A recent article in Insurance Journal by Amy O’Connor discusses a new wave of insuring reputational risk due to the exposure created by the boom in the social media. Your first question might be, “What is reputational risk as it pertains to insurance?” In the article, the author defines reputational risk as “a company’s risk of having its reputation damaged because of certain events or incidents and the fallout that takes place because of these incidents.” Another article in the same publication by author Seamus Gillen states that pure reputational risk does not exist but that it occurs “when operational risk and reputational risk combine to create a perfect storm.” Furthermore, the article cites the BP Deepwater Horizon oil leak in the Gulf of Mexico, Toyota’s failing brakes on its cars, and the hacking of Sony’s customer data as illustrations of reputational risk and describes the process as:
- “Something goes wrong inside a company which is serious enough to threaten some significant aspect of its operations, and a material part of the related revenue generation which underpins the business model. Investors lose confidence – initially because they perceive a threat to the company’s potential for earnings growth, then more substantially when they see no quick fix to the company’s difficulties. These insecurities grow – and this is the important part – when other key stakeholders, whose support is needed to reestablish the equilibrium of the business model, also lose confidence, and leave in droves.”
A second question might be: “Is it an insurable risk?” The answer: Apparently so. Ms. O’Connor’s article references three recent programs by Aon with Zurich, Willis, and Chartis that address exposures of reputational risk and offer risk management services to help corporations keep their reputations intact. Further, an article by Charles Boyle gives a general description of the coverage offered by Aon with Zurich is discussed which offers advice on pre-crisis planning in addition to coverage for losses. In Ms. O’Connor’s article, Robert Yellen, chief underwriting officer for the executive liability division of Chartis in New York, states that the company’s product provides two categories of coverage. The first covers “reputation attacks” defined as “a public attack upon a company’s reputation” and the other covers “reputation threats” defined as “acts or events that the company believes, if made public, would have a material impact on the company’s reputation and would be seen as a breach of trust by the company’s stakeholders.” The Willis product is targeted toward hotels and responds to incidents that lead to, or are likely to lead to, hotel business losses from adverse publicity through any medium and provides cover for lost revenue based on a hotel industry metric that measures revenue per available room.
Do you think reputational risk is the next big thing in insurance coverage? Can/will the coverage be profitable? How does one determine that the initial rates are adequate? What pitfalls do you see in offering this coverage and how susceptible is it to fraudulent claims? Tell us what you think.