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< PreviousProtect the Brand Reputation Insurance Evolves by Christopher J. McKeon INSIGHTS | Summer 2024 | 9 INSIGHTS | Summer 2024 | 9 This article discusses the history and development of reputation insurance, the current state of the product, and the increasing need for it, as well as related underwriting considerations and challenges. It then examines the effects of social media, cancel culture, and populism on reputation insurance; presents emerging opportunities for the product, especially in light of AI and ever-advancing technology; and offers some predictions for further consideration.10 | INSIGHTS | Summer 2024 Billionaire investor, businessman, and philanthropist Warren Buffett famously said, “It takes 20 years to build a reputation and just five minutes to ruin it.” This adage has rung true for decades, but in today’s environment of viral messaging, it is even more apropos. Through an insurance lens, reputation is a risk that needs increasingly broader understanding and safeguarding. It involves the threat of damage to brand equity, triggered by adverse publicity or negative social media exposure. The resulting damage is generally characterized as loss of revenue, market share, or value dilution from regulatory fines, litigation costs, jury verdicts, talent management, and public relations expenses. A Slow Start Protection from such damage began with the development of crisis-management services—which was kickstarted, in essence, by Johnson & Johnson’s Tylenol- tampering scare in 1982. 1 Even while that event, in which seven individuals died from cyanide poisoning, gripped the nation, 14 more years passed before the first type of reputation insurance was available. AIG came to market in 1996 with a management liability product called Crisis Fund, which offered $50,000 of public relations expense coverage. 2 Today, more than 25 years later, hundreds of millions of dollars of capacity for reputation insurance is available, either on a stand-alone basis or through other insurance products. Variations of reputation coverage can be found in everything from primary liability, excess casualty, and cyber liability product lines, along with bespoke parametric products offered by both insurers and reinsurers. (For more information, see “Reputation Insurance Today.”) The Necessity of Reputation Insurance In stressing the need for reputation insurance, risk experts will point to well-known public relations crises such as the Tylenol scare, which cost Johnson & Johnson about $50 million, or the 2010 BP oil spill, which cost $65 billion in all. 3 More recently, the Facebook Cambridge Analytica scandal reduced Facebook’s valuation by about $120 billion. 4 These examples were nationwide headlines related to some of the largest corporations in the world. But companies that aren’t household names are exposed to reputation risk as well. And even though their triggering events aren’t often media sensations, they still have a significant negative financial impact. Consider that over 90 percent of consumers read online reviews. When a 5-star Yelp rating drops to a 3-star rating, restaurants are known to experience an 18-percent reduction in sales. Similarly, for publicly traded companies, a 5-percent decrease in shareholder value typically follows a crisis year—a loss that’s closer to 15 percent for companies without crisis management programs. 5 In addition, public companies see an increase in their cost of capital due to a customarily experienced 9-percent rise in post-crisis equity beta (a measure of risk that compares volatility of a company’s stock returns with the broader market’s). 6 Plus, employee talent suffers, as 71 percent of United States workers have said they won’t apply for jobs at companies with perceived negative reputations. 7 In some cases, even a single company event negatively tarnishes an entire business segment. An example of this is the aforementioned BP oil spill, which affected the oil industry at large.With such damaging consequences in the balance, the cognitive dissonance between a company’s acknowledged level of reputation risk and often minimal efforts to safeguard against it is hard to understand. WTW’s 2021 Global Reputational Risk Management Survey report highlighted that 44 percent of corporate respondents indicated they didn’t have access to reputation-monitoring tools within their company. In the same survey, however, 86 percent said reputation damage could cause a loss of income or reduce their customer base; 61 percent reported that a loss of talent could occur from a crisis; and 36 percent said that their license to operate could be jeopardized if their reputation were damaged. Similarly, more than 1,400 participants in Aon’s 2015 Global Risk Management Survey report expressed that reputation damage is a top corporate concern. In their 2020 report, Safeguarding Reputation—Are You Prepared to Protect Your Reputation?, Lloyd’s and KPMG confirm these impressions. They find that brand and reputation equity represents 25 percent of the global market capitalization, which equates to approximately $16.7 trillion of shareholder value. Why, then, doesn’t a risk as significant as reputation damage elicit the robust development of reputation-management tools or insurance products? Underwriting uncertainty may play a role. REPUTATION INSURANCE TODAY Commercial Liability Cyber Liability Reputation Protection Crisis Management Restricted coverage for personal and advertising injury loss. Indemnification for loss related to data breaches that could financially damage a corporate brand. Coverage for loss of revenue related to a public relations event negatively impacting a brand. Due to their tailored nature and