An introduction to reputational risk insurance
When a reputation is diminished it can cost the organisation customers, profit, even its ability to do business – so the knowledge that it is insured against reputational risk would doubtless be a great comfort to any company in the public eye.
But how can something as arguably abstract and intangible as reputational risk be quantified? More specifically, how can organisations put a price on their reputation? And, even more complex, how can that value be effectively rolled into an insurance policy that is both attractive to the insurance company, and worth the paper it’s written on to the holder of the policy?
The concept of reputational risk insurance has been floated for years, but historically has been limited to a payout mechanism, activated at an agreed level of negative media coverage, to cover the cost of a counter campaign by a PR consultancy, and thus to communicate the organisation’s way out of trouble. These arrangements, however, are more correctly understood as a funded crisis management response, rather than the kind of measured, far-thinking behaviours usually associated with effective risk management.
One organisation that ran ahead of the curve was Aon, who in 2011 created an innovative reputational risk cover, underwritten by Zurich to the tune of $100m. Aon worked with data collection and analysis organisation Oxford Metrica to structure a framework on which to base the coverage
Now other insurers are following suit and offering comprehensive cover that accurately reflects the potentially catastrophic effects of reputational damage, beyond the remint of crisis management insurance. The industry has seen a shift towards measuring the damage done by a negative event, and its sustained impact, and reimbursing policyholders based on a more ‘traditional’ insurance set up.
This might take the form of a clause bundled into a broader policy, such as business owner’s liability insurance – often minimal, and focused on incidences of libel, slander or false advertising – or cyber threat insurance – where coverage for the consequences of a cyberbreach includes the elements of sensitive customer data being disseminated, or negative social media activity.
Targeted reputation insurance, meanwhile, although still embryonic in development, is of increasing relevance to large organisations, in order to cover loss of sales or income caused by a damaged brand. Premiums are high, reflecting how serious these effects can be. Allianz offers real time monitoring of developing crises and support from crisis communication consultants as part of its Reputation Protection product. Costs accrued from crisis response are covered, as is loss of operating costs. To help pre-empt reputational risks, clients are also offered a preparatory reputation protection workshop.
In the same vein, in May Hiscox announced enhancements to its Security Incident Response product, which include cover for an ‘allegation’ of an insured event having occurred. In other words, Hiscox will now pay out for damage inflicted by negative, false reporting.
The challenge for the industry, however, remains one of quantification.
At what point is a reputational risk reached? How long before the payout is triggered? At what point do we know that ‘normality’ has resumed?
Existing methods typically rely on one or more of negative media cuttings, gut assessment and/or movements in share price, none of which are satisfactory or accurate and risk disputes between insurer and insured over when a policy is triggered.
For this type of insurance to take off a combination of advanced analytical techniques in combination with analysts is required to create the robust measurement framework needed to satisfy all parties. This involves the auditing and registering of pre-existing company and sector reputational risks, the quantification of their historic and normative impact levels as well as the establishment of agreed reputational risk thresholds that determine an initial alerting of risk before a triggering of a policy occurs. Real-time measurement and alerting on the status of these and new risks is needed to enable companies to ward off potential risks.
A solid, quantitative, real-time reputational risk quantification framework is required at the centre of any reputational risk policy, which, working in concert with insurance specialists and PR and communications teams can create realistic policies to indemnify organisations against reputational damage.
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