Firms exposed to underinsurance as reputation becomes ‘massively growing risk issue’

Reputation is a vital intangible asset for any business or organisation. A good reputation can take a long time to build and adds real value. However, that reputation can be quickly or easily damaged by words, deeds or a crisis, which could impact revenues, scare off customers, spook investors or diminish the ability to hire and retain talent.

Because reputation helps to build value, boards must protect and build their firm’s reputation across their networks. But the reputational risk landscape has changed significantly in recent years, a process that has accelerated as the Covid-19 pandemic continues to unravel.

A recent report published by Lloyd’s and KPMG described reputation as ’a risk of risks’. This is because major adverse events impacting an organisation can lead to potential reputational damage. Not every accident will necessarily lead to actual damage; it will often depend on how the organisation acts in the aftermath of the crisis.

The report highlighted key actions that risk owners in organisations need to think about to advance their preparedness to safeguard their reputation. These include proactive signal sensing to identify changing social norms or changing narratives among stakeholders, as well as building resilience across the whole organisation to prevent the consequential risk of reputation.

It also said organisations must create a culture of responsibility throughout, which must be underpinned by training at all levels, including senior executives.

“The reputational risks facing organisations are becoming increasingly complex, and a ‘one-size-fits-all’ approach to protection simply won’t work,” said Paul Merrey, head of commercial and specialty insurance at KPMG UK.

“Insurers can play a key role in supporting businesses, though to be truly effective we expect new products will measure more nuanced triggers and be tailored to specific industries and companies’ needs.

“Just as cyber insurance has become a core offering to reflect a changed risk landscape, we anticipate that reputation products will become a staple within the insurance industry in the next five years.”

A volatile risk

Insurers take on the protection of corporate reputation in a number of ways, through covers such as business liability, cyber, public relations (PR) and crisis management.

Beazley leads the Custodian Consortium at Lloyd’s, which offers a reputational risk solution to protect insureds through a crisis.

The consortium, which renewed in January 2021, also includes RenaissanceRe, Tokio Marine Kiln, Chaucer and Talbot.

The reputational risk insurance policy includes crisis management services to minimise reputational damage, as well as business interruption cover that insures against the impact to profitability of a downturn in revenue.

It also provides artificial intelligence-enabled tools to help policyholders control their corporate brand and reputation more effectively.

The policy is designed for consumer-facing companies across a range of industries, including leisure, hospitality, technology, manufacturing, transportation and healthcare.

George Beattie, head of incubation underwriting at Beazley, said: “Reputation means different things to different people, so the first thing the industry needs to do is segment what it means to different types of companies. It comes in different flavours and because they’re different flavours, it changes how you transfer the risk around them.

“It is a massively growing risk issue and one companies are uninsured or underinsured against.

“Rising public anger, intolerance and lower trust in authority are contributing to a more volatile reputational environment.

“The exposure of the public to manipulative social media content compounds the difficulty business leaders have in meeting their fiduciary responsibility to minimise balance sheet risk and to maintain stakeholder value. This solution helps companies in two key ways.”

Firstly, it provides executives with reputational insights at a time when many companies are the target of stakeholder action relating to perceived failures to act on emerging risks.

Secondly, it helps companies to mitigate the risk to profitability posed by reputational crises by paying for loss of profit and providing immediate access to crisis consultancy services.

Beattie continued: “In the past, reputational policies have been arguably somewhat difficult to understand. They’ve also catered to very specific perils within a reputational context. Certain offerings out there are named perils basis policies. It can be difficult for policyholders to get their heads around what is being covered.”

Furthermore, gauging the extent of potential reputational risk can be challenging.

“The reality is that reputation nowadays can have absolutely nothing to do with people’s experience of a company. It might be completely surmised, they might have had no interaction at all with that company,” Beattie added.

“It is extremely chaotic - freedom of reach makes things really hard for companies to understand who their stakeholders are. Companies have to be ready for a crisis at any time.”

Insurers also cover reputation under business liability insurance, which protects the client in the event of cases such as libel, and cyber policies, which protects clients in the event of sensitive customer data being hacked or leaked.

The role of public relations

A vital component of any reputational coverage is the crisis management that will help mitigate the damage of a major issue impacting on a company. Insurers often provide immediate access to crisis consultancy services, including PR.

“The problem is brands have become increasingly vulnerable, particularly with the advent of social media,” explained Adrian Beeby, associate director at PR firm Luther Pendragon.

“It is the PR’s skill to identify the actions required to shore up or rebuild brands. It is not an instant process; it could take three years. There could be some short-terms actions. Fundamentally, you’re going to have to make some form of apology or admit some form of culpability.

“There will be a price to pay and heads may have to roll - it might be a financial payment or you may have to commit to a course of action.

“Then you can embark on a rebuilding programme, which is going to take time. That’s where the PR people have to look at things strategically and plan.

“It’s a slow process [to mend] the trust gap, which is the difference between what an organisation says and the public’s experience of a business. That gap can be very small, it can be huge, but it’s PR’s job to close that gap.”