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

4 Companies That Rocked It by Treating Injured Workers as Equals; Not Adversaries

The 2018 Teddy Award winners built their programs around people, not claims, and offer proof that a worker-centric approach is a smarter way to operate.
By: | October 30, 2018 • 3 min read

Across the workers’ compensation industry, the concept of a worker advocacy model has been around for a while, but has only seen notable adoption in recent years.

Even among those not adopting a formal advocacy approach, mindsets are shifting. Formerly claims-centric programs are becoming worker-centric and it’s a win all around: better outcomes; greater productivity; safer, healthier employees and a stronger bottom line.

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That’s what you’ll see in this month’s issue of Risk & Insurance® when you read the profiles of the four recipients of the 2018 Theodore Roosevelt Workers’ Compensation and Disability Management Award, sponsored by PMA Companies. These four programs put workers front and center in everything they do.

“We were focused on building up a program with an eye on our partner experience. Cost was at the bottom of the list. Doing a better job by our partners was at the top,” said Steve Legg, director of risk management for Starbucks.

Starbucks put claims reporting in the hands of its partners, an exemplary act of trust. The coffee company also put itself in workers’ shoes to identify and remove points of friction.

That led to a call center run by Starbucks’ TPA and a dedicated telephonic case management team so that partners can speak to a live person without the frustration of ‘phone tag’ and unanswered questions.

“We were focused on building up a program with an eye on our partner experience. Cost was at the bottom of the list. Doing a better job by our partners was at the top.” — Steve Legg, director of risk management, Starbucks

Starbucks also implemented direct deposit for lost-time pay, eliminating stressful wait times for injured partners, and allowing them to focus on healing.

For Starbucks, as for all of the 2018 Teddy Award winners, the approach is netting measurable results. With higher partner satisfaction, it has seen a 50 percent decrease in litigation.

Teddy winner Main Line Health (MLH) adopted worker advocacy in a way that goes far beyond claims.

Employees who identify and report safety hazards can take credit for their actions by sending out a formal “Employee Safety Message” to nearly 11,000 mailboxes across the organization.

“The recognition is pretty cool,” said Steve Besack, system director, claims management and workers’ compensation for the health system.

MLH also takes a non-adversarial approach to workers with repeat injuries, seeing them as a resource for identifying areas of improvement.

“When you look at ‘repeat offenders’ in an unconventional way, they’re a great asset to the program, not a liability,” said Mike Miller, manager, workers’ compensation and employee safety for MLH.

Teddy winner Monmouth County, N.J. utilizes high-tech motion capture technology to reduce the chance of placing new hires in jobs that are likely to hurt them.

Monmouth County also adopted numerous wellness initiatives that help workers manage their weight and improve their wellbeing overall.

“You should see the looks on their faces when their cholesterol is down, they’ve lost weight and their blood sugar is better. We’ve had people lose 30 and 40 pounds,” said William McGuane, the county’s manager of benefits and workers’ compensation.

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Do these sound like minor program elements? The math says otherwise: Claims severity has plunged from $5.5 million in 2009 to $1.3 million in 2017.

At the University of Pennsylvania, putting workers first means getting out from behind the desk and finding out what each one of them is tasked with, day in, day out — and looking for ways to make each of those tasks safer.

Regular observations across the sprawling campus have resulted in a phenomenal number of process and equipment changes that seem simple on their own, but in combination have created a substantially safer, healthier campus and improved employee morale.

UPenn’s workers’ comp costs, in the seven-digit figures in 2009, have been virtually cut in half.

Risk & Insurance® is proud to honor the work of these four organizations. We hope their stories inspire other organizations to be true partners with the employees they depend on. &

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