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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

Insurtech

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.”

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“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.

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“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?

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“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.