2018 Most Dangerous Emerging Risks

Social Media Acts as 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.
By: | April 9, 2018 • 8 min read

Weinstein. Spacey. O’Reilly. Lauer.

We don’t need to consult Google to know who these men are or what they’ve allegedly done. Now stitched into the very fabric of our society, the entertainment industry “elite” accused of sexual misconduct are part of the mantra of a movement to end harassment and call out others who violate trust. Their reputations are ruined.

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But reputation exists outside the person; the Weinstein Company, for example, filed for bankruptcy four months after the story broke that the man in charge allegedly sexually harassed or assaulted more than 80 women during his career.

“Threats to reputation always involve anger or disappointment from stakeholders triggered by a failure to live up to expectations,” said Nir Kossovsky, CEO, Steel City Re.

Stakeholders, he said, expect companies to have systems in place that act as deterrents for bad behavior, like sexual harassment in Weinstein’s case.

The value of reputation-related claims is on the rise, too.

“Because of #MeToo and the gymnastics scandals, there is a concern that employment claim values could go up,” said Larry Reback, managing principal and leader, policy response unit, Integro Insurance Brokers, referencing the former USA Gymnastics doctor Larry Nassar, who has been convicted of serial child molestation.

Reputation risk isn’t new. But the way a business’s reputation is threatened has entered a new realm of uncertainty because of how fast information can travel. The #MeToo movement is just one example of how hundreds of thousands of people can band together globally. It acts as a reminder of just how fast a reputation can fall: reputation is now an existential risk.

The Speed of Social Media

Companies big and small can be ruined with a tweet, a like or a share.

“Reputation risk is, in part, a function of culture-linked expectations. Social media is a channel in which culture is spread. New expectations can be global in minutes. In a way, the internet has been weaponized,” said Kossovsky.

Nir Kossovsky, co-founder and chief executive officer, Steel City Re

“Look at the headlines,” said Natalie Douglass, senior managing director, management liability practice, Gallagher, in regard to #MeToo.

“The Weinstein Company tried to sell its assets to avoid bankruptcy. A year ago, it was the most successful entertainment company in the world. Social media is playing the largest role. It moves fast and reaches more people in an instant.”

But with the way #MeToo has swept the country by storm, are businesses approaching reputation coverages differently?

“It’s too early to tell,” said Douglass. She added that the movement does hold the possibility to change how reputation cover is handled over time, but that would need to be monitored moving forward.

“There’s a notion that reputation risk spread through social media can descend like a tornado; one does not prepare for the tornado as it’s descending.” — Nir Kossovsky, CEO, Steel City Re

What #MeToo did do, however, was show just how fast a reputation can be put at risk. What may start off as a disgruntled post on social media can turn into hundreds of thousands of voices ringing out against someone and their business.

“#MeToo isn’t necessarily a watershed moment,” said Kossovsky. “But it forced the leadership of companies to appreciate the speed at which reputation can be threatened.”

Reputational risk has always been there, said Sandy Crystal, executive vice president, Crystal & Company, whether it be a cyber event or a product recall or #MeToo.

“In the age of social media, things happen more quickly. Social media exacerbates reputational risk,” he added.

In the last few years alone, a number of companies faced the wrath of social sharing:

After a doctor was dragged off a United Airlines flight at Chicago O’Hare International Airport, one bystander’s video of the incident surpassed four million views on YouTube. It led a number of Twitter users to spread the hashtag #BoycottUnited. Within days, the hashtag had more than 3.5 million impressions.

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The modern-age taxi service Uber faced a bevy of crises in February 2017, from allegations of workplace sexual harassment to a leaked video of the company’s CEO berating an Uber driver. A survey showed that some 57 percent of rideshare users held the company in a negative light following the allegations. That same survey also showed 56 percent of users between September 2016 and March 2017 stopped using Uber because of the negative news associated with it.

Another big name affected by the speed of the internet? Wells Fargo. One scandal on top of another, from opening unauthorized credit card accounts to failing to issue refunds on policies where people paid auto loans off early, the bank is still working to rebuild its reputation.

#MeToo and these similar events placed reputation in the spotlight with a whole new force. It’s become a risk that moves so fast, it’s hard to be certain where it’s headed next.

Difficult to Cover

As an existential risk, underwriters find reputation difficult to price because of the wildly different outcomes that could arise. Defining how to put value to a company’s brand is equally as challenging. Many are hesitant to even write the risk at all.

Larry Reback, managing principal and leader, policy response unit, Integro Insurance Brokers

“Underwriters need to model losses to underwrite a risk,” said Reback. He used Chipotle as an example. After numerous health-related outbreaks, including norovirus, salmonella and E. coli, the food chain suffered significant financial losses and a drop in its consumer base.

