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An introduction to reputational risk insurance

An introduction to reputational risk insurance

When a reputation is diminished, it can cost the organisation customers, profit, and even its ability to do business. Unfortunately, reputational risks are myriad, encompassing failure to meet customer needs, product recalls, technology breakdowns, cyber attacks, negative news reporting, and damage to premises or property, among many others.

Any of these events could significantly dent corporate reputation for a considerable period of time. Being able to guard against this is an appealing prospect, and the advent of reputational risk insurance has been a welcome fillip for companies with fragile public profiles.

But, as with life insurance, the issue lies in defining monetary value. How can something as abstract and intangible as reputational risk be accurately quantified?

Can businesses put a price on their reputations? And 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 its holder?

A history of reputational risk insurance

The concept of reputational risk insurance was floated many years ago, but historically has been limited to a fixed payout mechanism in return for insurance premiums. Activated at an agreed level of negative media coverage, this was designed to cover the cost of a counter campaign by a PR consultancy, to talk the organisation’s way out of trouble.

Such arrangements should, however, be more correctly described as crisis management insurance, a step change away from measured, far-thinking risk management.

One provider that ran ahead of the curve was Aon, which 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 the rest of the insurance market is following suit, offering comprehensive cover that accurately reflects the potentially catastrophic effects of loss or damage to corporate reputation. The industry has shifted towards measuring both the initial damage caused by a negative event and its sustained impact, then reimbursing policyholders based on a ‘traditional’ insurance set up.

 

How reputational risk insurance works

Reputation insurance may be a clause bundled into a broader policy, such as business owner’s liability insurance. This will likely be minimal, and focused on incidences of libel, slander or false advertising. Or it might form part of a cyber threat policy, covering the consequences of a cyber breach, such as including sensitive customer data being disseminated.

Standalone reputation insurance, meanwhile, although relatively embryonic in development, has become of increasing relevance to large organisations. Its value lies in covering the cost of lost income due to a damaged brand. Premiums are high, reflecting how serious these losses can be.

In 2018 Allianz offered real-time monitoring of developing crises and support from crisis communication consultants as part of its Reputation Protection product. It covered costs accrued from crisis response and loss of operating costs.

In a similar vein, in 2019 Hiscox released enhancements to its Security Incident Response product, including cover for an ‘allegation’ about an insured event having occurred. In other words, Hiscox will pay out for damage inflicted by negative, false reporting.

Fast forward to today, and the latest evolution sees specialist insurer Beazley announcing AI-enabled enhancements to its reputational risk policy.

 

Who needs reputational risk insurance?

With premiums currently pricing out any but the largest companies, it’s important to weigh up whether insuring a reputation is worth the cost.

Reputational risk insurance should be a consideration for:

  • Businesses with a high-value brand vulnerable to damage by shifts in public perception.
  • Companies within industries whose operations expose them to high reputational risk.
  • Organisations with sensitive data caches likely to be targeted by cybercriminals, or which have suffered breaches in the past.
  • Any business for which the cost of a damaged reputation is greater than that of the insurance premiums.

The ongoing challenge of insuring reputation

The challenge for the industry remains one of quantification. At what point is reputational risk confirmed to have occurred? How long before a payout is approved? At what point can it be said that ‘normality’ has resumed?

Existing methods typically rely on negative media cuttings, gut assessment and/or movements in share price. None of these are satisfactory, however, and all contain the risk of disputes between insurer and insured over when a reputational risk policy clause should be triggered.

For this type of insurance to be worth the cost, a series of advanced analytical techniques in combination with experienced analysts is needed to create a robust measurement framework that will satisfy all parties.

Such a framework requires:

  • The auditing and registering of pre-existing company and sector reputational risks.
  • The quantification of their historic and normative impact levels.
  • Agreed reputational risk thresholds that determine an initial alerting of risk before triggering of a policy occurs.
  • Real-time measurement and alerts on the status of new risks to enable companies to ward off potential threats.

A mutually agreed, real-time reputational risk quantification framework is the foundation of any reputational risk policy. Working in concert with insurance specialists and PR and communications teams, it can then create realistic policies to indemnify organisations against reputational damage.

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