RIMS, Airmic, and RepTrak have jointly released a new report exploring best practices and challenges for effectively managing reputational risk. It is based on interviews with 40 risk leaders in the US and Europe, as well as discussions between academics and industry thought leaders. These were brought together in working groups to discuss reputational risk management challenges and best practices.
‘Closing the Gaps on Reputational Risk Management’, explores six challenges that risk professionals face in understanding and addressing risks to reputation:
- Unclear definition of reputation.
- Confusion on the categorization of risks to reputation.
- No commonly agreed upon, consistent measurement of the business impact from specific risks to reputation.
- No framework for linking the strategic, operational, and tactical aspects of reputational risk management.
- An absence of integrated ownership and accountability across organizations.
- Slow development of solutions for risk transfer including insurance.
The report states that risk professionals today are at a crossroads, where they can follow one of two paths: the first, where they have the responsibility but no influence and control; or the second, where they can contribute value to the organization by leading implementation of a structured, data-driven and systematic approach to reputational risk that draws the whole organization together around a common framework.
It was heartening to read in the white paper recently released by AIRMIC and RIMS, ‘Closing the Gaps on Reputational Risk Management’ (9/24/20), that the insurance industry is aware of the litigation costs of reputation loss and acknowledges a link between reputational events and financial consequences—especially for insurers. The implication is that the insurance industry should give risk managers a break on costs in this hard market, if they can prove they are mitigating reputation risks.
However, it was odd to see that some in our industry still think reputation risk is an unquantifiable mystery. It is no mystery. It is a class of perils with tangible, quantifiable consequences. In fact, parametric strategies have been in use for years to measure it, insure it and protect against the business impacts arising from it.
Put simply, reputation risk is a peril caused by the effects of disappointed and angry stakeholders whose expectations have not been met. Their actions manifest themselves in impaired cash flows, higher cost of capital, loss of market cap, diminished customer loyalty, increased regulatory and political scrutiny, and a range of other personal and commercial cash flow impacts.
One of the greatest perils of disappointment today are the corporate claims on such things as ESG or signing onto pledges like the one promoted by the Business Roundtable. These raise stakeholder expectations and, in the absence of a robust risk management response, increase reputational risk.
Risk managers need to think expansively, understand what a company is pledging, what stakeholders are expecting and where their company is likely to fall short. With the intelligence gathered, they need to manage the shortfall operationally enterprise wide. The additional benefit of using reputational insurances, besides covering the costs of shortfalls, is that they publicly validate—for insurers considering giving them a premium price break—their governance and operational practices. That’s reputation risk management, and it’s a story worth talking about.
Nir Kossovsky, CEO, Steel City Re