Aon, Zurich Launch Innovative $100 Million Reputational Risk Coverage

By | October 11, 2011

A company’s reputation often constitutes one of its most valuable assets; however, as the damage to value, as well, as the nature of the risks that may cause it, are hard to calculate, obtaining coverage has been a complex process.

Aon, in partnership with Oxford Metrica, a UK-based research firm, specializing in data collection and analysis, have put together a wide range of information to structure a program for “reputation management.” Dr. Deborah Pretty, a principal at Oxford Metrica, presented the firm’s findings, which Aon relied on in structuring coverage.

The main goal is to prevent, protect and/or mitigate damage to the insured’s business following a “reputation event.” The new program will be underwritten by Zurich with an upper limit of $100 million.

In announcing the program at the FERMA conference in Stockholm, Aon’s CEO, Greg Case, underscored the serious nature of reputational risk. “Eighty percent of Aon’s business clients will suffer an event that will cause them to lose more than twenty percent of their value every five years,” he said.

Case’s statement is supported by a look at the “top 10 reputation events” for 2010. By far the largest of these was the fatal explosion of the Deepwater Horizon oil rig in the Gulf of Mexico, which caused BP to suffer a 29 percent value reduction, and a $53.5 billion exposure to claims.

It wasn’t the only event, however, and most of them weren’t caused by natural or man-made catastrophes. Hewlett-Packard suffered the second largest loss in value, 18.5 percent, or around $20 billion, when it announced that its CEO had resigned. Johnson & Johnson’s value dropped 7.7 percent, more than $13 billion, when it was required to make product recalls. Goldman Sachs value dropped by 12.6 percent, over $12 billion, when the SEC announced it was investigating the investment bank for fraud.

Such events can hit a company at any time, and the only way to minimize the damage is to realize this, and try to prepare multiple responses in advance. In shaping the coverage Aon’s John Harris stressed that it had “addressed the problem directly, as it must be a part of any company’s enterprise risk management (ERM).”

He described some of the necessary components. Plans for a recovery must be in place before – not after – an event; the projected costs need to be in the company’s budget, and the top management – at board level – should be aware of “what can happen, and what steps have been put in place to deal with it.”

Oliver Schofield, chief strategy officer at Aon Benfield, laid out some of the policy’s parameters. He stressed the necessity for “crisis communication. You should anticipate what might happen, and how you are going to respond.”

The complexity of the risks involved, necessarily dictates that the policy itself is complex. It is structured to minimize damage to a company’s brand as well as compensating it for material losses. Schofield explained that it is triggered by a specified event – there are 19 stated in the policy – as well as “other events” that aren’t specifically set out.

It targets “adverse publicity” as much as financial loss. Case added that it is based on “sound underwriting,” and if it simply covered property casualty losses it wouldn’t be much different from those policies. But what Aon and Zurich are offering also offers advice on pre-crisis planning from expert consultants, which may be even more critical in dealing with a crisis.

It would seem to work in similar fashion to K&R policies, which are designed to prevent the abduction of a company’s employees, as much as providing consulting and meeting financial demands, if a kidnapping occurs.

Dr. Petty pointed out that the “social media has shrunk the timelines,” which “are now much faster and more global.” A company can either “be a winner, or a loser,” she said.

Johnson & Johnson became legendary as a winner for its prompt recall and redesign of its Tylenol packages, following tampering incidents. Not only did it regain its share value, but also increased it, as consumers were given added confidence in its brand. Others, notably a number of airlines, have not been as forthcoming following air crashes, and their brands have suffered accordingly, Dr. Petty noted.

Aon and Zurich hope to be able to put the kind of positive response represented ny Johnson & Johnson in the hands of many more companies. It’s a good sign of the insurance industry’s capacity to innovate in the face of new and increasingly challenging risks. This is exactly the type of product that risk managers – notably FERMA’s past president Peter den Dekker – have been calling for.

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