Here comes bad news

Corporate scandals of the past few years have sullied many businesses. Environmental incidents, workplace casualties, litigation and more have dragged the names of others through the media, destroyed shareholder value and ended careers. “As recently as the 1970s, the value of a company lay primarily in physical items, such as ships and cargo, that fostered global trade,” explains Susan Crabtree, Regional Head of Product Development, Financial Lines and Entertainment, at AGCS. “But in the 21st century, the value of companies is less about solid objects than of intangibles such as intellectual property (IP), data and reputation.”

Such assets are hard to define, let alone value in dollar terms. But when bad news comes and a company suffers a blow to its reputation, their value becomes obvious – market value can collapse with astonishing speed. For example, credit bureau giant, Equifax, to date has spent $1.4bn on clean-up costs and updating its IT security in the wake of its devastating 2017 data breach that affected half of all US residents [1].

The company’s 2018 earnings of $300m were a 49% decrease from 2017 [2] and its stock price tumbled 31% in just a week after it first announced the breach, erasing $5bn in market capital was down 60% a year later in the third-quarter 2018 [3] and was still trading at about 15% less than that by the end of the first-quarter 2019 [4]. 

Negative compliance events can quickly turn into a reputational risk – a cyber-attack that compromises user data now leaves firms open to eye-watering fines under the European General Data Protection Regulation (GDPR) – for example, the UK Information Commissioner’s Office (ICO) fined British Airways a proposed $230mn for the data compromise of half a million customers. It also fined Marriott a proposed $123mn for the loss of 339 million guest records [5] (both companies plan to appeal the fines). 

Those proposed fines may pale in comparison to what the Irish Data Protection Commission could levy against Facebook, Google and Apple later in 2019, rumored to be in the billions of dollars. Businesses are also finding that, as they rely more on outsourcing, they may be held responsible for the sins of subcontractors. Major clothing labels and retailers found themselves in the press in 2012 due to sub-standard garment manufacturing after a fire in a Bangladesh factory killed 112 workers.

Apart from any financial penalty, a company with its name splashed across social media will see a significant dent in its annual numbers. It doesn’t take much thought to reel off a list of organizations that have had their reputations trashed online, including airlines, banks, car manufacturers and charities. A 2018 study by Pentland Analytics and Aon of 125 reputational events over the past decade found the impact of reputation events on stock prices has doubled since the introduction of social media [6].

“In the age of social media, what starts as a small incident or even as ‘fake news’ can reverberate rapidly around the world wiping out brand value in seconds,” says Steffen Lochner, Financial Lines Underwriter at AGCS.

It is estimated that more than one quarter of reputational crises spread within an hour and over two-thirds within 24 hours. A growing awareness of the potential damage for reputational risk for businesses is seen in results of the Allianz Risk Barometer 2019, an annual survey of risk managers, brokers, insurance professionals and Allianz experts, in which reputation was ranked the ninth top risk garnering 13% of responses.

“Really, it is a unique risk because it is linked to all other risks by the blowback that such things as social media can cause to reputation,” says Lochner.

Effective planning and crisis management has become essential during reputational crises. Almost a quarter of a company’s value (24%) is estimated to lie in its brand [8]. Pentland Analytics suggests that a company can lose close to 30% of its equity value in the year following a reputational crisis – clearly, there is a lot on the line if a crisis occurs.

Unfortunately, even major corporations with processes in place and staff trained in reputational risk management can be overwhelmed by the speed and reach with which crises develop in today’s ever-evolving 24/7 news cycle.

In recent years, there has been growth in reputation insurance products seeking to address the costs of bringing in a crisis communication agency to minimize the fallout. However, these products have often been restricted to specific markets or only address the cost of dealing with a reputational crisis, not the value damage caused by the event. 

“The market has really only provided piecemeal solutions,” says Joachim Albers, Head of Product Development, Financial Lines, AGCS. “I think one of the main criticisms is that while existing products provide access to crisis communications firms, they don’t indemnify organizations against financial losses to income they may suffer as a consequence of the incident.”

A new product, which Albers developed with AGCS regional experts, aims to address exactly this aspect. Allianz Reputation Protect PLUS provides an effective way for companies to access the crisis communications services they need to professionally navigate the complex and sensitive issues that can arise in a crisis.

“The ‘PLUS’ aspect is optional, but having it means that where reputational damage cannot be prevented, it offers compensation for the loss of profits arising from the crisis – and that is around the world,” explains Crabtree. 

“The product protects companies for up to 180 days of falling net operating profits, starting from the initial discovery of the reputational harm, including the cost of hiring an external expert to prepare and present the quantity of financial loss.”

“The product protects companies for up to 180 days of falling net operating profits, starting from the initial discovery of the reputational harm, including the cost of hiring an external expert to prepare and present the quantity of financial loss.” 

Reputational risks can come in the form of a negative compliance event, a cyber-attack, a financial crisis, risks around a company’s culture and behavior, product safety concerns, labor conditions, ethical/social/environmental (ESG) violations and corporate misconduct. An organization’s reputation is constantly vulnerable.

When companies invoke the Allianz service they have immediate access to Media Tenor International, a 24/7 media monitoring consultant which assesses the severity and tracks the development of the crisis. 

If a reputational risk unfolds, companies can also access a choice of leading crisis communications firms to help frame the response and ensure a company speaks with one voice so that the reputational damage is minimized. Insurance covers consulting fees, as well as costs for crisis responses such as media interviews, client information campaigns or advertising.

Albers says that interest in Allianz Reputation Protect PLUS is growing, particularly among companies in Europe, and specifically in the food, IT and tourism industries. 

“There is no shortage of examples of reputation damage we can point to when talking to customers,” says Albers, “but usually businesses highlight cases where they have been adversely affected or come close to suffering damage. It may seen like a case of ‘closing the stable door after the horse has bolted,’ but having had a scare once, they see the value.”

He adds that reputation management is no longer just a topic for marketing or communications teams, but one that should be on risk manager's agenda.

Many companies are still inadequately protected against the consequences of a reputational crisis and a professional response can make a difference. Research shows the value of a company that effectively manages a reputational crisis can rise by 6% the following year [8].

"Allianz Reputation Protect PLUS is also driving take-up of cyber insurance,” Lochner notes, since with a policy companies are more cyber aware and keen to ensure they have their reputation covered.”