Reputational Risk: A New Five-Year Test

When I was young, my mother insisted that I take the five-year test anytime something seemingly traumatic happened to me.  That is, ask yourself, “Will this matter in five years?”  Fortunately, as a child the toughest life situations usually involved squabbles of he said, she said at the swing set during recess.   Thus, with an answer of “No” I usually passed the five-year test with flying colors.

So let’s take the “he said, she said at the swing set” dilemma, multiply it by 200 million, and tag a smooth $10 billion consequence to it.  That’s what some companies have to risk everyday in the tech-savvy world in which we live.  Simply substitute “he said, she said” for 200 million Twitter tweets, and substitute the swing set for a virtual playground as big as the Web will allow.  Bad publicity has always been bad publicity, but today negative opinion has the ability to spread like wildfire across the globe. 

Not only is it relatively easy for a consumer to voice their opinion over the Web, but the speed of delivery is almost instantaneous.   The amount of time that companies have to respond to and mitigate negative situations decreases with the ever-increasing reaction time of social media sources. 

Easy information sharing also creates an abundance of possible opportunities for reputational disasters.  According to a recent article from Business Insurance regarding a new reputational risk study, public companies can expect to have an 80% chance of losing 20% of their equity in a single month over a five-year period because of a reputational crisis.  Seemingly, a new five-year test has been established…but the question remains: Will your company pass?

Reputation can be a company’s best asset, which makes it all that more important to protect.  While protection for reputational risk is still considered avant-garde in the insurance world, some insurers are beginning to lay the groundwork for commercial coverage.  Recently companies like Zurich, Willis and Chartis have developed new insurance products to help their clients manage and protect against reputational crises.  These policies are intended to provide coverage for the costs associated with avoiding or minimizing the impact of negative publicity. 

While research and studies surrounding reputational risk are new, there aren’t too many companies that can’t claim to support a good chunk of their business on reputation.   Somewhere along the line small town word-of-mouth turned into a much more global platform, but the concept remains the same.  And as the world gets smaller through the Internet, a company’s reputation can grow that much bigger. 

What price is a business willing to pay to keep their reputation intact?  What do you think?  Will reputational risk insurance grow in popularity among carriers and policyholders alike?  Do insurance carriers know what they are getting themselves into?  Let us know.