Reputational Risk

Here’s Why Putting a Price on Reputational Damage Is So Hard — But Totally Worth It

Despite the growing threat of reputational risk, quantifying and mitigating the risk itself continues to challenge risk managers and insurers.
By: | September 28, 2018 • 6 min read

An oil spill, a plane crash, a tax scandal, a sexual harassment lawsuit. In the age of social media, negative brand events are amplified, and reputations are damaged in seconds, sometimes irreparably.

The financial repercussions can be severe, from lost revenues to a tumbling stock price. “Wall Street will forgive you for an uninsured earthquake loss or a terrorism event, but it will not forgive you for operational failures that affect your reputation,” said John Kerns, leader of Beecher Carlson’s national financial services practice.

Even with internal and external social media policies in place, controlling the online fallout from a damaging incident is very difficult. Furthermore, the rise of movements such as #MeToo have highlighted just how quickly the actions of one individual can prompt a ‘trial by media,’ sullying the name of their employers or even the company they own.

“Litigation can take years, but your company can go out of business in weeks, maybe days,” said Robert Yellen, D&O and fiduciary liability insurance product leader, FINEX North America, Willis Towers Watson.

“Black swan” events such as these, he said, are much harder for risk managers to anticipate and plan for than a product recall event, for example. “These are crises that don’t necessarily reflect on the core business but can still have a huge reputational impact.”

Rob Yellen, D&O and fiduciary products, Willis Towers Watson

Yet despite the growing threat reputational risk poses to organizations, quantifying and mitigating the risk itself continues to challenge risk managers and insurers.

“When a brand has fallen short of its values or lost the trust of its customers, it sees a tangible fallout, whether that is loss of sales, partners, sponsors, endorsers or investors,” said Carol Fox, vice president of strategic initiatives at RIMS, before adding: “Reputational risk is multi-dimensional, making it hard to understand and articulate.”

Quantifying Reputation Risk

According to the Reputation Institute — which monitors and ranks the reputation of 7,000 major organizations globally — intangible factors account for 81 percent of a public company’s market value, and improvement or deterioration in a company’s reputation has a tangible impact on performance.

“Since 2006, a strong reputation yields 2.5 times better stock performance when compared to the overall market. And a 1-point increase in reputation yields a 2.6 percent increase in market cap,” the Institute said. It added, also claiming that when a reputation improves from ‘average’ to ‘excellent’ in rating, there’s a 2.7-times increase in purchase intent.

According to Dr. Nir Kossovsky, CEO, Steel City Re, which brokers dedicated reputational risk insurance solutions in partnership with Lloyd’s syndicate Tokio Kiln, reputation can be defined as an expectation of behavior. “Its value is measurable, and therefore it is manageable and insurable,” he said.

“The greatest challenge for the industry in quantifying reputational risk is the prevalence of simplified notions of the peril. Like fraud risk, reputation risk is a complex peril that has multiple contributing factors, and its going-forward costs are far greater than losses that are immediately appreciated.”

Only a handful of insurers offer dedicated reputation products and sources agree there is no consistency between the existing policies.

“Wall Street will forgive you for an uninsured earthquake loss or a terrorism event, but it will not forgive you for operational failures that affect your reputation.” — John Kerns, financial practice leader, Beecher Carlson

While Steel City Re, for example, offers parametric policies, which pay a pre-agreed sum upon specific triggers linked to reputation metrics being met, AIG’s product is primarily designed to assist with crisis management (though it did recently update the policy to include an income protection feature).

But the biggest criticism of standalone reputational damage insurance is that there simply is not enough capacity to offer meaningful indemnity against lost revenues or a stock crash.

“The truth is, insurance can’t do much to solve a company’s reputational crisis — even if you took all the capacity in the market and applied it to a bad loss, it would barely make a dent,” said Yellen.

Cover of around $5 million may help a small company survive an incident, but even then, he added, there is unlikely to be budget allocated to procure standalone reputational damage cover, and telling the board that insurance is in place may create unrealistic expectations over how well the company is financially covered.

“A reputation event could dent a major company’s market capitalization by billions of dollars, and insurers can’t offer anywhere near those kinds of limits,” added Kerns.

Through Steel City Re, larger limits may be covered through capital instruments and additional risk financing structured through a captive insurer, allowing access to reinsurance markets.

Slow on the Uptake

However, uptake of standalone reputational risk insurance has so far been slow and awareness of such cover even being available is relatively low.

“I’m not aware of any Fortune 100 company that has purchased a huge reputational risk program, and we work with many,” said Kerns, who advises those that do to seek extended periods of indemnity just as they would for a cyber policy. “The challenge is getting a carrier to agree that it’s not just the short period of time around a trigger event that they are covering, but how that event affects the company over a 12-month period.”

John Kerns, financial services practice leader, Beecher Carlson

Kerns feels that going forward, reputational risk is more likely to be addressed as a component within broad aggregated policies rather than on its own. “Conversations around this kind of comprehensive solution are happening more and more — in fact, we very recently placed one — and reputational risk is part of that conversation,” he noted.

Kerns does believe, however, that more underwriters will start addressing reputational risk given its rising importance to C-suites.

“Insurers will continue to offer innovations, but I don’t see insurance for reputational damage becoming mainstream anytime soon,” said Yellen. “The demand is there, but there just isn’t enough [capacity] to be a compelling solution.”

Damage Limitation

With meaningful indemnity seemingly a pipe dream, insurers may be able to add most value by providing pre- and post-crisis support solutions, such as providing experts to guide PR and social media strategies. After all, said Kerns, “it’s what you do to manage a crisis after it hits that keeps costs down.”

Fox advises companies to identify factors that can affect their reputation and to monitor them, from customer or employee satisfaction surveys to tracking social media coverage. “Not all reputation dimensions will affect every organization, however, it is essential to work through potential scenarios and prepare a thought-out response to a crisis event in advance,” she said.

This process calls for collaboration across business silos, said Yellen, as well as potentially hiring brand management consultants, which can help companies identify stakeholders and key messages well ahead of a Black Swan event.

“Communication in a crisis is critical. When there are thousands, perhaps hundreds of thousands, of people commenting about you on social media, if you’re not defining the message someone else likely will.”

Arguably the best defense is to make building a positive reputation a central and ongoing objective. Indeed, Fox believes reputation should not be looked at just as a risk but also as an asset.

“Effectively managing reputational risk is a criterion for success. Organizations need to both protect their reputation and create reputational value,” she said.

After all, companies that build up strong reputational capital are far more likely to recover from a damaging incident than those that are already poorly or even neutrally regarded; according to Reputation Institute, 63 percent of people give companies with excellent reputations the benefit of the doubt in times of crisis.

“These same companies are also 3.2-times more likely to be trusted to manage a crisis than companies with average reputation scores,” it said. “The result? Reputation acts as an insurance policy against disaster.” &

Antony Ireland is a London-based financial journalist. He can be reached 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.