premium levels, these policies are usually available only as a parametric structure and provided to very large corporations. Expense coverage for the emergency use of public relations firms to limit or contain brand damage. TYPE OF INSURANCEAVAILABLE COVERAGE Underwriting a Reputation Insurance Policy From an underwriter’s perspective, even though reputation risk has been around for decades and has elicited some insurance products—albeit minimal since 1996— information on how to assess and price this type of exposure remains limited. With a lack of reliable data, and therefore no consistent actuarial methodology to employ, availability has been limited to highly customized solutions for insurance buyers that are hard to scale to a broader customer base. INSIGHTS | Summer 2024 | 11 12 | INSIGHTS | Summer 2024 Actuarial data aside, the underwriting foundation for this product is a thorough risk analysis and assessment of a number of the insured’s characteristics, including the scope and quality of the insured’s products and services, new innovations or discontinued products, and comprehensiveness of the insured’s crisis management plan. Additional underwriting data needed to properly evaluate a risk includes: •Revenue by geography and brand •Net promoter scores •Statistics on agility in recovering from a past reputation crisis •Past technology breaches or current vulnerabilities to security of data or intellectual property •Existing enterprise risk management (ERM) and crisis management policies and protocols •Loss information related to any prior incidents •Product recalls •Negative safety and regulatory events, libel, slander, or advertising injury and lawsuits •Challenges in attracting talent, employee retention statistics, employee relations issues, and DEI (diversity, equity, and inclusion) and other corporate responsibility policies and initiatives •Overall employee life, health, and safety protocols Also important to examine thoroughly is behavior risk, including the corporate culture, its focus on integrity and ethics, and how it safeguards those values. After reviewing all data, the underwriter must assess and model the likelihood and magnitude of a loss of income or market share that could occur after a damaging reputation event. Once the risk analysis is completed, policy design work can begin. This is more challenging than the work accompanying a traditional indemnity contract, as reputation insurance is a highly customized, typically index-based insurance product. Parametric triggers with predetermined payouts are common, as are time durations. Examples of such triggers could include product recalls, data breaches, and public relations crises with regulatory judgments or quantified negative sentiment thresholds. On the low end, standard crisis response coverage will provide up to $250,000—but when constructing $100 million to $200 million towers, the complexity of the structure increases materially. Coverage limits are typically absolute and include legal expenses. Shared and layered approaches, or large deductibles and coinsurance provisions, can be routine features. For towers that reach a $100 million limit, an insured may pay $1 million to $2 million in premium, plus any deductible for which they’re responsible. As such, these products are designed for global corporations, not middle-market or small business entities. In addition, underwriters set conditions on the program, often requiring the policyholder’s use of sentiment or alert tools 8 or other types of ERM software to manage risk proactively. The policy may also include a list of preapproved crisis response or public relations firms the insured must use if a crisis does occur so that damage can be mitigated as much and as soon as possible. These terms and conditions are usually only affordable and manageable by the largest corporations and institutions, not the vast majority of businesses and entities in the global economy. Dynamic Trends in Reputation Risk In the last 10 years, brand and reputation risk has soared. This can be largely attributed to the proliferation of social media platforms; speed and breadth at which news can spread; and availability of portable technologies that can capture events, sometimes without full context, and distribute images and videos around the world in a matter of seconds. Additional factors include the phenomenon of cancel culture; social inflation; a rise in populism; and an increased focus on environmental, social, and governance (ESG) criteria. Aon and Pentland Analytics conducted a study showing the impact of having a good crisis management protocol in place. 9 After analyzing a number of crises, they put people and companies in two categories: winners and losers. INSIGHTS | Summer 2024 | 13 In the last 10 years, brand and reputation risk has soared ” “Entities like Clemson University’s Social Media Listening Center and resources like Listen First’s brand reputation index, which has been endorsed by the Software and Information Industry Association, promise to facilitate advanced tools with increasing frequency. Such tools help monitor social media and other reputation trends, as well as alert companies of simmering issues before they explode into crisis. Serving as early warning systems, they can allow clients to get ahead of problems and help corporations design robust reputation- safeguarding measures. From an insurance perspective, significant opportunities are available for enhancing the market’s existing suite of products. As social media monitors’ and reputation indexes’ capabilities mature, these tools can be embedded into insurance policies as alerts, claims, and loss control notification features, as well as serve as payout triggers. In the personal lines space, a