Reputation - In August we challenged the insurance market to show that it could offer meaningful cover for reputation risk. A response from Lloyd’s insurer, Kiln.

August's Airmic News questioned the ability of the insurance market to come up with a credible product to cover the financial consequences of reputation risk.  Well, Lloyd's managing agency Kiln has recently developed an offering to fill this gap. Will it win over sceptical risk managers? Mark Baylis went to investigate.

Reputation risk consistently comes out as a top stay-awake issue for Airmic members, but very few have ever bought insurance for it. Whilst buyers want clarity and certainty from their insurers above all else, reputation is seen as a murky area that is very difficult to translate into meaningful coverage. This is largely because the value of reputation and the impact of specific events can be exceptionally difficult to measure and almost always subjective, and it is not a core area of expertise for risk managers. Furthermore, relevant products are hard to find and not well known.

Insurers in this space have tended to nibble at the edges. It is relatively easy to find cover to provide emergency PR assistance at a time of crisis or compensate you for wasting money on a celebrity ambassador who turns out to be a flawed character. However, this is not the same thing as a policy that reimburses you for the financial consequences of loss of reputation.

Lloyd's insurer Kiln is looking to fill the gap. In addition to the benefits mentioned above, their policy offers to cover loss of income caused by adverse media coverage. Whilst this falls short of insuring all aspects of reputation, it does address a core area. According to underwriter Tom Hoad, it is already generating interest from a small band of enthusiastic risk managers.

In developing the product, Kiln built on their extensive experience of Business Interruption, especially Trade Disruption. These are both areas that normally require bespoke wordings, where events can be more challenging to define and their impact hard to quantify.

“This is absolutely not a commoditised product. Every business is unique,” explains Hoad. “It is part of a paradigm shift from physical risks to the intangible.”

How does it work?

The client decides what kind of scenario to cover. A supermarket may choose a potential situation where they sell horsemeat believing it to be beef, resulting in adverse publicity and loss of sales. You then measure sales before and after the event, and the insurer provides compensation for the difference in profit, subject to the usual deductibles and limits.

This represents a relatively straightforward claim but, even here, the exact figure would be a matter of judgement. You have to trust your insurer in these circumstances to reach a fair settlement, and Hoad insists that it is in Kiln’s interest to do the right thing. After all, they also have a reputation to protect.

Many scenarios will be considerably more complex, however. Take, for example, a theme park that suffers hostile media interest after an accident. It then sees a big drop in takings for the rest of the summer, but this might also be explained by a deterioration in the weather that takes place at the same time. I ask him how he would determine the proportion of the income loss attributable to the adverse publicity.

“We would hope that we would take a reasonable view of that depending on the circumstances at the time. We have to act with utmost good faith,” he replies.

The role of the risk manager

Reputation is a tricky area for risk managers, because it is not normally within their comfort zone. They may well be working with reduced resources as companies economise on staff, and be tempted to put it on the ‘too difficult’ pile. The most sensible approach, says Hoad, is for risk managers to co-ordinate things whilst calling on colleagues from their PR, legal and other departments for advice. 

This type of product will appeal mainly to firms in the consumer rather than business-to-business market. The coverage available per policy is typically around £50 million, whereas the brand value of a multinational company can be measured in hundreds of millions or even billions. In other words, the facility is by no means the whole deal, and Kiln does not claim that it is.

However, bigger companies could still find value in using this type of cover to address specific vulnerabilities. Kiln believes this to be a unique and ground-breaking product; it is difficult to disagree.