hours from his home to see the situation for himself. Little did he know, he’d been reading fake news stories about the restaurant.

On a wider scale, many people believe that fake news impacted the outcome of the U.S. election. In November, Buzzfeed said it discovered more than 100 pro-Trump fake news sites operated by Macedonian teenagers as for-profit click-farms.

What Is Fake News?

Fake news, by definition, is a completely made-up story, manipulated to resemble a credible news report and to attract maximum attention and advertising revenue.

Given the power of the internet, and the fact that an estimated 62 percent of the U.S. population now gets the majority of their news from social media, fake news spreads wide and is hard to stop.

Elizabeth Carmichael, owner, Carmichael Associates LLC

“Fake news spreads faster than ever,” said Elizabeth Carmichael, owner of Carmichael Associates LLC, a firm that provides compliance and risk management services to educational institutions. “The authors make stories sensational to get as many clicks as possible by getting people to forward them and retweet them. The fact that many of these fake news sources are anonymous, and often passed on by millions of people, means it’s extremely difficult to stop or prosecute offenders.”

Despite Facebook’s plan to flag false news stories by using fact checkers, there’s still a long way to go to eliminate the problem altogether.

William Atak, CEO of SafeOnNet, an insurer specializing in online reputational risk, said the potential for reputational harm increased significantly in recent years. Along with it, the potential for millions in lost profits.

“Fake news has always existed. Only now, the perpetrators have the tools and knowledge to create stories at just the right moment and exploit social media and its algorithms,” he said.

Nir Kossovsky, CEO of Steel City Re, whose firm specializes in reputation insurance for publicly traded companies, said that fake news has the ability to undermine a company’s business model and the credibility of its leadership. Worse, it can impact any organizations it is associated with.

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“The specter of consequences arising from this post-fact type of communication can be far-reaching,” he said.

In the case of Pizzagate, Carmichael said, the restaurant’s owners faced not only reputational damage, but also the physical and psychological impact on its staff.

“The most worrying thing yet is that this has the potential to happen to almost any business in the world,” she said.

Pre-Emptive Strategy

In most circumstances where reputational damage has already occurred, a company would assess its losses and then take action, said Kossovsky. With fake news, however, he said, firms need to be proactive in dealing with the damaging misinformation that impairs their value as investors dump stock or threaten to sue directors for their actions.

“The general rule is lay low, shut up and say nothing until you have figured out what’s going on,” he said. But fake news can spread so rapidly that companies need to assess the potential consequences in advance.

Kossovsky said it is important to get all stakeholders on board from the outset, including investor relations, marketing and risk managers.

“Humans by their very nature tend to latch onto the first piece of information they find. Then it’s up to you to convince them otherwise,” he said.

“Therefore it’s key to take a position so that when fake news is circulated, stakeholders either don’t believe it or don’t pay any attention.”

Atak said that companies need to keep a watchful eye on the internet; act swiftly to communicate with customers, staff, boards of directors and investors; and utilize newsletters and social media.

“We have witnessed countless examples of companies that spent more than 25 years establishing a good reputation, only to see it ruined in an instant,” he said.

“The most worrying thing yet is that this has the potential to happen to almost any business in the world.” — Elizabeth Carmichael, owner, Carmichael Associates LLC

Carmichael said that denial is often the worst course of action once fake news is out. A better strategy is to put out an even bigger story to counter it.

She added that a company should include crisis communications in its disaster recovery or emergency response plan(s) and, once targeted, engage its communications team.

“That might be anything from putting out a disclaimer or a news story on their web page to getting the legitimate press to discredit the original fake news story,” she said.

“The big problem, however, is that once the fake news story has been banned or removed from one platform it quickly moves on to another.”

Reputation Insurance

Despite the viral nature of fake news, Kossovsky said, companies can take out insurance to cover themselves against reputational damage and losses to go alongside their risk mitigation strategy.

Nir Kossovsky, CEO, Steel City Re

“The whole point of the risk management process is firstly to pre-emptively mitigate against the impact of an assault of post-fact communication, and secondly to create a loss-absorption strategy to deal with the temporary panic that might arise.”

Carmichael added that while some insurers also offer crisis communications support, blanket specialized coverage for reputation risks is some way off.

“The best defense is to have good, well-monitored policies and procedures in the organization so the company can readily demonstrate with its own data the falsity of the story,” she said.

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A worrying recent development witnessed by Atak is the rise of criminal gangs that create fake news solely for blackmail purposes.

“It is easy to cover your tracks online and the authorities are not yet capable, nor do they have the tools, to fight this new type of digital crime,” he said.

In order to stem the flow of fake news, Kossovsky believes that large corporations need to partner with the media to develop a market-based solution.

“Social media firms have the technology to vet a lot of this content, but they can only attack pieces of information at one time,” he said.