“How do you measure an organization’s reputation? Each company is different, but the consequences of a reputational event can be catastrophic. It would also likely require the participation of the worldwide insurance market for meaningful risk transfer and, right now, there aren’t a lot of markets willing to provide protection for financial loss.”

“Only a handful of insurers have been willing to cover reputation as a stand-alone policy,” said Douglass. “I don’t see that changing.”

Though some insurance products — from cyber to D&O to liability — include aspects of reputation to fill in the gaps, the lack of stand-alone policies poses an interesting challenge for risk managers to implement practices to prevent damage from spreading.

With social media, reported Forbes, it’s actually worse for a business to ignore a negative post online.

Even a simple response acknowledging a customer’s complaint is better than leaving it unanswered. A RightNow Customer Experience Impact Report found that 89 percent of consumers begin doing business with a competitor following a poor customer experience.

The same report found that half of the people surveyed only give businesses about a week to respond before they stop doing business with them. And once the social media storm begins, the stakeholders hold the power. What tends to bring a company to a grinding halt is how its stakeholders perceive a blow to reputation.

“Is it a rogue employee in a well-governed business who stepped out of line? Or is it deeper than that? Is the behavior of the person a symptom of something more systemic?” asked Kossovsky.

Waiting until a sexual harassment claim is filed or a misguided employee acts up won’t cut it; risk managers have to prepare for the worst before the worst can happen. When an issue is deeply rooted in the culture of the company, fast action to expel the behavior and the person or people behind the behavior is quickly taken.

Take Volkswagen for example. After the Environmental Protection Agency found that VW diesel engines were rigged to pass carbon dioxide emissions tests when they were not street legal, the company’s chief executive resigned within a week of the scandal coming to light.

VW also endured a company-wide internal inquiry and suffered a quarterly loss of more than $3 billion.

“This is an opportunity for risk managers to show their value to an organization. They can get involved with the board and the C-suite.” — Larry Reback, managing principal and leader, policy response unit, Integro Insurance Brokers

“The topic [of reputation] is getting a lot of attention from the C-suite and board levels,” said Reback. Despite reputation not typically being an insured risk, those in higher positions are not taking reputation risk lightly.

“The board and CEOs recognize that business reputation risk can become personal reputation risk,” said Kossovsky.

Stakeholders expect quick action to expel those in charge of a company blunder. In Weinstein’s case, a zero-tolerance policy was just one tactic used to soothe its stakeholders. But it was too little too late due to the magnitude of the allegations and how deep the behavior went.

“This is an opportunity for risk managers to show their value to an organization. They can get involved with the board and the C-suite,” said Reback.

Mitigating Reputation Risk

“A lot of the conversation surrounding reputation happens narrowly, product by product,” said Crystal. “The conversation needs to be broader.”

With the growing force that is social media, companies are cognizant of how easily their brands can fall. There are some key ways businesses mitigate reputation risk today, like company-wide training or investing in liability or D&O coverage to fill in the gaps, but this risk requires a proactive approach. Not reactive.

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“There’s a notion that reputation risk spread through social media can descend like a tornado,” Kossovsky said. “One does not prepare for the tornado as it’s descending; they have to build defenses to prepare for it from the get-go.”

“#MeToo is a wake-up call to employers and risk managers. While, unfortunately, the underlying conduct is not new, it is an opportunity to review corporate culture and training,” said Reback.

“Some organizations use a captive to help fund some of these losses,” he added. “But it’s still a growing exposure.”

The best outcomes come when risk managers are aligned with human resources, IT and other departments, said Douglass.

She added: “Reputation needs to be a part of the culture of a company. From top-down, there needs to be a focus on protecting the brand.” &

Autumn Heisler is the digital producer and a staff writer at Risk & Insurance®. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Exclusive | Hank Greenberg on China Trade, Starr’s Rapid Growth and 100th, Spitzer, Schneiderman and More

In a robust and frank conversation, the insurance legend provides unique insights into global trade, his past battles and what the future holds for the industry and his company.
By: | October 12, 2018 • 12 min read

In 1960, Maurice “Hank” Greenberg was hired as a vice president of C.V. Starr & Co. At age 35, he had already accomplished a great deal.

He served his country as part of the Allied Forces that stormed the beaches at Normandy and liberated the Nazi death camps. He fought again during the Korean War, earning a Bronze Star. He held a law degree from New York Law School.

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Now he was ready to make his mark on the business world.

Even C.V. Starr himself — who hired Mr. Greenberg and later hand-picked him as the successor to the company he founded in Shanghai in 1919 — could not have imagined what a mark it would be.

Mr. Greenberg began to build AIG as a Starr subsidiary, then in 1969, he took it public. The company would, at its peak, achieve a market cap of some $180 billion and cement its place as the largest insurance and financial services company in history.

