Phil Ellis, the CEO of Willis Global Solutions Consulting Group, called on the insurance industry “to innovate rapidly to address the glaring gap that exists for reputational risk cover.” Speaking at a seminar -The Risk Frontiers Conference – in London, he pointed out that “a staggering 95 percent of major corporations have suffered at least one major reputational crisis in the last 20 years, but of these events, less than 10 percent are insurable.”
Ellis’ research into the performance of 600 publicly-held companies concluded that “major firms suffer a significant reversal of fortune once every seven years. Furthermore, 19 out of 20 companies suffered at least one such reversal over the 20-year time span of the research.”
He also explained that the “reasons behind these reversals are widespread and impossible to predict, ranging from the aftermath of 9/11, to sudden obsolescence of technology, rumor of product contamination, failed international expansion, fraud and M&A activity.
“About 50 percent of the events we researched had to do with problems with the company’s business strategy or model; 15 percent were from lawsuits; 10 percent were due to M&A problems; notably, until 2011 natural catastrophes were not a factor in these reputation crises,” Ellis told the audience at London’s Grange City Hotel.
There is, however, a significant “lack of viable insurance solutions” for reputational risk. Ellis noted: “Our industry deals with protection against named perils – a storm, a fire, an explosion, piracy, a war, etc – some of these or a combination may damage a company’s reputation, but usually they do not. In fact, based on our own research, less than 10 percent of major reputation-damaging events are due to an insurable, peril-related event.
“As a result, our standard insurance products aren’t designed to help out when reputation is damaged, except when a policy against a peril, like product recall, coincides with a fall in reputation. But even then the sums paid are not enough to turn the heads of any reputation stakeholder,” he continued.
He also pointed out that in most circumstances involving damage to reputation “clients want immediate payment from their insurance policies, with no or few exclusions and very high limits.” They also expect the solution to be priced significantly below the cost of capital. “Insurers have so far not shown any real interest in responding to these needs, and so we’re looking increasingly towards capital markets for answers,” he stated.
“A worrying 80 percent of a company’s leading risks, of which reputation is just one, are uninsurable with today’s products,” Ellis observed. “The insurance industry itself is facing a fall in its own reputation for not keeping up with new and emerging risks, and we have a long way to go in order to improve our relevance and standing in corporate risk finance and management.”
Source: Willis Group Holdings
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