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The Rough Notes Company Inc.



December 27
11:02 2016

ARTful Measures

There’s a growing role for agents in identifying and managing reputation risk

Corporate risk management has changed significantly over the past 10-plus years as companies have grown and matured. The most important change involves emerging risks. These risks are triggered by unexpected events, such as the volcanic eruption in Iceland, or familiar risks in unfamiliar conditions, such as the churning of mortgages that triggered the 2008 financial crisis.

Most risk management professionals believe emerging risks introduce volatility into companies’ earnings. Previously, insurance buyers and their agents and brokers restricted their involvement to insurable risks, leaving reputation risk to others in the organization. Meaningful changes have been occurring, however, and they have been broadening the scope of risk management.

Today, many companies have advanced to a more holistic approach to risk management known as enterprise risk management (ERM). Although there is no consistent definition for emerging risk, many risk professionals believe they are unseen risks whose loss potential is not fully known.

The ERM approach has expanded the list of risks that the corporate risk manager is required to oversee. The holistic nature of ERM depends on eliminating the traditional approach of siloed risk and taking a broader view of risks. This approach allows new and emerging risks to be more easily incorporated into the overall risk management program.

Reputation risk

One new and challenging risk that’s gotten the ear of company leaders is reputation risk. According to the 2014 Reputation@Risk report prepared by Deloitte/Forbes Insights, reputation risk topped the list of C-suite concerns for the fifth straight year. Its importance is easy to understand when the report authors state that “a company’s reputation should be managed like a priceless asset and protected as if it’s a matter of life and death, because from a business and career perspective, that is exactly what it is.”

Insurance buyers are turning to both their risk manager and their agent or broker to identify and handle reputation risk. Along with reputation, a major emerging risk today is cyber risk, such as concerns that the U.S. election may have been tampered with. Many experts believe we have just begun to scratch the surface with regard to these risks, which often are intertwined.

For evidence one need only look at examples such as the financial irregularities of giant firms like Enron, which went bankrupt and took thousands of employees down with it, and the schemes concocted by a plethora of Wall Street firms. Credit and debit card handling by Target and other retailers resulted in reputation damage and millions of dollars spent to repair the breaches and deal with consumers. Several vehicle manufacturers were forced to issue recalls when the components of their products caused deaths or injuries or, in the case of Volkswagen, when it jiggered the emissions systems on millions of its vehicles.

“Inconsistencies in existing coverage make a captive insurer an ideal solution for managing reputation risks.”

In many of these cases, customers and shareholders showed their displeasure by turning to other providers or selling their stock. When these breaches or misdealings become public, the news goes viral quickly, thanks to social media. This zunderlines the need for businesses of all sizes to develop proactive reputation management strategies, including product recall systems and crisis management plans. Speed of action and continuity of response are essential.

Insurance response

One strategy to manage reputation risk is the purchase of insurance. Most insurers are aware of reputation risks, and many have added reputation coverage to the traditional directors and officers liability policy. Liability limits for the coverage may be low; further, because no standard forms exist, insurers must create manuscript forms that may contain coverage gaps. Finally, existing reputation coverage takes no consistent approach to loss settlement, with some coverage providing for reimbursement of expenses and other coverages reimbursing the insured for lost profits.

These inconsistencies make a captive insurer an ideal solution for managing reputation risks. Captives are designed to reduce overall costs and return underwriting profits and investment income to the captive owner.

Another advantage of a captive is that forms can be written specifically to address the insured’s unique needs. Also, services can be unbundled, so the captive owner can select the services it wants. The captive can be structured to allow the owner to be as active as it wishes in claims settlement.

All of these factors make reputation risk an ideal situation for the agent or broker to propose that the client consider forming a captive. In fact, this is an excellent way to establish a relationship with a prospect. In a recent study, 66% of respondents believed that their reputation was inadequately protected from an insurance standpoint.

Assisting a client or prospect to manage its reputation risk builds loyalty and offers the agent or broker an opportunity to move beyond the selling function and act as a true risk management consultant.

 The author

Michael J. Moody, MBA, ARM, is the retired managing director of Strategic Risk Financing, Inc. (SuRF), a firm that was established to provide consulting services to captive and other alternative risk transfer mechanisms. As a regular columnist, he continues to actively promote the benefits of the ART market by providing current, objective information about the market, the structures being used, and the players involved.

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