Hit enter to search or ESC to close

Get in touch

A quantitative framework for reputational risk insurance

In our introductory blog outlining the concept of reputational risk insurance, and how it could be employed to mitigate the effects of reputational damage, we concluded that, at the centre of any reputational risk policy must sit a real-time reputational risk quantification. Only through the use of such a framework, in concert with the efforts of insurance specialists and communications teams, can realistic policies be created to indemnify organisations against reputational damage.

Quantifying the known risks

How, then, could such a framework be constructed? The foundations would be laid on known risks, starting with an audit of an organisation’s reputation; examining the existing risk register, and analysing and quantifying what a ‘normal’ state looks like for these risks. By tracking how much exposure an organisation has to a given issue, the level of negativity surrounding it, which stakeholders are talking about it, and in what context, the base level reputational risk can be established.

Once the norm is established for known risks, organisations can plot in real-time any deviation from that standard: increasing levels of negative exposure; new and more vocal antagonists entering the fray; greater strength of criticism from usually benign stakeholders. Real-time reporting can then generate automatic alerts, enabling intervention before reputational damage occurs.

Understanding the sector context

Another strut in the ‘known risk’ sector of the framework is composed of red flag issues to which an organisation is exposed due to the nature of its activity. Tracking the tenor of negativity around these issues gives an understanding of likely reputational damage.

For example, the use of palm oil has become a rallying point for environmental NGOs lobbying big business: any organisation in the food or pharma sectors using palm oil should, therefore, understand not only their own reputation, but the shifting reputation of the product itself (is it getting more negative, are viable alternatives being championed?), and make a risk/reward calculation on its use. If the reputation of a product becomes increasingly negative, and NGO pressure and media coverage over its use escalate, there comes a point where reputational damage outweighs the financial reward of using it.

In addition, organisations need to track whether they are ‘decoupled’ from the rest of the sector regarding a specific issue, and therefore at greater risk because they stand out. Being out of step with the sector on an issue exposes a company to potential targeting by NGOs and therefore to greater risk of reputational damage.

How to address future risks

Monitoring and managing the known risks is only one dimension of the framework needed to build reputational risk insurance. The ‘unknown unknowns’ as posited by Donald Rumsfeld, could derail any attempt to structure reputational risk insurance – you can’t insure against the unknown events which you don’t know will affect you. Two decades on from Mr Rumsfeld’s speech, however, we have the tools to expose the unknown.

Technology, including machine learning and topic modelling, enables analysts to surface new risks – identifying issues that were previously unconsidered –and so protect against them. By looking at the organic growth of negative reporting around certain topics, organisations can determine what they need to change their position on.

It is now, therefore, possible to create a quantitative framework upon which to build a reputational risk insurance policy and which can in turn be used to objectively assess when such a policy is triggered and for how long. The challenge for the insurance companies remains how to put a price on it.

See more articles
Join our Newsletter

Be part of the Connected Intelligence community Join our Newsletter

Join our Newsletter
Subscribe Now

Sign up to alva’s resources

Subscribe Now

In the second of our monthly #ESG sector profiles, we see the #Pharma industry enter positive territory with an average score of +10. Four out of nine material issue areas score negatively in Q3, driven by Affordability & Pricing (-22%)
👇Download report: https://t.co/ud1gia4FtA

2020 has taught us that resilience and flexibility are the hallmarks of a sustainable business. Strong ESG performance lies at the core of that sustainability, and firms that can manage their #ESG liability will be the ones that thrive in the future.

The rise of stakeholder capitalism is being thrown into sharp focus through the #ESG lens. Each #stakeholder group encompasses its own risks and opportunities, and businesses need to be able to track and respond to them all #stakeholdercapitalism
👉 https://t.co/sgGfBVXc2H

Load More...

Be part of the Connected Intelligence community

To join our Connected Intelligence community simply complete the form below.