Question

A) Generally discuss the The legal and regulatory frameworks of reputational risk and its insurance

B) Which types of modern organisations would benefit most from reputational risk insurance

In about 300-500 words :)

Answer 1

Ans A) The legal and regulatory frameworks of reputational risk and its insurance :

Reputational risk is a threat or danger to the good name or standing of a business or entity. Reputational risk can occur in the following ways:

• Directly, as the result of the actions of the company itself
• Indirectly, due to the actions of an employee or employees
• Tangentially, through other peripheral parties, such as joint venture partners or suppliers

In addition to having good governance practices and transparency, companies need to be socially responsible and environmentally conscious to avoid or minimize reputational risk.

• Reputational risk is a hidden threat or danger to the good name or standing of a business or entity and can occur through a variety of ways.
• The biggest problem with reputational risk is that it can literally erupt out of nowhere and even without warning.
• Reputational risk can pose a threat to the survival of the biggest and best-run companies and has the potential to wipe out millions or billions of dollars in market capitalization or potential revenues.

Understanding Reputational Risk

Reputational risk is a hidden danger that can pose a threat to the survival of the biggest and best-run companies. It can often wipe out millions or billions of dollars in market capitalization or potential revenues and can occasionally result in a change at the uppermost levels of management.

Reputational damage is quantifiable, which in turn makes it insurable. An insurance covering reputational damage generally covers the company’s loss of profits and offers financial support for crisis management and efforts to restore its image. The policy provides indemnification for forgone forecast sales growth, giving a company more certainty for its planning. The insurer verifies the sales forecasts by comparing them with performance to date. Reputational damage resulting from cost savings leading to lower quality, fraud or other intentional acts is, of course, not covered.

Reputational risk protection can mitigate the impact of cyber attacks

Cyberattacks not only often lead to business interruption and the associated revenue losses – they also damage the enterprise’s reputation. The fall in sales resulting from a successful cyberattack, however, is not deemed to be a business interruption.

New cyber risks are no insurmountable obstacle but the reputational risks involved require defined loss triggers. The challenge in this coverage concept lies in defining appropriate loss triggers and giving prior thought to loss adjustment policy – a challenge Munich Re is happy to tackle with tailored solutions.

Components of our reputational risk cover

Incidents that spark a reputational crisis can occur in almost any area of the organisation. This is why our insurance solution provides cover for any activity in your company related to business or clients. It even covers allegations.

Ans B)Types of modern organisations would benefit most from reputational risk insurance :

Executives know the importance of their companies’ reputations. Firms with strong positive reputations attract better people. They are perceived as providing more value, which often allows them to charge a premium. Their customers are more loyal and buy broader ranges of products and services. Because the market believes that such companies will deliver sustained earnings and future growth, they have higher price-earnings multiples and market values and lower costs of capital. Moreover, in an economy where 70% to 80% of market value comes from hard-to-assess intangible assets such as brand equity, intellectual capital, and goodwill, organizations are especially vulnerable to anything that damages their reputations.

Most companies, however, do an inadequate job of managing their reputations in general and the risks to their reputations in particular. They tend to focus their energies on handling the threats to their reputations that have already surfaced. This is not risk management; it is crisis management—a reactive approach whose purpose is to limit the damage. This article provides a framework for proactively managing reputational risks. It explains the factors that affect the level of such risks and then explores how a company can sufficiently quantify and control them. Such a process will help managers do a better job of assessing existing and potential threats to their companies’ reputations and deciding whether to accept a given risk or to take actions to avoid or mitigate it.

The Current State of Affairs

Regulators, industry groups, consultants, and individual companies have developed elaborate guidelines over the years for assessing and managing risks in a wide range of areas, from commodity prices to control systems to supply chains to political instability to natural disasters. However, in the absence of agreement on how to define and measure reputational risk, it has been ignored.