Reputation risk is a material peril of economic harm from angry disappointed stakeholders. It is the gap between those stakeholders’ expectations and the reality of their experience with any given entity. Nine out of 10 companies today mention reputation, its materiality, and the gravity of its loss in their annual reports. But very few detail the steps they are taking to mitigate the risk, leaving themselves and their boards in the position of setting expectations (they recognize the risk), but then disappointing stakeholders when an incident occurs by their failure to have employed appropriate mitigation strategies.
In fact, most companies still mistakenly confuse reputation with public opinion. It can be a very costly misunderstanding. The media amplifies the crisis once it is set in motion, but it is not the cause of a loss in reputational value.
Reputation value is measurable and therefore it is manageable and insurable. In an attempt to help companies manage and insure that value, Steel City Re has compiled this Solution Executive Summary.
Why Deploy a Solution?
Reputation is a product of social, political and economic factors. Reputation is a vital asset of a firm, which boards have a duty to protect. Reputation risk management and financing can reduce: the frequency, duration and economic impact of an adverse event and the ensuing negative media; a board’s exposure to shareholder derivative suit liability; a company’s cost of capital.
How is it Delivered?
Reputation risk is a complex peril arising from unmet expectations amplified by media. (Compliance professionals might see a parallel to fraud risk in that both are complex perils with three elements.) Steel City Re’s comprehensive solution provides inspection/advice followed by insurance. Similar to solutions offered by the Hartford Steam Boiler Inspection and Insurance Company, and the Federal Deposit Insurance Corporation, and their historic impact on the stability of the industries they served, selective risk transfer helps mitigate anger and fear.
The advisory services comprise (i) a focused review of reputation risk arising from operational failures; (ii) reputation risk mitigation strategies, and (iii) reputation risk management plans. The deliverable is an enterprise reputation risk management roadmap with quantified risk exposures.
The economic service covering lost reputation value—the going-forward cost of angry disappointed stakeholders—comprise insurance policies led by the Lloyd’s syndicate, Tokio Marine Kiln. Capital instruments may be used for larger limits. Additional risk financing also may be structured through a captive insurance vehicle. All risk financing and transfer policies are structured a priori and triggered parametrically.
What is in a Solution?
Steel City Re’s solutions are based on proprietary reputation risk and value quantification models. The reputation risk model is compatible with COSO 2017. Steel City Re’s synthetic quantitative measures of reputational value are used by Wall Street for equities arbitrage strategies, Lloyd’s for parametric risk transfer; and others for better insurance captive compliance.