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Reputational Risk: Looking Out For Your No. 1 Asset

Reputational damage is one of those vicissitudes of our litigious age which we instinctively want to believe invariably happens to someone else. And yet, even a cursory review of the headlines of recent years reveals that reputational damage strikes organizations and institutions in a broad range of sectors from healthcare and pharmaceuticals to manufacturing and even retail.

In fact, reputational risk has been rising up the list of strategic risks for years. Some surveys have revealed this risk category to be elevated to the top position among executives surveyed, concurrent with the rise of social media as the top disruptor of their business model. The damage is hardly inconsequential. A 2010 study published by Insurance Journal revealed that, at least once during every five-year period studied, 80% of companies lose more than 20% of their value due to major reputational event.

To cite just one example, Pilot Flying J, the nation’s largest truck stop chain, was implicated in 2013 in a well-publicized ethics case involving a rebate program. As in all cases involving brand reputation, going back to the well-known Corvair and Pinto episodes in the 1960s, the company’s primary focus is rectifying and compensating the immediate damage caused by the initial incident. However, the second focus is the more disabling damage done to the reputation of the brand or company in question.

In this regard, reputational damage is like any other source of risk, which can affect the corporate bottom line and growth. As such, it should be considered by corporate risk managers in the same context and at the same time as other sources of exposure that require strategic approaches.

Captives Fill A Market Gap.
Unfortunately, reputational risk is one category for which the standard insurance market has offered limited products and coverage. It’s not hard to understand why. After all, unlike many risks, reputational damage is difficult to predict. In many cases, it may also be difficult to quantify the financial impact of exposure, a priori, to reputational damage. In addition, in many industries, globalization with its extended supply chains can often add yet another layer of complexity.

As a result, many of the existing insurance products and strategies are geared toward specific industries or groups, and thus have narrowly defined terms. Advice on reputational risk outside of these covered categories can be a challenge for many risk managers.

A captive can be a lucrative vehicle for addressing and covering potential damage to corporate reputation and goodwill. It provides flexibility and coverage and can be designed to meet the needs of the owner. By paying for expenses and compensating otherwise irrecoverable losses, a captive liberates owners to make more intelligent responses to events in real time. By facilitating a company’s ability to defend or preserve a reputation, establishing a captive can be seen as the reverse side of building brand awareness in the first place.

Specific Risks, Specific Coverage.
Developing a comprehensive and detailed picture of corporate exposure is typically a collaborative process. To assist in the formation of a captive, a captive manager like Atlas Insurance Management will interview prospective clients extensively to evaluate their business and assess their particular situation with regard to key areas including customers, regulation, and public exposure. An enterprise risk captive can then be designed to cover administrative or regulatory actions, product recall exposure, and cyber risks—all of which can lead to reputational damage.

While product recalls are not necessarily long-term events, reputational damage can be of much greater duration. A second category of corporate vulnerability flows from today’s more complex regulatory environment. Oversight by governing bodies – whether HIPAA, Dodd-Frank, Consumer Protection Agency or other – means increased scrutiny, which can cause direct expenses. A third class of risk events includes cyber breaches, which have recently plagued marquee retailers like JCPenney, Target and others.

Considered a secondary risk to a larger primary risk, reputational damage can often be more costly than the primary risk. In recognizing and covering the risk of reputational damage within the captive, a captive insurance manager like Atlas will help the client quantify the risk and the financial impact to the company.

Social Media and PR: Living On The Fault Line.
Social media acts as a great aggregator of information. Whether on Facebook, Twitter, YouTube or one of dozens of other social platforms, users pass stories and information freely along with strings of commentary. Often, such stories are picked up and amplified by news media. Even when allegations can be disproven, the damage is costly and time-consuming to repair.

A twin strategy of establishing a captive program is having a crisis management plan in place. That’s why Atlas Insurance Management partners with the Anne Klein Communications Group to assist their clients, typically mid-sized companies, in developing an effective response plan for dealing with any situation.

According to Chris Lukach, President of Anne Klein Communications, “Preparedness and response are in actuality two sides of the same coin. What we do is help customers think through the audiences that are necessary to reach and the best way to communicate with those various audiences, whether they’re customers, employees, stakeholders and other publics.”

The heart of a crisis management strategy is developing an approach for the first fifteen minutes to one hour following an event. “This seems like so little time,” says Lukach, “and yet it is our firm belief that you need to have a response within the first fifteen minutes. If you don’t, someone else is already setting in place the response for you in a way you won’t be able to control. It is absolutely critical to take the time up front to get that first statement right.”

Having a crisis communications plan in place ensures that responses and protocols will employ pre-approved statements both during and following any crisis event. “Again, it comes back to that first fifteen minutes to one hour,” says Lukach. “We focus on the key questions. Who do we absolutely have to reach? What are the responses? And who is the best person to reach them?”

Providing companies with proper coverage, a well-structured captive program, fortified with a strong crisis communications strategy, will recognize and address the potential magnitude of loss from responding to and repairing reputational damage.

Reputational damage isn’t just for big targets. Today’s standard insurance market provides few attractive products for addressing this important category of risk. A captive is a smart solution to the problem of defraying the risk of reputational damage. Unlike standard market models, which often target vertical industries, a captive can be designed to meet the specific needs of its owner or parent company. An experienced captive manager can assist you in evaluating the risks to reputation, the potential financial consequences, and a comprehensive strategy for transferring the risk through a structured captive approach.

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