huge opportunity exists to address millennials, who are entering their prime earning and asset-accumulation years. As members of the first generation that grew up with smartphones and social media accounts, millennials have cyber records that might house youthful indiscretions and other potentially damaging posts. As their net worths increase, millennials could face financial risk from reputational damage. The possibility of this risk, in turn, creates enormous potential for a personal lines product that goes beyond today’s cyber extortion and cyber bullying coverages. Similarly, small and midsize businesses would benefit from an affordable reputation risk product. Winners had a robust crisis response and were able to outperform pre-crisis expectations by approximately 10 percent within the first year after an event. These organizations had such good procedures in place that they were not only able to repair their brand but enhance their reputation and increase the value of their company. In contrast, those categorized as losers mishandled a reputation event. In turn, they suffered, on average, a 15 percent dilution in company value compared with pre-crisis expectations. To be a steward of a corporate reputation and an expert in crisis management, companies should consider some of the following strategies: •Donating to charities that match corporate values, both before and after a crisis •Rebranding, which may even entail changing names •Severing ties with influencers or product promoters who have been boycotted or are the target of cancel culture •Increasing their focus on ESG scores of both their own company and vendors with whom they partner Reputation Risk in an AI World and Future Insurance Opportunities Clearly, reputation risk is not an emerging trend, but a highly present exposure. As a dynamic and evolving risk, AI-enabled sentiment analysis and reputation indexes need to become more prolific and sophisticated. From an insurance perspective, significant opportunities are available for enhancing the market’s existing suite of products ” “14 | INSIGHTS | Summer 20241.Dave Roos, “How the 1982 Tylenol Poisonings Nearly Canceled Halloween,” History.com, September 12, 2023. 2.Mark Landler, “Corporate Insurer to Cover Cost of Spin Doctors,” The New York Times, September 10, 1996. 3.United States Environmental Protection Agency, “Deepwater Horizon—BP Gulf of Mexico Oil Spill,” (last updated on) August 14, 2023. 4.Sam Meredith, “Facebook-Cambridge Analytica: A timeline of the data hijacking scandal,” CNBC, April 10, 2018. 5.Dr. Deborah Pretty, “Reputation Risk in the Cyber Age: The Impact on Shareholder Value,” Pentland Analytics Limited, 2018. 6.Pretty, “Reputation Risk in the Cyber Age.” Unfortunately, most reputation products today are geared toward large corporations, even though the mom-and-pop shops, which can have a family’s entire savings and livelihood wrapped up in their small business, are extraordinarily vulnerable. One bad incident or series of bad reviews, deserved or not, can destroy such a business—and the corresponding family’s livelihood. Regardless of the insurance customer segment, more education in general is needed about reputation insurance and the solutions available to protect a brand. Companies and individuals need to implement meaningful best practices related to reputation preservation and enhancement. Companies must champion robust standards, embrace transparency, and safeguard their brand equity. Additionally, they must recognize that they’re accountable and that, if a reputation- threatening incident does occur, they must be decisive and think globally, as such incidents go viral quickly and don’t stay local. Further, if an event does occur, a company must repair its reputation through authentic atonement. Hollow apologies will cause more damage. There are, however, times when misinformation abounds, and a company needs to assertively defend itself. Accordingly, a balance of atonement, authenticity, and brand loyalty is required in today’s environment. Within the insurance industry, reputation insurance will likely follow a path similar to that of environmental liability and cyber liability coverage: initially nice-to-have products that become necessary purchases. With the viral nature of news, the partisan and unforgiving tendencies of the global community—not to mention the unknown potential risk of advanced AI outputs, such as deep fakes—a reputation is more precious than ever, yet harder to preserve. Reputation insurance will therefore become a must-have tool for businesses and individuals. Moreover, the insurance industry will once again demonstrate its ability to be creative, dynamic, and responsive by finding solutions to challenges within its community. 7.CareerBuilder, “71 Percent of U.S. Workers Would Not Apply to a Company Experiencing Negative Publicity, According to a Recent CareerBuilder Survey,” PR Newswire, July 20, 2017. 8.Sentiment software analyzes the tone of articles or customer reviews to determine whether the overall feeling, or sentiment, is negative or positive. Alert tools notify insurers when negative sentiments or imminent problems are detected. 9.Pretty, “Reputation Risk in the Cyber Age.” INSIGHTS | Summer 2024 | 15 Artificial intelligence (AI) has the potential to result in adverse outcomes. To address this, laws and regulations are emerging that will likely affect almost everyone within an organization. While insurance professionals will not need to hold a degree in algorithms to deal with these new regulations, by understanding the history, motivation, and intent behind them, such professionals can ultimately help their companies comply. NEW REGULATIONS MAKE EVERYONE’S JOB by Jim Weiss INSIGHTS | Summer 2024 | 17 Next >