While many in the insurance industry were focused on the cyber liability, cargo theft, and weather segments in 2012, this year a number of insurers are turning their attention to other emerging markets with potential. Carriers and brokers are strategizing over how they can best address three hot topics in particular: healthcare, the fracking segment of the energy market, and reputational risk. These segments aren’t new to the industry, but they do present new exposures.
Some companies are developing products to meet what they consider to be an inevitable demand for coverage options in these three areas. It remains to be seen if others will follow suit, but these segments are here to stay and will create new opportunities – and exposures – for those seizing them.
In 2011, several insurers attempted to address reputational risk, which refers to a company’s risk of damage to its reputation because of an incident or event and the fallout that could result from such an incident. Companies are more at risk than ever from social media and the 24 hour news cycle that can turn even the smallest mistake into a highly-publicized event that can damage a company’s image beyond repair.
Aon and Chartis launched specific products aimed at helping companies protect and manage their reputations, as well as a crisis response service to help minimize reputational damage and restore a company’s image. Willis went a more niche-specific route and launched Hotel Reputation Protection 2.0 specifically for the hotel industry.
It appeared at the time that insurers had recognized an underserved area of the market and were taking steps to fill the void with reputational risk products. But in 2012, most of this market was very quiet.
Only two major insurers launched new standalone reputational risk products last year, bringing the total number of reputational risk-specific products to five. In April, Munich Re launched a product to cover financial loss from a reputational risk event that mainly targets business to consumer companies. Later in the year, Allianz released Allianz Reputation Protect that helps respond to a crisis incident and provides a risk assessment to see how a company is currently perceived by the media and public.
The Reputation Institute in London, which deals with all aspects of managing a company’s reputation before and after a crisis event, has worked with the insurance industry as it tries to tackle this segment. Seamus Gillen, a senior adviser at the Institute, says he had numerous meetings with insurance companies last year that were looking at developing reputational risk products.
“As far as I am concerned, [the insurance industry] is still grappling with how to turn an intangible asset into a tangible insurance product,” says Gillen.
The Reputation Institute was also approached by insurance companies to partner on reputational risk products, but the parties couldn’t find a model that made sense for them be involved with. Gillen says in the last three to four months he hasn’t heard anything from the industry, but the risk is still very much there with numerous studies citing reputation as one of the top issues “keeping CEOs awake at night”.
“It’s not as if there has been any shortage of reputational impacts,” he says. “There has been a number of big stories throughout the year of companies screwing up and having their reputations impacted. What we know is that it’s definitely still front of mind, but we haven’t yet seen the insurance industry respond.”
Gillen isn’t the only one challenging the industry. Willis Global Solutions Consulting Group CEO Phil Ellis expressed frustration with the “lack of viable insurance solutions” for reputational risk at the Risk Frontiers Conference in London last February.
“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,” Ellis said at the time.
Benedikt Schermutzki, head of New Risk Solutions in the Corporate Insurance Partner Division for Munich Re, says his company launched the coverage because corporations and risk managers are extremely interested in the topic and consider it to be one of their top issues.
“We believe this is a very real risk that large corporations face nowadays and there are many prominent examples of serious incidents that have also had substantial financial impact,” says Schermutzki.
Unfortunately, that is not translating to sales for the coverage, Schermutzki acknowledges. The product has attracted interest but actual policy purchasing has been slow. He says that is expected with atypical insurance developments.
For Aon, the difficulty has been educating insureds about their product and what reputational risk insurance really means. Randy Nornes, executive vice president at Aon Risk Solutions, says the reputational risk market now is similar to what the industry experienced when cyber liability coverage first came out.
“People were uncomfortable and didn’t know the risk. The industry put out products but it took five or six years until insurers got more comfortable and now the products today are much more valuable. I see [reputational risk] following a similar trajectory,” he says. “The clients just aren’t ready now, and they don’t have enough information.”
Nornes says larger clients appear more interested in addressing reputational risk through captive insurance companies because they say third party products are not doing the job. There is also not a designated “reputation risk manager” at most companies, which means there is no natural buyer to make the purchasing decision for a third party reputational risk product.
An easier path for insurers, says Nornes, is actually to go away from the standalone product. He expects that is the way this market is headed, at least for now.
“This has more to do with the realities of how money gets spent [by insureds] and decisions [by carriers] about how money is made,” he says.
Zurich and Aon are in talks to make their standalone product part of an integrated product so it is easier for clients to think about it as part of their overall risk management strategy. Nornes says clients have found it more valuable in the past to have add-ons that address the issues of reputation like crisis management because insureds are unclear on the risk and are unfamiliar with reputation products.
“2011 was the first time a label was put on and a lot of these issues captured. It put a more holistic wrapper on these bits of pieces,” he says. “If insurance companies continue to raise reputational risk and make it part of the regular discussion, they can help clients clarify the issue.”
Gillen says he agrees the best approach insurers can take in 2013 is to develop products from a crisis response and risk management strategic perspective, which some have done already.
“It makes more sense to latch it on to an existing product and existing service and see how it evolves,” says Gillen. “If it gains maturity it becomes a product that can stand on its own two feet.”
Nornes says it can be tricky when each product that is available tackles the reputation issue from a slightly different direction, but just having the conversation with clients will help the industry get there eventually.
“I think the challenge is I don’t think people pause enough to say ‘what is the next step? What can drive the loss or damage to the reputation?’ and get down into the weeds on it, which I think you have to do,” he says. “The process itself has been useful. A client may not have bought a product at the end of the day but there was certainly an education.”