Airmic Head to Head: Reputation

Is it possible to accurately and thoroughly insure against reputational risks?

No, says John Ludlow, SVP and head of global risk management, IHG

Reputation is the sum of the rational and emotional feelings we have about something. In business it is about the feelings that social and economic stakeholders have for a brand and how these affect their decisions – which then has consequences for the business.

While reputation is primarily an emotional risk, it is the commercial risk to the business – or more importantly to its stakeholders – that typically acts as a trigger event for crisis.

The most pragmatic framework I have seen is produced by the Reputation Institute. This has the measure of reputation as trust, admiration and esteem, as seen by the informed general public – this is driven by the rational dimensions of leadership, financial performance, product or service, innovation, workplace, governance and citizenship.

As with all areas of resilience, businesses must be proactive in managing risks and prepare for crises. Insurance has an important role to play in the area of reputation resilience – but woe betide any business leader who considers insurance to be the total solution.

The biggest challenge to insuring reputation risk is that the value of today’s highly evolved businesses is largely based on intangible assets such as brands, which are by nature difficult to measure, monitor and control. The risks to these assets are dynamic, with logical and lawful decisions being challenged by stakeholders who measure right and wrong in a much more emotional way than lawyers ever would.

Traditionally insurance would try to insure the value at risk, or the maximum probable loss, but given the disproportionate value corporate reputations now represent, insurable values would be very high and difficult to judge – resulting in products no one would offer or buy.

However, all is not lost – there are things the insurance industry could offer, such as: risk engineering for corporate reputation value protection; funding the crisis response, such as media monitoring, solution development; and funding crisis recovery by drawing on fixed contingent funds to repair stakeholder relationships by working on the performance of the business model.

So while insurance cannot be used to insure against reputational risks, it can be a vehicle for building both management capability and activity so businesses can plan and recover from events our complex world regularly throws at our risk leadership.

Yes, says Nigel Pearson, global head of fidelity, Allianz Global Corporate & Specialty

The intangible respect people might have for a brand is as hard to define as it is to value. Reputation depends on such a wide variety of factors –
customer experience, word of mouth, analyst opinions and wider perceptions of sector.
As putting a value on reputation is highly subjective, insuring it is far from straightforward. Nevertheless there are insurance products that do just that – but they tend to be expensive, have bespoke valuation methods and don’t address the reputational crisis directly.
Measuring how a company’s reputation moves over time – without attempting to put a value on it – is much less contentious, and is at the core of the media monitoring undertaken by many specialist organisations.
Reputation monitoring is also at the core of another approach to insurance, best be described as ‘aggressive mitigation’. Whereas traditional insurance is designed to pay out after a loss, reputational insurance based on aggressive mitigation seeks to deal directly with the crisis as it evolves – thereby mitigating the impact. Still relatively new to the market, its advantages over the more traditional approach are: it deals with the reputation crisis as it happens, reducing long term damage; it is informed by media monitoring in real time; it provides independent expert crisis management; and it is less expensive.
It is rare for businesses to encounter reputational issues, so even the largest are very unlikely to have specialist teams. With experienced external professionals managing reputation, senior management can concentrate their efforts on resolving the crisis. When BP’s Deepwater Horizon platform exploded, for example, senior management needed to focus on the loss of life and containing the issue as quickly as possible. The immediate media onslaught was clearly a distraction from this – but was still a vitally important part of dealing with the issue.
If a reputation is valued in the millions, the premiums to cover this loss using a traditional after the event policy would be huge. Policies focusing on aggressive mitigation offer a lower level of liability and are, therefore, far more palatable premiums – as well as the distinct advantage of not seeing a reputation end in tatters before the policy kicks in.
It is possible to accurately insure against reputational risks – indeed, innovation is something the insurance market has a reputation for.