In recent times, managing reputation and mitigating the risk surrounding it has increased in importance for multinationals.
With companies arguably under more scrutiny than ever, proactively managing reputational risk and planning for the event of a crisis has crept its way up the priority lists of companies.
The past few years have seen a number of scandals rock the corporate world. Prior to going public, the recently-listed ride-hailing giant Uber warned investors about a safety report it planned to put out which could negatively impact its brand. The report comes nearly a year after an investigation found that at least 103 Uber drivers in the United States had been accused of sexually assaulting or abusing their passengers in the previous four years.
“Nowadays, no crisis escapes the media’s scrutiny and organisations are held closely accountable about the way they protect their people, the environment, and sensitive data,” says Alex Smith, underwriter of crisis management and special risks at AXA XL. “Consequently (and arguably quite rightly), the bar for companies’ standards of crisis preparedness has risen substantially in the past decade.”
Tech giant Facebook is also a business that has found itself battling with an image problem in the past 12 months. Back in April last year, Facebook revealed that the data of up to 87m people was improperly shared with political consultancy business Cambridge Analytica.
Managing reputational risk is now arguably harder than ever. With the instant nature of news, increasing political instability and cyber crime all with parts to play, organisations are forced to look at their processes to limit the damage.
“…Organisations are more vulnerable now than they have ever been – and this is for two main reasons,” Smith explains. “First, they are increasingly reliant on IT systems to function. Second, the advent of social media and the 24-hour news cycle has meant that the reputational dimensions to a crisis ignite quickly and spread unpredictably.”
In order to manage reputational risk as efficiently as possible, a captive is “crucial”, says Shiwei Jin, global programme and captive regional director for Asia at AXA XL.
“When a crisis takes place, a captive would promote faster, more effective responses as they are covering the related risks. Usually, in order to cover risks associated with intangible assets such as reputation, data and related resources, a captive would examine the whole organisation and various threats they are facing closely,” she adds.
Quantifying the risk and managing it proactively are the key factors for Nir Kossovsky, CEO of reputational risk consultancy SteelCity Re.
The value of an organisation’s reputation is the accumulated revenue costs and stakeholders’ expectations, he says. If stakeholders understand how the risk is calculated, they will either lay out more funds, or demand less compensation in the event of a claim, he explains.
He adds that the most efficient way for a business to control its reputational risk is to utilise a captive.
“Almost every single one of our solutions for large companies involves a captive because of the amount of capital needed to finance and transfer reputational risk is greatly in excess of market capacity,” he says.
“I cannot imagine a large company in any way managing reputational risk without a captive embedded in the process.”
More businesses are attempting to mitigate their reputational risk than previously, claims Kossovsky, and as a result, the profile has changed.
Managing a multinational’s reputation has changed from a marketing responsibility to a risk management obligation. Controlling the expectations of internal stakeholders and the public is crucial to ensuring that reputation is kept in check before a crisis takes hold.
Kossovsky explains, “The notion of reputation has transformed. It used to be the problem of negative public relations, media or image. Over the years, that definition has evolved into the language of risk management, and it has become the peril of angry, disappointed stakeholders.
“For example: If an oil company says ‘we’re beyond petroleum, we’re going green’, that’s the source of the reputational risk because expectations have risen.
“Marketing builds up great expectations, and if the company can’t execute on it, the gap between expectation and reality is where the reputational risk is. If that happens, it then leads to angry stakeholders.”
Once a crisis has begun, a plan to limit the damage and mitigate the risk is of the highest importance. A captive can help to identify the specific risks of its parent, and then respond.
“While captives increasingly participate in unconventional risks and seek reinsurers’ support either through the conventional market or a multi-line/multi-year contract supported by structured reinsurance, the captive will strive to develop a mechanism for capturing better data about the unconventional and often intangible risks in the parent companies. This would draw close attention to crisis response, a review of underlying risks… and therefore raise the need of a better crisis response plan,” Jin explains.
The captive can also raise the importance of a crisis response plan with the parent company’s board, claims Jin, in turn instilling the right behaviour needed for implementation.
For Kossovsky, although a crisis response plan is “essential”, it’s better to manage the risk of the situation before it has begun.
“A plan is certainly necessary,” he says. “But it would certainly be a lot better if you didn’t have a crisis.
“A crisis response plan is like the emergency room of communications. It’s very dramatic. It’s great for the doctors and nurses, but terrible for the patient. As a risk manager, your success is when the crisis response team is under deployed.
“You ensure there’s a team in place because it will mitigate the magnitude of the damage, but the whole point of reputational risk management is that you understand what your exposures are, so if something happens, you can tell your investors that you’re covered financially.”
The desire of multinationals to manage their reputation is not waning, and the captive insurance space is seeing more activity than ever.
“Our business has doubled annually for the past four years, we’re now managing more than 50 active policies and most of which involve captives,” Kossovsky reveals. “I think we’re just looking at the tip of the iceberg.”