Risk management has changed significantly over the past decade. One of the most important changes involves emerging risks. The term “emerging risk” generally refers to risks that were not previously recognized, but are now known to expose a business to significant loss. One “emerging risk” is reputational risk, which has become an important part of a risk management strategy.
“Reputational risk” recognizes the importance of a company’s good name and the affect that negative publicity could have on its revenues. In addition to lost revenues, a company could also be exposed to significant costs, including litigation, to restore its reputation. It is not surprising that a report published by Deloitte Touche Tohmatsu Limited found that reputational risk topped the list of executive concerns for the fifth straight year. According to the report “a company’s reputation should be managed like a priceless asset and protected as if it’s a matter of life and death, because from a business and career perspective, that is exactly what it is.”
One strategy to help a business manage reputational risk is insurance. Many commercial insurers have begun to offer reputational risk insurance, both as a stand-alone policy and as an add-on to the traditional directors’ and officers’ liability policy. However, the coverage offered by commercial insurers is often inadequate. In addition, some insurers only offer coverage for lost profits, while others only offer coverage for expenses incurred in restoring the company’s reputation. These gaps in coverage could leave a business exposed to significant loss.
RMC Group advocates a holistic approach to risk management. This means that a business should look to non-traditional forms of insurance, when commercial insurance is inadequate. Reputational risk insurance is an area in which a captive insurance company can provide an ideal solution. A captive allows a business to provide insurance that is written to address the specific needs of the business.
A typical RMC’s Reputational Risk insurance policy issued by a captive provides broad coverage similar to the following:
This policy will cover lost revenue and the costs and expenses incurred by and Insured caused by the publication by a third-party of a statement or opinion that negatively affects an Insured’s reputation. The profitability of the business is closely tied to the positive reputation of the business conveyed to the public sector. Should the Insured’s reputation be damaged, the Insured would likely suffer a reduction in business revenue and would incur additional expenses to reclaim a premier reputation. The policy would reimburse the Insured for both loss of business revenue and expenses incurred in restoring the Insured’s reputation.
A captive is an ideal solution for reputational risk insurance, as well as other emerging risks. In fact, a recent study showed that two-thirds of respondents believed that commercial insurance was inadequate to protect their business from reputational risk. This provides an opportunity for a financial advisor to present their clients with the captive option.
Helping your clients manage emerging risks, such as reputational risk builds loyalty and offers you an opportunity to move beyond the selling function and act as a true risk management consultant. RMC Group can help you in this regard. To learn more about the benefits of captive insurance or the emerging risks they could cover, contact your RMC regional representative today or our risk department at 239.298.8210.
