Reputational Risk

Star-Studded Risk

Celebrity spokespersons can significantly elevate a brand, as long as they stay on their best behavior.
By: | October 1, 2016 • 6 min read

As the value of a celebrity or sports star’s contract with a major sponsor has increased in recent years, so it seems has the risk of them disgracing themselves in public.

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The benefits of having an A-list celebrity promote your brand can be enormous — boosting customer sales and raising your company’s profile. Many celebrities rake in multimillion dollar sums for being the face of top brands such as Nike or Coca-Cola.

However, such sponsorships are not without risk, particularly if a brand ambassador commits a disgraceful or criminal act. The consequences can be far-reaching. One small slip-up can turn into a PR disaster, ruining an entire advertising campaign and resulting in huge financial losses for the brand.

Rising NFL star Johnny Manziel, whose sponsors included Nike and McDonald’s, was dismissed halfway through his $8.2 million contract by the Cleveland Browns after breaking the NFL’s substance abuse policy, along with having the shadow of domestic violence charges hanging over him.

Earlier this year, tennis star Maria Sharapova was suspended for two years from the sport by the International Tennis Federation for taking a banned substance. Since testing positive, she has been dropped by most of her major sponsors.

Just weeks ago, Olympic swimming medalist Ryan Lochte was caught in a lie after trying to cover up bad behavior during the Olympic Games in Rio. Lochte lost four major sponsorships, including Speedo USA and Ralph Lauren.

Incidents like these are motivating more companies to seek out death, disability and disgrace insurance to protect themselves against such losses. The market, driven by Lloyd’s of London, has grown to $1 billion, according to industry estimates. Payouts are believed to range into the millions of dollars, sources said.

“There’s obviously massive benefit to using a celebrity to promote your product,” said Alan Norris, head of contingency at Talbot Underwriting. “But there’s also a huge potential downside that comes with it.”

In addition to advertisers and sponsors, financial institutions that provide loans and mortgages to sports stars are buying the coverage to mitigate losses when a player’s contract is terminated for criminal or distasteful behavior.

Public Expectations Tied to Value

The number of high-profile cases where a celebrity has become involved in a scandal or commits a disgraceful act has prompted worry among many advertisers and sponsors.

“Certainly more high-profile scenarios have grabbed the headlines in recent times,” said Mark Symons, contingency underwriter at Beazley, who has seen a 50 percent increase in business over the last five years.

On top of that, he said, social media and the ever-increasing immediacy of news tend to magnify even the smallest indiscretion, and companies have become acutely aware of that reality.

“Because of the internet, the speed at which a person’s behavior can destroy their reputation is almost instantaneous.” — Nir Kossovsky, CEO, Steel City Re

“Because of the internet, the speed at which a person’s behavior can destroy their reputation is almost instantaneous,” said Nir Kossovsky, CEO of Steel City Re, a provider of D&O reputation solutions.

“The attributes of that person are expected to reflect favorably upon a product or brand, so therefore the loss of value of those attributes will have a negative impact on that product,” he said.

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Kossovsky said that an individual’s reputation value was tied to six major behaviors — ethics, innovation, safety, sustainability, security and quality — and their failure to live up to public expectation would put both the sponsor’s and their own value at risk.

“In Sharapova’s case it was ethics — the drug enhancement issue,” he said. “It was the impairment of her value to her sponsor resulting from a failure to meet her public’s expectations in terms of her behavior.”

Lori Shaw, GAMES practice leader at Lockton’s Charlotte office, said that because reputation accounts for 25 percent of a company’s market value, choosing the right brand ambassador is critical.

“Companies need to be aware of what they are getting into when they take on a talent or celebrity to promote their brand, as well as protecting their balance sheet against the exposures that brings,” she said.

One of the biggest problems for insurers is determining what constitutes a disgraceful act and how to price that risk accordingly.

Broadly speaking, a death, disability and disgrace policy is triggered by “an offense against public taste or decency,” ranging from criminal acts to offensive statements.

Both Kossovsky and Symons noted that the loss of value often depended on that one individual’s expected behavior.

Celebrities with an existing reputation for being controversial are less of a risk than those with a squeaky clean image.

“Perversely, that means the most sensitive risk is often the individual with the best reputation because the impact of their actions can be felt far more disproportionately than someone who has a track record,” said Symons.

Quantifying Losses

Death, disability and disgrace insurance can be bought either as a stand-alone product or as part of a broader policy.

In addition to covering the costs associated with having to change or drop a campaign altogether, a standard policy can also be used to protect against a loss in sales linked to the death or disgrace of the individual concerned.

Alan Norris, head of contingency, Talbot Underwriting

Alan Norris, head of contingency, Talbot Underwriting

Often, however, it’s difficult to quantify the size of a potential loss in revenue or damage to the brand associated with an endorsement when things go wrong.

“With a death, disability and disgrace policy you can only really insure the actual costs associated with that campaign, but what you can’t insure against is the financial damage to the brand because it’s an intangible asset,” said Norris.

Shaw said that even before assessing the impact of a celebrity’s behavior on a company’s market value, you’ve got the upfront costs of scrapping the campaign or starting a new one.

Initial costs can include hiring a replacement spokesperson, removing a celebrity’s image from packaging, reshooting or reproducing new advertising material or reimbursing the money paid to secure the endorsement in the first place.

