Nir Kossovsky, Steel City Re
Captives should consider writing protection coverage for their owners as a way to diversify their exposures and build up their capital bases, according to Nir Kossovsky, chief executive officer at Steel City Re, speaking exclusively to Captive International.
Companies face significant reputational risks at all times, with social media serving as a vessel for the swift dissemination of negative publicity that can have a significant negative impact on the bottom line. While there is some commercial coverage available, availability is limited, meaning companies that want to manage this risk may be best served writing coverage via their captives.
“Commercial insurers can offer reputational coverage but at the moment there is not much appetite for taking on this kind of new risk,” Kossovsky explained. “They tend to prefer to focus their attention on more conventional lines, even though now would actually be a great time to get into reputational insurance when only the best risks are seeking coverage.”
Kossovsky emphasised the lack of correlation between reputation and other perils captives might write coverage for. “The closest is directors and officers (D&O) but there is a considerable lag in the payment of losses between them,” he said. “The D&O liability payments shows up around two-to-five years after potential reputation loss payments, which in our models could pay as soon as 20 weeks after an adverse event.”
Kossovsky believes reputation is also a great coverage for a captive to write because it is a low frequency risk.
“Most companies won’t have a reputational crisis, and they are very rare in the best governed companies, so taking in premium for reputation risk is a good way to build up capital,” he said.
Kossovsky admitted it can be hard to measure and quantify reputational perils, but Steel City Re has developed models that do just that. To illustrate its approach he cites the example of philanthropist and hedge fund manager Ray Dalio, who wanted to create a hedge for the risk of price fluctuations for the chicken used to make chicken nuggets.
“There were no chicken futures, but he realised the biggest drivers of the price of chicken were chicken feed - soy and corn,” explained Kossovsky. “So he created an index based on soy and corn futures--a synthetic index for poultry futures—to help his clients manage the risks of chicken price fluctuations.”
The same principle can be applied to reputational risk, said Kossovsky, by finding an appropriate proxy that correlates with the reputational risk a business wants to insure. To this end, Steel City Re’s data include 7 million measures of reputational value, from 7800 companies, captured weekly for 20 years.
Reputational risk is divided into ten big perils, including: enterprise-wide economic damage; cashflow; humiliation in the court of public opinion; derivative litigation; short-term earnings shortfall; fear of a reputational crisis; non-financial risk; social inflation; society risk; and compliance, the last of which was added in recent months.
“The common theme is that there is an impact on cashflows as a result of behavioural change,” explained Kossovsky.
Steel City Re has been supplying reputational data to Wall Street firms for 14 years by fusing financial modeling with behavioral economics. It also has around 200 captive clients that can slice the data by size or sector to ensure it is relevant to them, ensuring the coverage can be tailored to suit the reputational threat most relevant to them.
These data can be used to create coverage for different sized exposures, from a $100 million policy for a captive owned by a large public company, right down to a $10 million policy.
“We have a track record that is reliable, scalable and repeatable, and the data are being used to create parametric insurances for reputation,” said Kossovsky. “Our metrics, drawn from public data, are modeled into a synthetic index of forward-looking measures for reputation.”
Kossovsky advised businesses thinking about reputational risk to appoint an executive who can be ultimately responsible for it, whether that is an enterprise risk manager or someone else - advice he says also applies for cybersecurity.
“The chief financial officer is likely to see it very differently to the human resources manager,” he explained. “Understanding reputational risk is like a blind man feeling an elephant. Different stakeholders will have very different perspectives even if they are looking at the same thing. It can lead to angry customers, concerned regulators and demotivated employees.”
Nir Kossovsky, Steel City Re, Reputational risk