Reputational risk is regularly one of the top five exposures highlighted by risk managers. Following recent innovation in the insurance space, there has been a significant increase in the uptake of reputational risk insurance coverage, particularly with use of captives. Our specialist Richard Coyle explains.
The momentum around reputational risk insurance is set to continue, building in line with stakeholders growing expectations for robust and demonstrable reputational risk management strategies.
In the digital age, a company's brand and reputation is everything. A misjudged tweet, problems in the supply chain or allegations of executive misconduct can seriously damage a company’s reputation, hitting revenue and affecting its ability to attract and retain talent, and potentially resulting in the loss of stakeholder support.
The value of brand and reputation has raised the stakes – the total value of the world’s 100 largest brands increased by a record 21% to USD4.4trn in 2018; more than double the value in 2010, according to the annual Brandz report from Kantar. In fact, the relevance of intangible assets like brand and reputation has increased enormously over time. In the mid-1970s, under 20% of the average S&P 500's value was made up of intangible assets like brand and reputation, but today they account for around 84% of a corporation’s value, according to a recent intangible asset study by Ocean Tomo.
At the same time, brand and reputation is more vulnerable in today’s fast-moving business environment. Key stakeholders including consumers and shareholders are increasingly keen to hold companies and boards to account on a range of issues where expectations are not met. Social media and 24-hour news culture has increased the speed and extent bad news and misinformation can spread, as well as the impact on a company’s brand and reputation.
Consumer-facing businesses are most at risk of reputational damage, but business-to-business organisations are not immune. Examples of reputational events include food poisoning outbreaks at restaurant chains, allegations of sexual harassment in the entertainment, technology and charities sectors, and the use of child labour by suppliers to large clothing brands and stores.
Fresh approaches required
Regulatory pressures and a surge in shareholder litigation has driven a number of companies to reposition reputation management out of the marketing department and into the enterprise risk management department. Reputation is widely disclosed by listed companies in public filings as one of their most important assets. Company directors may be questioned as part of regulatory investigations or shareholder litigation, on whether they did everything that could be reasonably expected of them to mitigate the reputational risks that were clearly disclosed in public filings. An insurance policy can be an extremely valuable signalling tool in helping to demonstrate a considered and well-thought-out approach to reputational risk management.
Originally a limited form of reputational risk insurance was available under defamation cover within contingency policies. This progressed to include indemnification for costs incurred for crisis management services alongside coverages such as Cyber and Product Recall. Now, however, a number of stand-alone risk transfer products exist to offer more robust solutions.
1. Crisis response and loss of profits
A recently established Lloyd’s product offers a comprehensive two-pronged approach; rapid response crisis management support followed by loss of profits cover. Once the insurer is notified of a covered reputational event, the policy triggers and the policyholder has immediate access to up to USD250,000 of crisis response funding with no deductible. The aim is to fund a fast and nimble response to a reputational event in order to mitigate the impact on the brand and reduce the potential financial damage. To this end, the cover gives policyholders access to crisis management consulting services, a valuable asset for companies with limited in-house crisis response capabilities. An additional USD750,000 is available for post-loss crisis management advice.
Perhaps most importantly, the policy will also protect against the financial impact to the firm’s bottom line, covering a pre-agreed level of lost profit for the lifespan of a crisis. Pre-agreed triggers are linked to a meaningful drop in revenue, which means claims can be settled quickly and without the need for complex loss adjusting. Meaningful limits of up to USD50m are available for loss of profits cover.
This latest iteration of reputational risk insurance is a firm step forward in the Lloyd’s market and it’s response to customer demand. The solution, developed with feedback from risk managers and buyers, addresses many of the challenges associated with previous approaches to reputation insurance.
For example, it is often difficult for organisations to predict precise triggers of a reputational crisis. Some reputational risk policies contain a named perils approach which left some potential buyers a little uneasy. Therefore, this policy is structured on an all-risk basis with some exclusions, in order to provide a sleep-easy cover that responds to many potential scenarios. Key exclusions include cyber, product recall, systemic events and fraud or criminal acts. The former two already have distinct and separate coverage options available.
2. Parametric reputational risk transfer
An innovative parametric solution can provide a unique opportunity for integrated reputational risk mitigation, financing and transfer. The product has been likened to a “warranty on governance” and is underpinned by proven actuarial measures of reputational value used by professional equity investors for many years.
The product utilises a “reputation value” index, which has been constructed algorithmically using nearly 20 years’ worth of publicly available data from an independent commercial data aggregator. Data inputs reflect the economic expectations of key stakeholders such as customers, equity investors, creditors, suppliers and market analysts, each of which are reflections of reputation value. Following a consultation process with the client, one or more index trigger values are assigned and defined in the policy wording. If an adverse event occurs and that event results in media coverage in specific outlets that have been pre-agreed upon, the reputation value index is measured. The extent to which it has been impaired below one or more index trigger values guides the magnitude of the parametric pay-out.
This tool is particularly useful in the utilising of captives to fund risk that until recently the commercial market was grappling with in terms of offering coverage and capacity options. If captive retention exceeds the captive’s means then the commercial market can supplement the capacity available.
This is a complex area of risk, but Miller specialists are at hand to help make these reputational risk solutions easier for the end-customer to understand, more relevant to the reputational risks they face, whilst being structured to meet budget expectations. The cover should provide companies and their boards with the comfort that help is at hand to mitigate the effects of a reputational crisis, as well as financial support should a reputational event impact revenues.