Question

a) the possible definitions and determinants of reputational risk and its insurance;
b) the legal and regulatory frameworks of reputational risk and its insurance;
c) which types of modern organisations would benefit most from reputational risk insurance;
d) how reputational risk can be quantified for insurance purposes;
e) the technical terms and conditions of reputational risk insurance;

You may support your discussions and explanations with examples where applicable. However, calculations are optional.

Answer 1

a) Definition of reputation risk- Reputation risk means invisble danger to the companies reputation/goodwill or the good name which can cause potential loss to financial capital and/or market share thereby affecting its revenue.

Example of Reputational Risk- In 2016 the scandal involving the opening of millions of unauthorized accounts by retail bankers (coerced by certain supervisors) was exposed at Wells Fargo. Wells Fargo's reputation was deteriorated, and the company continues to rebuild its reputation and its brand into 2019.

• Determinants of reputational risk-

1. Reputation-reality gap- A company’s overall reputation is a function of its reputation among its various stakeholders (investors, customers, suppliers, employees, regulators, politicians, nongovernmental organizations, the communities in which the firm operates)
2. Changing beliefs and expectations-When expectations are shifting and the company’s character stays the same, the reputation-reality gap widens and risks increase.
3. Weak internal coordination-Another major source of reputational risk is poor coordination of the decisions made by different business units and functions. If one group creates expectations that another group fails to meet, the company’s reputation can suffer.

Below are few more examples which illustrates the above points-

• 1.CEOs, company leadership and employees- If a companies CEO has a negative reputation, then so does the company. And that, affects revenue and investments. Also, any of your employees/leader could spark public outrage causing reputational damage.
• 2.Negative articles-Company layoffs, lawsuits, scandals and penalties can impact revenue for years. For example: Underperforming factory could trigger negative articles that damage's entities reputation.
• 3.Social media- Social media can be also be a cause for negative reputation. For example: When company leaders post controversial comments online, their statements affect the entire business, not just the executive’s reputation.
• 4.Data loss- A data breach will corrode your institution’s reputation and could cost you hundreds of millions of dollars.

To protect the company from losses in a crisis due to reputation damage reputation risk insurance is taken. Reputational Risk Insurance can give you the power to mitigate damage done by any number of adverse events, including accidents, hacks, and data breaches.example-

A major vehicle manufacturer decides to buy a Reputational Risk policy to safeguard the company in case environmental activists accuse the company’s new luxury hybrid SUV of causing unintended environmental damage.

b) Framework of reputational risk-

• 1) Reputation reality gap- Examine the gap between the comapnies reputation and actual performance. Improve if required.
• 2) Changing belief and expectations- Shareholder's changing expectations can effect companies reputation.
• 3) Weak internal coordination- Focus on reputational risk and manage it in proactive and coordinated manner.

The framework should be aimed to identify, evaluate, and mitigate the risk with the proper reputational risk managment. And reputation risk insurance should be taken timely if there are chances of its happening by assesing the risk.

d) The reputation risk is quantified as-

-By identifying the event which have potential for loss risk (for example public event) {Assessing risk}

-Estimating the stock performance in case the event had not occurred (estimate the return using the beta of the stock relative to the market based). {Evaluating performance}

-Calculating the difference between the actual stock performance and the expected performance (based on the beta) (must have a relevant index to compare the performance of the stock) {Comparing performance}

-Determine reputation risk impact (compare adjusted market capitalization loss to the actual financial loss announced).If the loss relative to expectations is greater than the size of the loss announced (as part of the event), the difference could be attributed to the reputation risk impact. {Evaluating impact}

e)Technical terms and conditions of reputational risk insurance-

Reputational Risk Insurance typically comes bundled along with other major risk policies.These are some of the more common forms you’ll see Reputational Risk Insurance offered as:

• General liability insurance. Reputational Risk Insurance can be packaged along with your general liability policy, often related to the personal and advertising injury coverage portion of your policy.
• Crisis management insurance. While crisis management once focused on reputation management as a whole, it has since pivoted and narrowed to pinpoint online properties as well as technology-related omissions and other errors. Examples of what may be covered here include data breaches, workplace violence
• Cyber liability insurance. Risks arising from the world of information technology are targeted by this coverage, which bridges a gap often not addressed by typical insurance policies.
• Standalone policy. While the coverages listed above are extensions of larger policies, standalone Reputational Risk Insurance is relatively rare and typically reserved for the largest of firms.

Conditions- If you believe that your business is in such state where it needs to be guarded against, adverse events, workplace practices, data retention failures, product recalls, bad financial statements, and CEO reputation issues then reputation risk insurance should be taken int considerations.

Ask yourself the questions about your business. Such questions may include:

-What is my company’s current reputation? If there have been breaches of trust?

-Has my company had a previous breach?does it need to be addressed?

-Do I retain extensive sensitive records which could harm the company if breached?

-What is my company’s financial picture and how would it be affected by damage to my reputation?