This month, Mr. Greenberg travels to China to celebrate the 100th anniversary of C.V. Starr & Co. That visit occurs at a prickly time in U.S.-Sino relations, as the Trump administration levies tariffs on hundreds of billions of dollars in Chinese goods and China retaliates.

In September, Risk & Insurance® sat down with Mr. Greenberg in his Park Avenue office to hear his thoughts on the centennial of C.V. Starr, the dynamics of U.S. trade relationships with China and the future of the U.S. insurance industry as it faces the challenges of technology development and talent recruitment and retention, among many others. What follows is an edited transcript of that discussion.


R&I: One hundred years is quite an impressive milestone for any company. Celebrating the anniversary in China signifies the importance and longevity of that relationship. Can you tell us more about C.V. Starr’s history with China?

Hank Greenberg: We have a long history in China. I first went there in 1975. There was little there, but I had business throughout Asia, and I stopped there all the time. I’d stop there a couple of times a year and build relationships.

When I first started visiting China, there was only one state-owned insurance company there, PICC (the People’s Insurance Company of China); it was tiny at the time. We helped them to grow.

I also received the first foreign life insurance license in China, for AIA (The American International Assurance Co.). To date, there has been no other foreign life insurance company in China. It took me 20 years of hard work to get that license.

We also introduced an agency system in China. They had none. Their life company employees would get a salary whether they sold something or not. With the agency system of course you get paid a commission if you sell something. Once that agency system was installed, it went on to create more than a million jobs.

R&I: So Starr’s success has meant success for the Chinese insurance industry as well.

Hank Greenberg: That’s partly why we’re going to be celebrating that anniversary there next month. That celebration will occur alongside that of IBLAC (International Business Leaders’ Advisory Council), an international business advisory group that was put together when Zhu Rongji was the mayor of Shanghai [Zhu is since retired from public life]. He asked me to start that to attract foreign companies to invest in Shanghai.

“It turns out that it is harder [for China] to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

Shanghai and China in general were just coming out of the doldrums then; there was a lack of foreign investment. Zhu asked me to chair IBLAC and to help get it started, which I did. I served as chairman of that group for a couple of terms. I am still a part of that board, and it will be celebrating its 30th anniversary along with our 100th anniversary.

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We have a good relationship with China, and we’re candid as you can tell from the op-ed I published in the Wall Street Journal. I’m told that my op-ed was received quite well in China, by both Chinese companies and foreign companies doing business there.

On August 29, Mr. Greenberg published an opinion piece in the WSJ reminding Chinese leaders of the productive history of U.S.-Sino relations and suggesting that Chinese leaders take pragmatic steps to ease trade tensions with the U.S.

R&I: What’s your outlook on current trade relations between the U.S. and China?

Hank Greenberg: As to the current environment, when you are in negotiations, every leader negotiates differently.

President Trump is negotiating based on his well-known approach. What’s different now is that President Xi (Jinping, General Secretary of the Communist Party of China) made himself the emperor. All the past presidents in China before the revolution had two terms. He’s there for life, which makes things much more difficult.

R&I: Sure does. You’ve got a one- or two-term president talking to somebody who can wait it out. It’s definitely unique.

Hank Greenberg: So, clearly a lot of change is going on in China. Some of it is good. But as I said in the op-ed, China needs to be treated like the second largest economy in the world, which it is. And it will be the number one economy in the world in not too many years. That means that you can’t use the same terms of trade that you did 25 or 30 years ago.

They want to have access to our market and other markets. Fine, but you have to have reciprocity, and they have not been very good at that.

R&I: What stands in the way of that happening?

Hank Greenberg: I think there are several substantial challenges. One, their structure makes it very difficult. They have a senior official, a regulator, who runs a division within the government for insurance. He keeps that job as long as he does what leadership wants him to do. He may not be sure what they want him to do.

For example, the president made a speech many months ago saying they are going to open up banking, insurance and a couple of additional sectors to foreign investment; nothing happened.

The reason was that the head of that division got changed. A new administrator came in who was not sure what the president wanted so he did nothing. Time went on and the international community said, “Wait a minute, you promised that you were going to do that and you didn’t do that.”

So the structure is such that it is very difficult. China can’t react as fast as it should. That will change, but it is going to take time.

R&I: That’s interesting, because during the financial crisis in 2008 there was talk that China, given their more centralized authority, could react more quickly, not less quickly.

Hank Greenberg: It turns out that it is harder to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.

R&I: Obviously, you have a very unique perspective and experience in China. For American companies coming to China, what are some of the current challenges?

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Hank Greenberg: Well, they very much want to do business in China. That’s due to the sheer size of the country, at 1.4 billion people. It’s a very big market and not just for insurance companies. It’s a whole range of companies that would like to have access to China as easily as Chinese companies have access to the United States. As I said previously, that has to be resolved.

