Reputational harm insurance making progress

Buyers can access expanding insurance protection for reputational damage with improvements in loss-of-profit cover and cyber protection.

Higher demand has broadened the scope of reputational harm policies, with loss-of-profit cover increasingly offered by carriers. This protection has been added to PR and media consultancy services, which have traditionally formed the bulk of indemnification.

Limits are also on the rise. But companies eager to transfer large amounts of risk may have to look at excess layers to obtain higher capacities.

“Most insurers in the market heavily sub-limit rep harm, but we are comfortable providing full limit covers up to $25m,” said Paul Gooch, an underwriter in the enterprise risk division at Tokio Marine Kiln (TMK).

Reputational harm policies cover two core elements. These are crisis communication expenses and loss of gross profits following a reputational harm incident. The latter used to be a challenge for insurers to estimate, but a growing number have been offering it of late.

“Estimating loss of profit following a reputational event is not as simple as calculating a property insurance claim, but not as difficult as some people seem to think either,” Mr Gooch said.

“Once we understand how the client generates revenue, we can better craft the language to respond effectively to a reputational harm event. Also, most companies track their typical monthly recurring revenues. We can plot the data on a timeline and calculate material decreases in the rate of new customer acquisition, or material increase in the rate of churn, and estimate the loss of gross profit following an adverse media event,” he explained.

There have been recent innovative approaches to calculating loss of profit. For example, Steel City RE, a US-based MGA that works with capacity from Lloyd’s carriers such as TMK, has created a parametric solution. It aims to trigger coverages automatically, once market value losses suffered by a company following a brand image crisis reach a certain level.

There have been many examples of reputational crisis in recent years, from the Volkswagen emission scandal to exploding Samsung phones. More recently, a ruptured tail dam in Brazil is believed to have killed more than 300 people and put mining giant Vale in the spotlight.

Seemingly run-of-the-mill situations can hit companies, fuelled by social media and non-stop media coverage. For instance, a 1% drop in Nike’s stock price last month was attributed by some to an injury suffered during a national TV game by a top college basketball player. The player, Zion Williamson, was wearing a Nike sneaker that blew apart during play.

“The speed with which crises and events unfold is much quicker than it was years ago,” said James Crask, head of resilience advisory at Marsh.

But, according to Mr Gooch, cyberattacks and data privacy laws are the main reasons why companies are increasingly interested in reputation insurance.

Cyberattacks can cause operational disruption and affect a company’s image as clients lose confidence in the brand. In the past, firms like Talk Talk and Home Depot endured significant financial damage after they were targeted by hackers, lost clients and then revenue.

That is the reason why many companies preferred not to report such attacks if they could get away without doing so. But the General Data Protection Regulation and other similar legislations, such as California’s and New York’s data privacy laws, have made reporting cyber incidents mandatory.

The link between a cyber event and brand image crisis has fuelled interest in reputational coverages as add-ons to cyber policies, according to Mr Gooch. This is the most common kind of coverage sold in the market, he said, although companies like TMK also offer standalone policies.

The trigger for reputational harm cover is adverse media coverage resulting from named perils such as a data breaches, food-borne illnesses and product recalls. Mr Gooch said coverages are usually tailor-made for clients.

“Reputation damage can affect the cost of credit, market capitalisation, sales volumes, margins, employment recruitment and retention, and other tangible issues that we do not traditionally link to brand,” he said.

CEO of Steel City RE Nir Kossovsky said two recent regulatory developments have driven demand for reputational harm coverages in the US. Financial companies have been required to have mechanisms for active reputation risk management in place. In addition, tougher enforcement practices against directors and officials by the Department of Justice have made companies keen to show good risk management practices.

“Our product helps to separate the board and the company from rogue operators within their businesses,” said Mr Kossovsky. “If a company can point out that a third party like us has affirmed their reputation risk management process and has taken their risk, the board has a simple, credible and convincing story to tell regulators that it is doing a good job.”

Experts highlight the important of taking reputation risk management seriously and making sure that the company is prepared to react in an effective way when a crisis unfolds.

“Gone are the times when you could just issue a press release after an event. Today you need to have an active dialogue with stakeholders, including on social media,” Mr Crask said.