“Having an industry-wide solution in the form of a panel that sets the standard for the quality of news would go much further towards tackling the problem.” &

Alex Wright is a U.K.-based business journalist, who previously was deputy business editor at The Royal Gazette in Bermuda. You can reach him at [email protected]

More from Risk & Insurance

More from Risk & Insurance

2017 RIMS

Resilience in Face of Cyber

New cyber model platforms will help insurers better manage aggregation risk within their books of business.
By: | April 26, 2017 • 3 min read

As insurers become increasingly concerned about the aggregation of cyber risk exposures in their portfolios, new tools are being developed to help them better assess and manage those exposures.

One of those tools, a comprehensive cyber risk modeling application for the insurance and reinsurance markets, was announced on April 24 by AIR Worldwide.

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Last year at RIMS, AIR announced the release of the industry’s first open source deterministic cyber risk scenario, subsequently releasing a series of scenarios throughout the year, and offering the service to insurers on a consulting basis.

Its latest release, ARC– Analytics of Risk from Cyber — continues that work by offering the modeling platform for license to insurance clients for internal use rather than on a consulting basis. ARC is separate from AIR’s Touchstone platform, allowing for more flexibility in the rapidly changing cyber environment.

ARC allows insurers to get a better picture of their exposures across an entire book of business, with the help of a comprehensive industry exposure database that combines data from multiple public and commercial sources.

Scott Stransky, assistant vice president and principal scientist, AIR Worldwide

The recent attacks on Dyn and Amazon Web Services (AWS) provide perfect examples of how the ARC platform can be used to enhance the industry’s resilience, said Scott Stransky, assistant vice president and principal scientist for AIR Worldwide.

Stransky noted that insurers don’t necessarily have visibility into which of their insureds use Dyn, Amazon Web Services, Rackspace, or other common internet services providers.

In the Dyn and AWS events, there was little insured loss because the downtime fell largely just under policy waiting periods.

But,” said Stransky, “it got our clients thinking, well it happened for a few hours – could it happen for longer? And what does that do to us if it does? … This is really where our model can be very helpful.”

The purpose of having this model is to make the world more resilient … that’s really the goal.” Scott Stransky, assistant vice president and principal scientist, AIR Worldwide

AIR has run the Dyn incident through its model, with the parameters of a single day of downtime impacting the Fortune 1000. Then it did the same with the AWS event.

When we run Fortune 1000 for Dyn for one day, we get a half a billion dollars of loss,” said Stransky. “Taking it one step further – we’ve run the same exercise for AWS for one day, through the Fortune 1000 only, and the losses are about $3 billion.”

So once you expand it out to millions of businesses, the losses would be much higher,” he added.

The ARC platform allows insurers to assess cyber exposures including “silent cyber,” across the spectrum of business, be it D&O, E&O, general liability or property. There are 18 scenarios that can be modeled, with the capability to adjust variables broadly for a better handle on events of varying severity and scope.

Looking ahead, AIR is taking a closer look at what Stransky calls “silent silent cyber,” the complex indirect and difficult to assess or insure potential impacts of any given cyber event.

Stransky cites the 2014 hack of the National Weather Service website as an example. For several days after the hack, no satellite weather imagery was available to be fed into weather models.

Imagine there was a hurricane happening during the time there was no weather service imagery,” he said. “[So] the models wouldn’t have been as accurate; people wouldn’t have had as much advance warning; they wouldn’t have evacuated as quickly or boarded up their homes.”

It’s possible that the losses would be significantly higher in such a scenario, but there would be no way to quantify how much of it could be attributed to the cyber attack and how much was strictly the result of the hurricane itself.

It’s very, very indirect,” said Stransky, citing the recent hack of the Dallas tornado sirens as another example. Not only did the situation jam up the 911 system, potentially exacerbating any number of crisis events, but such a false alarm could lead to increased losses in the future.

The next time if there’s a real tornado, people make think, ‘Oh, its just some hack,’ ” he said. “So if there’s a real tornado, who knows what’s going to happen.”

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Modeling for “silent silent cyber” remains elusive. But platforms like ARC are a step in the right direction for ensuring the continued health and strength of the insurance industry in the face of the ever-changing specter of cyber exposure.

Because we have this model, insurers are now able to manage the risks better, to be more resilient against cyber attacks, to really understand their portfolios,” said Stransky. “So when it does happen, they’ll be able to respond, they’ll be able to pay out the claims properly, they’ll be prepared.

The purpose of having this model is to make the world more resilient … that’s really the goal.”

Additional stories from RIMS 2017:

Blockchain Pros and Cons

If barriers to implementation are brought down, blockchain offers potential for financial institutions.

Embrace the Internet of Things

Risk managers can use IoT for data analytics and other risk mitigation needs, but connected devices also offer a multitude of exposures.

Feeling Unprepared to Deal With Risks

Damage to brand and reputation ranked as the top risk concern of risk managers throughout the world.

Reviewing Medical Marijuana Claims

Liberty Mutual appears to be the first carrier to create a workflow process for evaluating medical marijuana expense reimbursement requests.

Cyber Threat Will Get More Difficult

Companies should focus on response, resiliency and recovery when it comes to cyber risks.

RIMS Conference Held in Birthplace of Insurance in US

Carriers continue their vital role of helping insureds mitigate risks and promote safety.

Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]