Roundtable: Risk managers can do more to manage reputation

Reputational risk has consistently come at or near the top of Airmic member concerns for as long as anyone can remember. But what exactly is it? And how can risk managers address it? The latest Airmic roundtable drew together a diverse and distinguished panel to discuss one of the most intangible of intangible perils. Mark Baylis reports.

This was a discussion with a mission. At the Birmingham annual conference Airmic CEO John Hurrell announced that the association was to consult about a framework for reputational risk in general, and specifically for developing insurance products. Taking notes throughout the deliberations were technical director Paul Hopkin and insurance R&D manager Georgina Wainwright, who will between them have the task of doing much of the research.

What is reputational risk? Can it be defined? Can its consequences be measured? How do companies tackle it and what role does the risk manager have to play? Is it feasible to insure? These were some of the questions under debate.

The risk manager perspective

“The ability to react quickly is especially important in view of the spread of social media”– Julia Graham

Airmic deputy chair John Ludlow, who also chairs the association’s risk management steering committee, began proceedings by describing reputation as “a big chunk of intangible value” that brings competitive advantage. Among other things, he said it supports the recruitment and retention of staff at IHG (InterContinental Hotels Group) and maintains the confidence of stakeholders such as the company’s owners, suppliers, governments and other businesses, who are also among its customers. It creates a more trusting, stable and forgiving relationship.

Although all stakeholders have a responsibility to support the group’s reputation, he chairs the key internal working group, which includes the heads of communications, brand and strategy. The company also takes out a measure of risk transfer through Allianz.

Karl Sawyer, from ITV, said risk is not controlled centrally via risk management and insurance within his own company. Each strand may take its own approach to risk, with stakeholders setting their own risk appetite. There is, though, a central crisis management team, chaired by the chief executive and including the heads of legal and communications, among others.

“[At ITV] there is a central crisis management team, chaired by the chief executive”– Karl Sawyer

On-screen regulatory compliance is a big issue, he said. Production, which can be viewed as part of the supply chain, is often the most difficult to control. This became all too evident a few years ago with the premium rate phone scandal, which resulted in fines by the regulator and loss of reputation. The company’s response was to take the function in-house.

Julia Graham from the global law firm DLA Piper described reputation as “the biggest threat to the business .... a major consequence of other risks.” Well over 80% of risk within her company stems from intangibles, she said. It is easy for lawyers to contravene regulations and, as she put it, “people do silly things”.

The company does have a crisis management team, but they prefer to call it Rapid Response since the aim is to prevent a crisis from happening at all. The team is made up entirely of board members plus the head of communications and herself. The ability to react quickly is especially important in view of the spread of social media.  They have written plans in place, which they rehearse. Prevention, however, is better than anything else and reputational risk forms part of their lawyers’ training.

The reputation expert perspective

“Organisations with the strongest reputations are likely to make the most rapid recoveries”– Spencer Fox

From the chair, John Hurrell asked Spencer Fox of the Reputation Institute whether reputation risk can be measured, and whether damaging events can be defined and quantified. For example, can the impact on share price be accurately assessed?

Fox described reputation as “the defining area of risk management”. You can never totally remove the risk, he said, but organisations with the strongest reputations are likely to make the most rapid recoveries from adverse developments – sometimes to such an extent that they find themselves outperforming their rivals.

Yes, he said, reputation can be measured – and this is something his organisation regularly does. Calculating the consequences of adverse events is more complicated, though, especially since reputation does not appear on the balance sheet. Take share price. There clearly is a link with reputational damage, but it can be difficult to isolate accurately because of all the other variables at play.  

It is possible, however, to develop specific measures for individual businesses. For example, a hotel group might link reputation to revenue per available room. His organisation, he said, has developed a framework for modelling the impact of various scenarios.

“Reputation is all about stakeholder perception”- Alberto Lopez-Valenzuela

“Reputation is all about stakeholder perception,” said Alberto Lopez-Valenzuela of intelligence firm Alva. He outlined a big data approach to managing reputation, obtaining both external and internal data about an organisation and its sector, classifying it by stakeholder and influence on sentiment and identifying areas of vulnerability. One advantage of this approach, he said, is the ability to identify early signals of potential issues – in other words, a reputational risk radar.

In doing so it is important to link issues to major corporate priorities and to focus on outcomes, he said, including potential positives. Measuring the volume and assessing the content of Twitter traffic is also a useful exercise, he said. Among other things it can flag up controversies in certain geographical regions that might otherwise escape the attention of those at the centre.

His company is also working with IHG’s internal team to measure the effectiveness of their communications.

The insurance broker’s perspective

“Risk managers need to understand and articulate the solutions they require”– Martin Emkes

The conversation turned to whether and under what circumstances insurance for loss of reputation is available – and how it might be extended and become more easily available.

“The key is to define what the customer wants,” according to Martin Emkes of Arthur J Gallagher. Although deals to date have been mostly reactive in this area, he can see the market for insurance products developing in the future, but risk managers first need to understand and articulate the solutions they require.

Looking at specific areas, he said cover for business interruption - loss of income following reputational damage - is attractive to some clients. There is also demand for covering the cost of rebuilding a brand after an event. Supporting earlier comments from  Spencer Fox, he said insuring against a drop in share price would be an altogether more complicated challenge; there is still a lot further to go before this type of product becomes available.

