According to a report published by ACE Group, which spoke to 650 executives responsible for buying insurance throughout the EMEA region, reputation risk is considered the hardest risk to manage. ACE reports that 77 percent of companies find it difficult to quantify the financial impact of reputational risk on their business; in addition, 66 percent of companies feel inadequately covered.
Captive International spoke to Tom Stokes, practice leader at JLT Towner, about how captives can be used to ease the burden of reputational risk.
How has the understanding and importance of reputation risk grown in the last few years? How difficult is it to place in the insurance market?
Several global consumer products companies have experienced local issues in far-flung areas concerning contamination, tampering, etc. Those that operate through franchise structures could lose lucrative outlets to competition. I have no direct experience with underwriters, but indications from brokers show that the cover would be limited in scope and prohibitively expensive.
Can companies look into insuring their reputation risk through a captive?
Captives should be available to fund the smaller, more easily containable losses, again, as risk transfer can be limited and expensive. Having emergency funds available to immediately address loss issues can help contain a situation and prevent it from getting out of control. More interesting is the idea of having the captive fund for acceptable layers of risk (based on the balance sheets of the captive and the parent/associated entities) and then to participate in a side-car vehicle that would access catastrophe bond cover for the truly catastrophic exposures.
How do you see reputation risk concerns developing going forward, in general and in terms of the captive market?
As companies continue to expand into global markets, I believe that this will be a major area of expanded use for captives. It is yet another example of captives being used to address complex exposures - far beyond the traditional predictable risks of the past.
JLT Towner, reputational risk, emerging risk, captive insurance