Reputational risk not understood by insurers or clients

Reputational risk continues to be one of the hardest risks for insurers and reinsurers to price and manage due to a lack of knowledge, according to a new study by insurer Ace.

The research, carried out on behalf of Ace between April and June 2013 by Longitude Research, found that one of the biggest problems was a failure to accurately define the risk.

“Many struggle to get their head around it,” said Gareth Lofthouse, managing director of Longitude Research. “This is where the problems start.”

The research found that although 81 percent of participants regard reputation as one of their most important assets, most admitted that they struggle to protect it. What is more, 77 percent said they found it difficult to quantify the financial impact of reputational risk on their business and only 25 percent said they felt confident that they could measure external perceptions of their company.

The report also revealed that companies of all sizes were struggling to effectively monitor this type of risk. “There aren’t many metrics for measuring reputation in the first place, let alone measuring its impact,” said Lofthouse.

However, Andrew Kendrick, president of ACE Europe, notes that there are ways of reducing the risk, which must be administered “from the top” if companies are to protect themselves against this increasing threat.

“Reputational risk can be difficult to predict,” he said. “However, some clear pointers emerge from our research as to the source of companies' key worries.

“One of these is the globalisation of business, with complex supply chains, expansion into new markets and the challenge of maintaining consistent standards across multiple borders all giving cause for concern. The other noticeable theme is regulation. Post-crisis, compliance has taken on a new importance and businesses of all shapes and sizes are more keenly aware of its relationship to their corporate reputation.”

The impact of social media was also high on the agenda, with 56 percent of participants saying that social media had greatly exacerbated the potential for reputational risk to affect their business

The research involved speaking to 650 risk managers, CROs, CFOs, COOs and other executives responsible for buying insurance from companies with turnover of more than $250 million in 15 countries.