Risk Insider: Nir Kossovsky

How Many Blows to the Head Can Wells Fargo Take?

By: | August 22, 2017 • 3 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 [email protected]

Medical science — and the NFL — have now come to recognize that repeated blows to the head, like those commonly suffered by football players, lead to a form of brain damage known as Cumulative Traumatic Encephalopathy or CTE.  It took years to acknowledge despite mounting evidence, at least partly because addressing the issue would require significant action and a change in culture throughout the league.

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There are several parallels that can be drawn between the current reputational crisis at Wells Fargo and the CTE crisis faced by the NFL.

First, a scandal involving phony accounts, followed by CEO and board departures. Now another scandal involving charges for insurance on auto loans — this one on the watch of the company’s new leadership. It’s a general rule of thumb that corporate reputations recover from crises more easily than do the reputations of individuals, but still, how much pounding can one brand take?

Just as the NFL has tried to do a better job of protecting players, employing technology in an effort to produce better helmets and seeking to alter player behavior through penalties and fines, Wells Fargo has tried to correct course through the appointment of new leadership and the promise of greater transparency and accountability.  But just as the NFL’s early refusals to acknowledge the CTE problem damaged its credibility, Wells Fargo’s inability to execute on its course correction — even with new leadership in place — has put the bank in a very deep credibility and reputational hole.

Reputation is essentially a product of stakeholder expectations. A reputational crisis occurs when stakeholders are angry over a failure to meet those expectations.  Credibility, integrity and reliability are values that stakeholders in any organization normally believe they can take for granted.

The personal reputations of the individuals in leadership are far more fragile. When their reputations sink, they lose their executive positions, their board seats and their compensation.

After years of denials and foot dragging at the NFL over CTE, the burden of convincing the public that they are serious about addressing it has become far greater than it would have been if they’d taken more of a leadership role in solving the problem when it first became known.

That leadership would have meant adopting many of the practices they ultimately adopted — changing rules on tackling and hits, imposing penalties and fines for violating those rules and using technology to develop better helmets. Immediate action would have delivered a simple-to-understand and completely credible message to NFL’s stakeholders that they were serious about protecting the players, and the reputations of both the teams and the league. Delaying in the face of mounting evidence caused lasting damage to the league’s credibility and reputation.

As for banks such as Wells Fargo, such leadership would have been a combination of better governance and internal controls to mitigate unauthorized “contacts” and the use of insurance solutions that act as third-party warranties and form the basis for a defense for the bank’s leadership in the event of inadvertent “contact.”

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How would such insurances be structured? Just as medical science has allowed us to understand the nature of CTE better, new algorithms now allow us to predict and measure reputational damage at corporations. We now know that each new reputational crisis at Wells Fargo makes the hole much deeper and the climb-out much steeper. Repeated blows to its reputation will eventually cause its stock price to suffer the financial equivalent of dementia.

In all likelihood, Wells Fargo will power through this crisis as other large, well known corporate brands have done in similar situations. With strong leadership in place and the significant marketing and other resources they can deploy — if it avoids further missteps — the company can chart a course toward reputational recovery.

The personal reputations of the individuals in leadership are far more fragile.  When their reputations sink, they lose their executive positions, their board seats and their compensation.

More from Risk & Insurance

More from Risk & Insurance

2018 Most Dangerous Emerging Risks

Emerging Multipliers

It’s not that these risks are new; it’s that they’re coming at you at a volume and rate you never imagined before.
By: | April 9, 2018 • 3 min read

Underwriters have plenty to worry about, but there is one word that perhaps rattles them more than any other word. That word is aggregation.

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Aggregation, in the transferred or covered risk usage, represents the multiplying potential of a risk. For examples, we can look back to the asbestos claims that did so much damage to Lloyds’ of London names and syndicates in the mid-1990s.

More recently, underwriters expressed fears about the aggregation of risk from lawsuits by football players at various levels of the sport. Players, from Pee Wee on up to the NFL, claim to have suffered irreversible brain damage from hits to the head.

That risk scenario has yet to fully play out — it will be decades in doing so — but it is already producing claims in the billions.

This year’s edition of our national-award winning coverage of the Most Dangerous Emerging Risks focuses on risks that have always existed. The emergent — and more dangerous — piece to the puzzle is that these risks are now super-charged with risk multipliers.

Take reputational risk, for example. Businesses and individuals that were sharply managed have always protected their reputations fiercely. In days past, a lapse in ethics or morals could be extremely damaging to one’s reputation, but it might take days, weeks, even years of work by newspaper reporters, idle gossips or political enemies to dig it out and make it public.

Brand new technologies, brand new commercial covers. It all works well; until it doesn’t.

These days, the speed at which Internet connectedness and social media can spread information makes reputational risk an existential threat. Information that can stop a glittering career dead in its tracks can be shared by millions with a casual, thoughtless tap or swipe on their smartphones.

Aggregation of uninsured risk is another area of focus of our Most Dangerous Emerging Risks (MDER) coverage.

The beauty of the insurance model is that the business expands to cover personal and commercial risks as the world expands. The more cars on the planet, the more car insurance to sell.

The more people, the more life insurance. Brand new technologies, brand new commercial covers. It all works well; until it doesn’t.

As Risk & Insurance® associate editor Michelle Kerr and her sources point out, growing populations and rising property values, combined with an increase in high-severity catastrophes, threaten to push the insurance coverage gap to critical levels.

This aggregation of uninsured value got a recent proof in CAT-filled 2017. The global tally for natural disaster losses in 2017 was $330 billion; 60 percent of it was uninsured.

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This uninsured gap threatens to place unsustainable pressure on public resources and hamstring society’s ability to respond to natural disasters, which show no sign of slowing down or tempering.

A related threat, the combination of a failing infrastructure and increasing storm severity, marks our third MDER. This MDER looks at the largely uninsurable risk of business interruption that results not from damage to your property or your suppliers’ property, but to publicly maintained infrastructure that provides ingress and egress to your property. It’s a danger coming into shape more and more frequently.

As always, our goal in writing about these threats is not to engage in fear mongering. It’s to initiate and expand a dialogue that can hopefully result in better planning and mitigation, saving the lives and limbs of businesses here and around the world.

2018 Most Dangerous Emerging Risks

Critical Coverage Gap

Growing populations and rising property values, combined with an increase in high-severity catastrophes, are pushing the insurance protection gap to a critical level.

Climate Change as a Business Interruption Multiplier

Crumbling roads and bridges isolate companies and trigger business interruption losses.

 

Reputation’s Existential Threat

Social media — the very tool used to connect people in an instant — can threaten a business’s reputation just as quickly.

 

AI as a Risk Multiplier

AI has potential, but it comes with risks. Mitigating these risks helps insurers and insureds alike, enabling advances in almost every field.

 

Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]