Thursday, December 17, 2009

Insurers to launch reputational risk product

Original posted in the Financial Times by Andrew Edgecliffe-Johnson:

Insurers are planning to introduce a new product to help companies limit the financial fall-out when their brands or high-profile spokesmen such as Tiger Woods suffer reputational damage.

DeWitt Stern, a 110-year-old US insurance broker, has already received expressions of interest from London underwriters about backing a reputational risk product it aims to launch early in 2010.

Scott Brady, Dewitt Stern managing director, told the Financial Times that the product could develop into something akin to directors’ and officers’ liability insurance, designed to protect boards from shareholder lawsuits. Over 30 years, “D&O” cover has grown into a multi-billion dollar market, he said.

DeWitt Stern has been working on the product for six months. But the business turmoil caused by Mr Woods’ admission of infidelity has starkly highlighted companies’ vulnerability if the reputations of their brands or pitchmen are struck by scandal.

Accenture, the consultancy, dropped the golfer from its advertising this weekend as other sponsors began to distance themselves from the sportsman. Accenture said it had seen no material impact on its business, however.

Many consultants predicted in 2005 that brands would be wary of using celebrities to endorse their products after Hennes & Mauritz and others dropped Kate Moss from their advertising following drug allegations.

DeWitt Stern would insist on individuals it covers undertaking a pre-screening process, including a detailed questionnaire about their lifestyle, and would attempt to limit the losses from any reputational damage with a crisis communications strategy. Companies’ demand for background investigations when hiring new executives or assessing business partners have already created a lucrative business for security groups such as Kroll.

Amy Lashinsky, managing director of Alaco, a London business intelligence consultancy, said many “responsible” companies already used due diligence to manage reputational risks. “Crises are not cheap. A reputational event could cost you billions of dollars,” said Robbie Vorhaus, a crisis communications executive working with DeWitt Stern.

Figures from TNS Media Intelligence this week estimated that Accenture was Mr Woods’ biggest backer, using him in 83 per cent of its $50m advertising spending last year, while he appeared in 27 per cent of Tag Heuer’s marketing and 4 per cent of Nike’s.

They also underscored the threat to the $600m spent by marketers on PGA golf broadcasts in the US each year, noting that for matches in which Mr Woods played advertisers paid a 53 per cent premium last year over those from which he was absent.

According to Willis, one of the world’s biggest insurance brokers, there is already cover available for reputational risks as part of some D&O policies. It is often referred to as “spin-doctor cover” because it helps pay for the publicists and brand consultants needed to help manage hits to reputation.

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