Liz Booth looks at the issue of reputational risk and emerging insurance solutions
The well-worn cliché that a name takes years to build but seconds to destroy has never been more obvious than in today’s world.
Consumers are increasingly intolerant of bad customer service and are quicker than ever to share the bad news on social media.
It may be hard to put a value on reputation but in a recent case, Sir Richard Branson's Virgin Enterprises is doing just that, suing a US rail company for $251m (£182m) over its decision to drop the Virgin name from its trains. There was a 20-year licensing deal that allowed Brightline to rebrand as Virgin Trains USA, however, Virgin claims that Brightline is reneging on the agreement by spuriously claiming the Virgin name has been damaged.
When it comes to insurers, the pandemic has been an up-and-down experience. In late 2020, in the wake of the Financial Conduct Authority’s business interruption (BI) test case, AM Best analysts warned: “It is important for the insurance industry’s reputation that transparency is improved and there is greater clarity as to what is covered in a BI policy,” pointing to the challenge facing the profession to rebuild its reputation among small-business customers.
Returning to the wider problem of reputational risk for businesses across the world, Harvard Business Review concludes: “Firms with strong, positive reputations attract better people. They are perceived as providing more value, which often allows them to charge a premium. Their customers are more loyal and buy broader ranges of products and services.
“Because the market believes that such companies will deliver sustained earnings and future growth, they have higher price-earnings multiples and market values, and lower costs of capital.”
However, it warns that most companies do an “inadequate job of managing their reputations in general and the risks to their reputations in particular”.
Loss of income
That would come as no surprise to Willis Towers Watson (WTW), which, in its 2020 Reputational Risk Survey, found that 86% of clients were concerned about loss of income and a reduced customer base due to reputational risk.
Key findings from the survey of 200 global organisations include:
- 72% reported that risk management teams have at least some responsibility for the monitoring, measuring or management of reputational risk.
- Nearly the same proportion said that reputational risk is reported at the c-suite (61%) or board level (66%) within their organisation. Almost 80% believe that the focus on reputational risk in their business will only increase in the coming five years. The majority of respondents highlighted that reputational risks could result in potentially crippling business outcomes for their organisation, such as loss of income (86%) and weakened human capital, because of their reduced ability to retain (62%) or attract (57%) talented employees.
- Framed against this increasing focus, most respondents pointed out that when it comes to measuring and monitoring reputational risk, they face real challenges in accessing reliable data (51%), with a large proportion (42%) indicating they have inadequate tools to do so.
Garret Gaughan, head of global markets P&C hub, WTW, says: “Reputational risk is increasingly of concern to our clients, with most risk managers now having some responsibility for risk mitigation in this area. As a previously difficult-to-insure risk, it is unsurprising that all of the survey participants agreed it would be helpful to them to have access to a reputation platform.”
Transferring the risk
Following on from that survey, WTW and Liberty Specialty Markets (LSM) have launched reputational crisis insurance. They say the solution enables organisations to transfer the financial risk associated with certain types of reputational crises, in addition to providing access to a range of non-insurance capabilities, including AI-powered data analysis.
Lewis Edwards, head of underwriting, specialty binders at LSM, says: “Clients’ increasing exposure to both traditional media and social media has led to a rise in reputational losses globally. Most reputational products in the market currently only respond to the crisis communication fees incurred following a reputational crisis event.
“This new product is one of the few that provides coverage for the loss of an organisation’s gross profit following such an event, providing financial protection and also giving clients the tools they need to protect their reputation. The ability to act quickly and transparently can have a hugely positive impact on a crisis outcome.”
Adam Garrard, head of corporate risk and broking at WTW, adds: “While the world contends with the outbreak of Covid-19, the importance of maintaining momentum in innovation remains clear. Emerging threats continue to arise and companies need the option of modernised risk transfer and mitigation solutions in response.
“For organisations of all types in a changing world, the holistic management of emerging risks like fake news, social engineering and perception manipulation will be critical to maintaining value.”
Liz Booth is contributing editor at the CII