A good reputation is valuable but also fragile. As Berkshire Hathaway Inc. Chairman Warren Buffett said, “It takes 20 years to build a reputation, and five minutes to ruin it.” In the headlines every day are incidents that damage the public’s perception of an organization, from social media controversies, to executive misconduct to regulatory violations. Fortunately, a new generation of insurance products is emerging to provide protection for reputational risks.
There are a number of reputational risk products currently available in the London market. 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, there are a number of stand-alone risk transfer products that offer more robust solutions. These reputational risk products include the following types:
Named-perils policies. Named-perils policies offer bespoke coverage for reputational harm and loss of profits arising from adverse media events, including cyber incidents, product quality issues, employee negligence, celebrity endorser disgrace, supplier disgrace and more. These types of policies may provide coverage for public relations expenses incurred due to adverse media events.
All-risks policies. This type of reputational risk product is designed for U.S.-domiciled organizations of all sizes — public, private or non-profit. The all-risks nature of the policy is designed to provide sleep easy protection for black swan events. Key exclusions include cyber, product quality issues and systemic events. A pre-agreed revenue drop trigger enables quick payment in the event of loss, without the need for complex loss adjusting. A sublimit for pre-loss crisis management, whether an incident ultimately is recorded as a claim, may also be included in a policy, which can be valuable especially to smaller organizations.
Parametric products. Parametric insurance offerings are growing in popularity [read more about parametric insurance in this recent article]. A reputational risk parametric product is unique and intended for large public companies with market capitalizations most likely above $1 Billion. This type of product can also be paired with captive risk financing programs. An example of a loss trigger includes failure of a scheduled business process that results in adverse publicity, as well as impairment of an agreed metric over a sustained period of time. An advantage of the parametric structure is prompt payment when coverage conditions are met. Companies utilizing this solution explain that it can be an extremely valuable signaling tool in helping to demonstrate a considered and well-thought-out approach to reputational risk management – particularly important in today’s litigious environment.
The expansion of reputational risk coverage options is appealing to many different types of insureds, with growing interest among companies within the restaurant, retail, tourism, healthcare, education and financial services industries.
Reputational risk policies of the past tended to be quite expensive relative to the limited coverage they offered. Rates for those products often were comparable to those for catastrophe coverage. The increase in the number of market participants and bespoke approach to underwriting has led to products now being available which are much more relevant and affordable to the insureds.
Compared to the risk of financial loss, reputational risk coverage today looks much more affordable. A Deloitte survey of organizations around the world found that the impacts of a negative reputation event were substantial: 41% of respondents who experienced such an event said a financial loss was the biggest impact, 41% said their biggest impact was loss of brand value, and 37% indicated the biggest impact on their organization was a regulatory investigation (source). It is worth noting that all of those consequences and others can arise from a single event, which may inflate and prolong the total loss to the organization.
The underwriting process for reputational risk coverage will depend on the type of product being purchased; All- risks, Named Perils or Parametric. Discussions with the proposed insured will be paramount to present a complete picture of the risk in order to tailor the most relevant coverage. Underwriters will also require granular financial data, particularly around the insured’s revenue, both historic and forward looking. Other important elements underwriters may also take into consideration include:
- Corporate governance policies and procedures
- Strategic priorities
- Crisis response plans
- Policies and approaches on interacting with the media
- Prior issues the insured can disclose
Organizations everywhere, in every industry, are exposed to events that can impair their reputation, which can result in long-term loss of revenue and has the potential to push them into insolvency. Having policies and procedures in place to mitigate reputational damage is critical, and adding financial protection in the form of reputational risk insurance is a smart step. To find the best coverage options for insureds, agents should work with a wholesale specialist that has deep experience and strong market relationships.
Contact a CRC Group producer for more information.
- Rachel Scharfnorth is an Associate Broker in the CRC Atlanta office and member of the ExecPro practice group.
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