Insuring Reputational Risk
Joe Herbers

Insuring Reputational Risk

Joe Herbers June 20, 2017 Posted in: Blog Posts, Cyber, ERM, Insurance / Insurers

How does an organization protect itself from reputational risk? Purchasing cyber liability coverage, adding safeguards to its IT systems, ensuring its employees behave in a professional manner both inside and outside the company walls and paying close attention to social media platforms come to mind. But are all of these even enough? Most organizations understand they must plan ahead and be prepared to get out in front of an adverse event to reassure their audiences that business will go on as usual.

The costs of protecting a company from a reputation-challenging event can be daunting. First, there are direct or crisis communications costs when professionals are needed to intervene at a moment’s notice to inform the public about how the company is handling the situation. Time is of the essence in managing the message, as the first communications tend to rule the day. An organization must be proactive to avoid solely reacting and playing defense in such cases. With the advent of social media, organizations have only hours, not days, to respond. Ineffective responses or those in which the company does not take responsibility for the event can do more damage than the event itself. Today’s communication platforms provide the opportunity for near-instantaneous responses to adverse situations.

Other direct organizational costs may include product recalls or reworks, legal fees and ongoing public relations to manage the message that the company’s actions are socially responsible. Business interruption costs can also be significant, but the indirect costs can be the most devastating. Loss of business relationships, suppliers, distributors and the like can result in a company’s demise. 

Although a company and its brand may survive a crisis event, there could be serious fallout for its management. Stakeholders’ responses necessitate that the organization take some responsibility for the event. Its leaders will likely bear the brunt of it.

Reputation is an expectation and is difficult to restore once breached. It is not unlike the trust a teenager builds with his parents. Once an adverse event occurs, the bank account of trust may be depleted to zero and must be restored. People have long memories, making a reputation difficult to reconstruct. Remember the problems Ford Pinto faced after video showed gas tanks exploding in rear-end collisions? Or the panic caused by cyanide-tainted Tylenol in the early 80s? More recent events have challenged Chipotle, Volkswagen and United Airlines with long-lasting repercussions.

In recent years, coverage for reputational risk has been available in enterprise risk captive programs, but new insurance products are beginning to emerge in traditional insurance markets as well. Most traditional products have taken the form of cyber liability. However, a well-known commercial carrier provides a crisis communications insurance product that furnishes access to communications experts during crisis situations. Another prominent commercial carrier provides coverage for business interruption or loss of revenue. 

Steel City Re, a captive insurance company, provides an innovative package of coverages that adds strategic value to an organization. Steel City Re developed the products in recognition of the fact that traditional coverages such as D&O and cyber do very little to protect a company from direct losses and/or costs incurred while reacting to public opinion. Coverage triggers for its product are dependent upon a parametric formula measuring several elements of reputation. 

We expect the market for reputational risk insurance products will continue to emerge as organizations come to a better understanding of the importance of their reputation in the business world and its connection to social responsibility.

Much of the content of this blog relates to a presentation from Dr. Nir Kossovsky, CEO and co-founder of Steel City Re. Dr. Kossovsky is an authority on business process risk and reputational value.

Joe Herbers is Pinnacle’s Managing Principal and a Consulting Actuary with over 30 years’ experience. His practice focuses on providing loss reserving and funding studies for a wide variety of entities – both traditional insurers and alternative markets. Joe’s specialties include policyholder-owned group captives, large-deductible and/or self-insured entities, lawyers’ professional liability carriers, Florida property writers and non-standard auto writers in the state of Illinois. Joe is an Associate of the Casualty Actuarial Society (ACAS), a Member of the American Academy of Actuaries (MAAA) and Chartered Enterprise Risk Analyst (CERA). He served as long-time member and Chair of the American Academy of Actuaries Committee on Property Liability Financial Reporting (COPLFR) as well as several other professional committees. He is a regular speaker at industry events.
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