It’s not going to be easy, because China has a history of not being treated well by other countries. The U.S. has been pretty good in that way. We haven’t taken advantage of China.

R&I: Your op-ed was very enlightening on that topic.

Hank Greenberg: President Xi wants to rebuild the “middle kingdom,” to what China was, a great country. Part of that was his takeover of the South China Sea rock islands during the Obama Administration; we did nothing. It’s a little late now to try and do something. They promised they would never militarize those islands. Then they did. That’s a real problem in Southern Asia. The other countries in that region are not happy about that.

R&I: One thing that has differentiated your company is that it is not a public company, and it is not a mutual company. We think you’re the only large insurance company with that structure at that scale. What advantages does that give you?

Hank Greenberg: Two things. First of all, we’re more than an insurance company. We have the traditional investment unit with the insurance company. Then we have a separate investment unit that we started, which is very successful. So we have a source of income that is diverse. We don’t have to underwrite business that is going to lose a lot of money. Not knowingly anyway.

R&I: And that’s because you are a private company?

Hank Greenberg: Yes. We attract a different type of person in a private company.

R&I: Do you think that enables you to react more quickly?

Hank Greenberg: Absolutely. When we left AIG there were three of us. Myself, Howie Smith and Ed Matthews. Howie used to run the internal financials and Ed Matthews was the investment guy coming out of Morgan Stanley when I was putting AIG together. We started with three people and now we have 3,500 and growing.

“I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

R&I:  You being forced to leave AIG in 2005 really was an injustice, by the way. AIG wouldn’t have been in the position it was in 2008 if you had still been there.

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Hank Greenberg: Absolutely not. We had all the right things in place. We met with the financial services division once a day every day to make sure they stuck to what they were supposed to do. Even Hank Paulson, the Secretary of Treasury, sat on the stand during my trial and said that if I’d been at the company, it would not have imploded the way it did.

R&I: And that fateful decision the AIG board made really affected the course of the country.

Hank Greenberg: So many people lost all of their net worth. The new management was taking on billions of dollars’ worth of risk with no collateral. They had decimated the internal risk management controls. And the government takeover of the company when the financial crisis blew up was grossly unfair.

From the time it went public, AIG’s value had increased from $300 million to $180 billion. Thanks to Eliot Spitzer, it’s now worth a fraction of that. His was a gross misuse of the Martin Act. It gives the Attorney General the power to investigate without probable cause and bring fraud charges without having to prove intent. Only in New York does the law grant the AG that much power.

R&I: It’s especially frustrating when you consider the quality of his own character, and the scandal he was involved in.

In early 2008, Spitzer was caught on a federal wiretap arranging a meeting with a prostitute at a Washington Hotel and resigned shortly thereafter.

Hank Greenberg: Yes. And it’s been successive. Look at Eric Schneiderman. He resigned earlier this year when it came out that he had abused several women. And this was after he came out so strongly against other men accused of the same thing. To me it demonstrates hypocrisy and abuse of power.

Schneiderman followed in Spitzer’s footsteps in leveraging the Martin Act against numerous corporations to generate multi-billion dollar settlements.

R&I: Starr, however, continues to thrive. You said you’re at 3,500 people and still growing. As you continue to expand, how do you deal with the challenge of attracting talent?

Hank Greenberg: We did something last week.

On September 16th, St. John’s University announced the largest gift in its 148-year history. The Starr Foundation donated $15 million to the school, establishing the Maurice R. Greenberg Leadership Initiative at St. John’s School of Risk Management, Insurance and Actuarial Science.

Hank Greenberg: We have recruited from St. John’s for many, many years. These are young people who want to be in the insurance industry. They don’t get into it by accident. They study to become proficient in this and we have recruited some very qualified individuals from that school. But we also recruit from many other universities. On the investment side, outside of the insurance industry, we also recruit from Wall Street.

R&I: We’re very interested in how you and other leaders in this industry view technology and how they’re going to use it.

Hank Greenberg: I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.

R&I: So as the pre-eminent leader of the insurance industry, what do you see in terms of where insurance is now an where it’s going?

Hank Greenberg: The country and the world will always need insurance. That doesn’t mean that what we have today is what we’re going to have 25 years from now.

How quickly the change comes and how far it will go will depend on individual companies and individual countries. Some will be more brave than others. But change will take place, there is no doubt about it.

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More will go on in space, there is no question about that. We’re involved in it right now as an insurance company, and it will get broader.

One of the things you have to worry about is it’s now a nuclear world. It’s a more dangerous world. And again, we have to find some way to deal with that.

So, change is inevitable. You need people who can deal with change.

R&I:  Is there anything else, Mr. Greenberg, you want to comment on?

Hank Greenberg: I think I’ve covered it. &

The R&I Editorial Team can be reached at [email protected]