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Reputational risk insurance – keeping pace with an ever-evolving market

Reputational risk insurance – keeping pace with an ever-evolving market | Insurance Business UK

Reputational risk insurance – keeping pace with an ever-evolving market

“It takes 20 years to build a reputation and five minutes to ruin it.” Warren Buffett’s warning to the world about the consequences of reputational damage is a fine update of the old Dutch proverb that trust arrives on foot but departs on horseback.

In his role as the head of Liberty Specialty Markets (LSM)’s delegated authority practice, Lewis Edwards (pictured), whose team oversees the rollout of its reputational crisis insurance offering, has a direct line-of-sight into the undulating environment through which all modern businesses must navigate. Several factors contribute to this volatile landscape, he said, among them the rise of the value of firms’ intangible assets – and, largely as a result, the changing weight of a business’s brand.

How can reputational risk impact organisations?

“There are lots of different ways that reputational impact can affect an organisation, particularly as we see more and more companies are being valued by their brands,” he said. “And that can be very interpretational and can swing to huge degrees of volatility, far greater than that experienced in the past.”

In terms of market value, if you think about the top 10 companies of 20 or even just 10 years ago, they were heavily in the manufacturing/physical product space, he said, whereas now the top 10 are dominated by firms with heavily intangible assets. And while the risk of reputational harm is sitting high on the risk register of lots of C-suite leaders, many of them don’t yet understand how to combat or reduce their exposure – or how mechanisms such as insurance can help remove some of their risk exposure.

While brand reputation has always been a central factor in a business’s success, its value as an intangible asset – particularly in the context of a world that disseminates good and bad news alike so rapidly via social media – has come into its own. And so, the role of insurance in creating the right products and services to go alongside that evolving significance is more critical than ever.

The changing nature of reputational risk insurance

Edwards highlighted that, traditionally, reputational risk (or brand rehabilitation or crisis management) insurance was not bought in isolation.

“It’s historically been an add-on to more traditional products,” he said. “Where you’d typically see a sub-limit or an additional bolt-on providing a company with limited indemnity or limited support around a breach at an intangible level.”

The shift in the value of intangible assets as a key measure of a business’s share price has focused minds on the risk of reputational damage – whether that’s hands-on harm caused by the business itself, or inadvertent damage through their industry or association with an impacted brand. This damage can now have a far greater impact on a firm’s share price and ultimately its business value, he said, and it’s an evolution that is leading businesses to ask more of their insurance providers.

For LSM the answer to this evolving need has been to go one step further than creating a solution that matches the most pressing needs of clients, to develop an offering that is always a step ahead of where the winds of reputational harm are blowing.

“For us, for example, we’re looking at broader impacts like how companies can be affected by association with celebrity endorsements,” he said. “It’s a real gap when you think about some recent high-profile examples and how their associated brands which they endorse have reacted one way or another, either ending the relationship or continuing to use the individual(s) for future campaigns.”

The changing spectre of celebrity endorsements

Adaptability is built into the very core of LSM’s reputational risk insurance offering, he said, because the insurer recognises that reputational risk is not a binary matter, but a complex and delicate consideration that can appear to belie prediction. The product can’t afford to be overly restrictive about the brands that clients endorse, because high-profile modern celebrities have proven that even quite shocking associations can help sell a brand.

“So, more and more companies do associate themselves with [brands or individuals] who historically, from an underwriting lens, you’d think would surely have the largest claims possible,” he said. “But in truth, actually, because it’s a known substance with regards to how they’ve risen to publicity and maintained themselves at such a high level, it takes quite a lot to shock an audience.

“So sometimes, those which have a very clean bill of health as a celebrity endorser can be the ones that create the greatest challenge when either historic events are discovered or profile raised, or alternatively when they are involved in something that is against people’s perception of them. The big balance that we have to find is between the known risk and the unknown risk.”

Liberty’s reputational risk insurance offering is highly in-tune with the tide of public opinion, Edwards said, because it works so actively with a range of partners to perform horizon scans for companies that measure their risk exposures. LSM’s reputational crisis product supports clients in both understanding and managing this risk through insurance risk transfer, real-time reputational data analysis and industry-specific crisis and brand rehabilitation consultancy services.

The role of data insights in mitigating reputational risk

In order to supply its clients with the reputation intelligence necessary to help mitigate their risk, LSM’s underwriting team has partnered with Polecat Intelligence - an insurtech which has built an algorithm offering significant horizon scanning across both traditional media and social media to generate advanced data insights. This multi-lingual tool can even dig into even bespoke industry publications, he said, as well as monitor social media content.

Built into the algorithm is the creation of a sentiment and taxometry scale, he said, where the LSM team can measure discourse around a certain topic – whether that’s by the volume of its audience or the frequency with which a certain company or specific keywords are being used. There are a number of different metrics which are used to create a ‘horizon score’ and a ‘sentiment score’ which is then sense-checked against the industry sector in which the client operates. This allows the score to be benchmarked against a client’s true peers in the market.

All the information utilised by LSM is publicly available, he said, but Polecat pulls it all together to form “one version of the truth“. This then allows clients to be deliberate in managing their reputational risk exposures rather than taking a scattergun approach to determining their next steps whether that’s to do with marketing campaigns, limiting the damage of a reputational crisis or looking to change the way they’re viewed in their marketplace.  

“While the LSM product solution is still in its infancy, we see the use of these tools becoming more critical,” he said. “This is a problem that is not new but it’s growing at its fastest pace in terms of becoming more critical to the valuation of a business. At the same time, a lot of companies have yet to get a handle on how they can de-risk themselves nor what tools are available to support such understanding.

“For companies which have started to try to address and understand their exposures, we have many now looking at these types of products as being critical. More and more [these businesses] are looking at their reputation exposure as a business-critical insurance risk transfer purchase, in the same vein as liability cover, or traditional tangible property coverage.”