Covering lost reputation value—the go-forward cost of angry disappointed stakeholders—are insurance policies led by the Lloyd’s syndicate, Tokio Marine Kiln. Capital instruments may be used for larger limits. Additional risk financing also may be structured through captive insurance vehicles. All risk financing and transfer policies are structured a priori and triggered parametrically.
Determination of Qualification
Qualification begins with a review of a company’s quantitative measures of reputational health that typically can be completed in less than 45 days. Approximately 20% of public companies will qualify for coverage purely on an analysis of reputation health and risk implied by these measures.
The underwriting process in and of itself places qualified companies in a class by themselves, providing transparent evidence of good governance. This process also generates a pricing indication that is subject to an underwriting process involving a review of high-level governance, risk and compliance processes.
The typical policies provide coverage with limits capped at $100 million. While this limit is growing as the market appetite increases, the typical level of coverage is deemed to have sufficient expressive force to mitigate reputational crises.
Additional instrumental value for loss absorption may be structured today following the same policy form through a captive insurance vehicle.
“…these reputation-based indemnification instruments, structured like a performance bond or warranty with indexed triggers, communicate the quality of governance, essentially absolving board members of damaging insinuations by activists.”
Triggers and Indemnification
Reputation Assurance and a form-following captive insurance policy are parametric solutions. A Reputational Value Loss is triggered by a failure of a scheduled enterprise level governance or Board oversight process, evidenced by both negative media and a 20-week sustained drop in the Insured’s Reputational Value Metrics.
Levels of indemnification for risk transfer are typically structured so that the Gross Premium is in the vicinity of 1% rate on line. Levels of indemnification for captive insurance vehicles typically lead to higher Gross Premiums.
Typical Indemnification Scenario
An insured sustains an operational failure in one or more areas felt to be the duty of senior management and the board to oversee, such as ethics, innovation, quality, safety, sustainability, and security. The failure sparks stakeholder outrage that is memorialized in the media.
Within 90 days, the reputational value metric (parameter) falls below the first Loss Gate. Two weeks later the parameter drops below the second Loss Gate. Twenty weeks later, the parameter has consistently remained below the 2nd Loss Gate thereby meeting the parametric condition for indemnification at the second Loss Gate that typically pays 40% of limits. No extenuating circumstances are noted, so the claim is honored anywhere between 22 and 40 weeks from the triggering event.
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