“There are very, very few underwriters in this space,” said Steve Bonnington of Lockton. He agreed with Martin Emkes that Airmic members need to work with their brokers to articulate what their specific risk concerns are. “You can’t develop a solution until you know what the problem is.”

“One of the challenges is the bespoke nature of the product”– Steve Bonnington

The key in designing insurance programmes is to ensure that the client’s key risk concerns are mirrored by appropriate specified perils triggers.

One of the challenges for insurers looking to provide insurance coverage for reputational risk, he said, is the bespoke nature of the product which render off-the-shelf product offerings largely inappropriate. His company are looking for underwriters willing to partner with them and their clients and “go on the journey with an absolute determination to see it through to a conclusion”. There would, he said, be no easy wins in solving what he described as a multi-dimensional problem.

The underwriter’s perspective

Tom Hoad of Lloyd’s entity Kiln underwrites policies that protect clients against the cost of damage to reputation caused by specific events, something almost no other London market insurer is willing to do. Activity, he said, is picking up. With limits of $25 million, it is a highly targeted product that does not attempt to cover the wider reputation of large corporates. Instead it protects, to use his expression, “pockets of risk”.

“Risk managers need to be able to identify the cause of loss and the impact of loss”– Tom Hoad

Like the previous two speakers, he placed an onus on Airmic members to define their needs. “Risk managers need to be able to identify the cause of loss and the impact of loss.”

Kiln operates on a named perils basis such as a drop in tickets sold by a theme park or supermarket sales or hotel bookings in the wake of adverse publicity. Loss of profit or a drop in a pre-agreed index are among the measures they use. Admitting it is a complex subject requiring flexibility, he said it is always necessary to sit down with brokers and clients in advance.

Nigel Pearson of Allianz underwrites a product that funds “aggressive mitigation” in the event of a loss of reputation. It does not, at least at this stage, compensate for the value of reputation lost. The difficulty, he said, is that you cannot reliably quantify the asset or the probability of a reputational hit, making it extremely difficult to price. “We look at reputation, and we scratch our heads,” he said.

Allianz have, however, only been in this market for two years: “My personal view is that the product will develop.” He could envisage a time when it will be possible to buy products that combine risk mitigation with compensation for the cost of loss of reputation.

“You cannot reliably quantify the asset or the probability of a reputational hit, making it extremely difficult to price”– Nigel Pearson

What they do provide is a fast-response service intended to reduce the damage before it happens. To achieve this, they partner with other organisations such as media monitoring companies and PR firms that specialise in crisis communications.

Where next?

The discussion had set out very effectively the current state of play and its limitations. The big question, said John Hurrell, is how can matters move to the next stage? In particular, is it possible to “productise” reputational risk insurance to make it easier to acquire?

What had become absolutely clear, everyone agreed, was the need for the different parties to work together – especially clients, brokers, underwriters and experts in the field of reputation. The risk management community and the firms that employ them, meanwhile, have a lot to learn.

“The priority is to manage reputation risk, then buy insurance.”– John Ludlow

John Ludlow summed up the challenges for Airmic members. They need a proactive approach, he said, and to do more to understand this type of risk. He recommended the Reputation Institute framework as the best of its kind. The priority, he said, is to manage reputation risk, then buy insurance.

Companies need to constantly monitor the media and have access to “aggressive mitigation” and potentially indemnification. To be effective in this area, members must collaborate with colleagues. The association has a role, he said, in educating its members.

Julia Graham said more needs to be done to address the disconnect between business continuity, PR and crisis management. She commended section four of the Airmic publication Roads to Resilience as pointing a way forward.

“Insurance underwriters need to break out of their silo mentalities as reputational risk can cut across many categories of risk” said Steve Bonnington. (There was general agreement on this point, whilst John Hurrell responded that it is part of the broker’s job to break down silos.) He added that “aggressive mitigation” on its own is not always enough; there is also a very real need to cover the business disruption caused by a reputational harm event.

Taking up the silo theme, Martin Emkes, said he would prefer reputational insurance to become all-risk. It is not like Kidnap and Ransom, he commented. “The crisis that happens next will be something you have not thought of.” Defining the trigger would be a key challenge before the market can move to the next phase.

Karl Sawyer compared many of the intangible issues in reputational insurance to those evident in Cyber.

Tom Hoad said getting the C-suite on side was a challenge as boards will need to assess the value of any risk transfer.

Looking ahead, Nigel Pearson advocated the creation of a risk management framework around reputation agreed with the insurance industry. He added that there are still not enough underwriters who understand the subject.

“Most companies are still learning about reputation”– Alberto Lopez-Valenzuela

Alberto Lopez-Valenzuela said that most companies are still learning about reputation – struggling even to define it or measure its impact. He advocated a joined-up approach extending well beyond just the risk manager.

Prompted by John Hurrell, Spencer Fox said the Reputation Institute would be willing to work with Airmic to create a common language and understanding around reputation. Businesses need to develop common reputational frameworks that overcome internal silos. And they need to understand specific perils and what events might lead stakeholders to remove their support.

So ended the discussion of a massive and complicated subject with plenty of traps for the unwary. There is a long way to go before anyone has the answer or there is a thriving market in easily understood reputation insurance products. However, Paul Hopkin and Georgina Wainwright of Airmic were given valuable guidance in their ambitious quest to facilitate an agreed framework for reputational risk.