It can also extend to money spent on TV or radio commercials and advertising space.

Edel Ryan, partner and head of media and entertainment at JLT Specialty Ltd., said that the onus was on the policyholder to prove that the celebrity had committed a disgraceful act according to the contract.

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“The underwriter will start by looking at the morals clause within the contract and the celebrity’s past history to determine if the policy should be triggered,” said Lockton’s Shaw.

Some acts, though considered outrageous, might be excluded if they are deemed to be within the bounds of the celebrity’s normal behavior.

All things considered, the benefits of a celebrity sponsorship must be weighed against the potential pitfalls.

“It’s critical to have the right cover in place to protect against the loss of value to their product or service,” said Kossovsky. &

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

Risk Management

The Profession

This senior risk manager values his role in helping Varian Medical Systems support research and technologies in the fight against cancer.
By: | September 12, 2017 • 5 min read

R&I: What was your first job?

When I was 15 years old I had a summer job working for the city of Plentywood, mowing grass in the parks and ballfields, emptying garbage cans, hauling waste to the dump, painting crosswalk lines.  A great job for a teenager but I thought getting a college degree and working in an air-conditioned office would be a good plan long term.

R&I: How did you come to work in risk management?

I was enrolled in the University of Montana as a general business student, and I wanted to declare a more specialized major during my sophomore year. I was working for my dad at his insurance agency over the summer, and taking new agent training coursework on property/casualty risks in my spare time, so I had an appreciation for insurance. My dad suggested I research risk management for a career, and I transferred sight unseen to the University of Georgia to enroll in their risk management program. I did an internship as a senior with the risk management department at Sulzer Medica, and they offered me a full time job.

R&I: What could the risk management community be doing a better job of?

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We need to do a better job of saying yes. We tend to want to say no to many risks, but there are upside benefits to some risks. If we initiate a collaborative exercise with the risk owners — people who may have unique knowledge about that particular risk — and include a cross section of people from other corporate functions, you can do an effective job of taking the risk apart to analyze it, figure out a way to manage that exposure, and then reap the upside benefits while reducing the downside exposure. That can be done with new products and new service offerings, when there isn’t coverage available for a risk. It’s asking, is there anything we can do to reduce the risk without transferring it?

R&I: What emerging commercial risk most concerns you?

Cyber liability. There’s so much at stake and the bad guys are getting more resourceful every day. At Varian, our first approach is to try to make our systems and products more resilient, so we’re trying to direct resources to preventing it from happening in the first place. It’s a huge reputation risk if one of our products or systems were compromised, so we want to avoid that at all costs.

We need to do a better job of saying yes. We tend to want to say no to many risks, but there are upside benefits to some risks.

R&I: What insurance carrier do you have the highest opinion of?

I’ve worked with a number of great ones over the years. We’ve enjoyed a great property insurance relationship with Zurich. Their loss control services are very valuable to us. On the umbrella liability side, it’s been great partnering with companies like Swiss Re and Berkley Life Sciences because they’ve put in the time and effort to understand our unique risk exposures.

R&I: How much business do you do direct versus going through a broker?

One hundred percent through a broker. I view our broker as an extension of our risk management team. We benefit from each team member’s respective area of expertise and experience.

R&I: Is the contingent commission controversy overblown?

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I think so. The brokers were kind of villainized by Spitzer. I think it’s fair for brokers and insurers to make a reasonable profit, and if a portion of their profit came from contingent commissions, I’m fine with that. But I do appreciate the transparency and disclosure that came out as a result of the fiasco.

R&I: Are you optimistic about the US economy or pessimistic and why?

David Collins, Senior Manager, Risk Management, Varian Medical Systems Inc.

While we might be doing fine here in the U.S. from an economic perspective, the Middle East is a mess, and we’re living with nuclear threat from North Korea. But hope springs eternal, so I’m cautiously optimistic. I’m hoping saner minds prevail and our leaders throughout the world work together to make things better.

R&I: Who is your mentor and why?

My Dad got me started down the insurance and risk path. I’ve also been fortunate to work for or with a number of University of Georgia alumni who’ve been mentors for me. I’ve worked side by side with Karen Epermanis, Michael Rousseau, and Elisha Finney. And I’ve worked with Daniel Dean in his capacity as a broker.

R&I: What have you accomplished that you are proudest of?

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Raising my kids. I have a 15-year-old and 12-year-old, and they’re making mom and dad proud of the people they’re turning into.

On a professional level, a recent one would be the creation and implementation of our global travel risk program, which was a combined effort between security, travel and risk functions.

We have a huge team of service personnel around the world, traveling to customer sites to do maintenance and repair. We needed a way to track, monitor and communicate with them. We may need to make security arrangements or vet their lodging in some circumstances.

R&I: What do your friends and family think you do?

My 12-year-old son thought my job responsibilities could be summed up as a “professional worrier.” And that’s not too far off.

R&I: What about this work do you find the most fulfilling or rewarding?

Varian’s mission is to focus energy on saving lives. Proper administration of the risk function puts the company in a better position to financially support research that improves products and capabilities, helps to educate health care providers and support cancer care in general. It means more lives saved from a terrible disease. I’m proud to contribute toward that.

When you meet someone whose cancer has been successfully treated with one of our products, it’s a powerful reward.




Katie Siegel is an associate editor at Risk & Insurance®. She can be reached at [email protected]