Corporates have become increasingly vocal about their concern that the insurance industry is failing to respond to the exposure of its client base to reputational harm and brand damage. Instead, large brands are transferring the risk down the value chain, with parts and ingredients suppliers taking up the protection required to reduce the risk of the brand owner.
The need for brand and reputational harm protection is set to grow further as companies place a greater importance on their intangible brand value and rely less on the physical assets that have traditionally been the basis for company valuations.
The Economist recently reported that 84% of the S&P 500 value is now made up of ‘identifiable non- monetary assets without physical substance’, so the risk managers in those companies face a huge exposure which is currently not being adequately addressed in the insurance marketplace.
Reputational harm policies do exist in the insurance marketplace but to date the income for this segment has not grown anywhere nearly as quickly as the economic exposure.
The policies generally seek to identify a specific trigger event such as the disgrace of an iconic figure promoting a brand. The consequent economic loss then becomes the loss payment.
Such parametric policies are often linked to an alternative risk transfer and captive arrangement to provide additional capacity.
“Insurers may argue that they have developed a variety of solutions to protect brands but the adoption to date has been extremely limited for a number of reasons, not least because the solutions are often perceived as too expensive,” says Ian Harrison, a Lockton Partner who heads up the Recall and Brand Damage Team at Lockton.
Beyond the sub-limits and bolt-on responses from the property/casualty (P&C) segment, which are recent adaptations and likely to disappear again as the market hardens, most bespoke solutions have been developed for sophisticated global brand owners. These companies have naturally been seeking extensive limits for a broad risk spectrum of unforeseen but potentially catastrophic exposures.
“Insurers developing cover in these unchartered waters often respond to clients’ requests by limiting their own exposure and pricing the risk conservatively (often a one in ten year or twenty payback i.e. 5-10% rate for capacity),” Harrison says.
“Given the significant costs and the untested nature of the wordings allied to a historically low cost of capital, most global brands have been choosing not to insure the risk or retain very significant self-insurance limits,” he adds.
A gap in supply and demand in the segment is likely to widen further as the market begins to tighten with insurers less willing to innovate outside their core lines of business.
As an alternative solution, many large corporations have opted to retain risk in an internal captive carrying the funding in case it is needed to address the cost of a faulty product.
The financial impact for example of a product failure can be significant but calculating the damage to a brand can be a complex task with a number of legitimate approaches available. The Firestone/Ford case in 2000 gives a sense of how serious such events can become for the brand reputation of the involved businesses. At the time, allegedly defective tires produced by Bridgestone’s Firestone Tire and Rubber Company and installed on Ford SUVs and pickup trucks were linked to 271 deaths and more than 800 injuries in the US alone, according to a report by finance and business news provider Kiplinger.
Ford reportedly told shareholders in 2001 that its recall of 13 million tires on its SUVs and pickup trucks would cost the company $3 billion. The company also faced $600 million in lawsuits.
To guard against this kind of event, companies should identify the main risk drivers to their brands and decide how these can be mitigated. This may, for example, involve critical crisis training for the staff. Companies may also consider a “worst case scenario” and put up an action plan that can be followed in case it happens.
Furthermore, the implementation of a culture that promotes diversity of opinions may be helpful to spot issues early, reducing the potential damage to the brand.
Meanwhile, the manufacturing sector has developed another strategy to deal with the brand protection gap.
”We are seeing clear evidence that global brand owners are protecting their brands by analysing and passing the exposure down the supply chain,” says Harrison. “With many consumer brands heavily reliant on key suppliers to maintain product quality, large corporations are passing on the risk via contractual obligation and enforcement of insurance obligations to cover the brand against damage caused by suppliers”, he explains.
Direct suppliers are passing the risk even further down the value chain. An example would be a key Tier 1 supplier of components to BMW passing on the risk all the way down to their own original parts suppliers such as basic rods and blocks.
In order to protect the end products image from being tarnished by quality issues of outsourced parts, brand owners are requiring suppliers to purchase protection. At this level, the insurance sector does provide solutions, developing a more organic, piecemeal approach across a number of industrial sectors such as the automotive, food/beverage and consumer industry sectors.
The push of contractual and financial obligations down the supply chain looks likely to continue and is providing a growth in insurers willing to cover this risk.
In the longer term, however, these adequate piecemeal solutions will not tackle the intangible brand exposure overhang that continues to grow.
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