As the value of a celebrity or sports star’s contract with a major sponsor has increased in recent years, so it seems has the risk of them disgracing themselves in public.
The benefits of having an A-list celebrity promote your brand can be enormous — boosting customer sales and raising your company’s profile. Many celebrities rake in multimillion dollar sums for being the face of top brands such as Nike or Coca-Cola.
However, such sponsorships are not without risk, particularly if a brand ambassador commits a disgraceful or criminal act. The consequences can be far-reaching. One small slip-up can turn into a PR disaster, ruining an entire advertising campaign and resulting in huge financial losses for the brand.
Rising NFL star Johnny Manziel, whose sponsors included Nike and McDonald’s, was dismissed halfway through his $8.2 million contract by the Cleveland Browns after breaking the NFL’s substance abuse policy, along with having the shadow of domestic violence charges hanging over him.
Earlier this year, tennis star Maria Sharapova was suspended for two years from the sport by the International Tennis Federation for taking a banned substance. Since testing positive, she has been dropped by most of her major sponsors.
Just weeks ago, Olympic swimming medalist Ryan Lochte was caught in a lie after trying to cover up bad behavior during the Olympic Games in Rio. Lochte lost four major sponsorships, including Speedo USA and Ralph Lauren.
Incidents like these are motivating more companies to seek out death, disability and disgrace insurance to protect themselves against such losses. The market, driven by Lloyd’s of London, has grown to $1 billion, according to industry estimates. Payouts are believed to range into the millions of dollars, sources said.
“There’s obviously massive benefit to using a celebrity to promote your product,” said Alan Norris, head of contingency at Talbot Underwriting. “But there’s also a huge potential downside that comes with it.”
In addition to advertisers and sponsors, financial institutions that provide loans and mortgages to sports stars are buying the coverage to mitigate losses when a player’s contract is terminated for criminal or distasteful behavior.
Public Expectations Tied to Value
The number of high-profile cases where a celebrity has become involved in a scandal or commits a disgraceful act has prompted worry among many advertisers and sponsors.
“Certainly more high-profile scenarios have grabbed the headlines in recent times,” said Mark Symons, contingency underwriter at Beazley, who has seen a 50 percent increase in business over the last five years.
On top of that, he said, social media and the ever-increasing immediacy of news tend to magnify even the smallest indiscretion, and companies have become acutely aware of that reality.
“Because of the internet, the speed at which a person’s behavior can destroy their reputation is almost instantaneous.” — Nir Kossovsky, CEO, Steel City Re
“Because of the internet, the speed at which a person’s behavior can destroy their reputation is almost instantaneous,” said Nir Kossovsky, CEO of Steel City Re, a provider of D&O reputation solutions.
“The attributes of that person are expected to reflect favorably upon a product or brand, so therefore the loss of value of those attributes will have a negative impact on that product,” he said.
Kossovsky said that an individual’s reputation value was tied to six major behaviors — ethics, innovation, safety, sustainability, security and quality — and their failure to live up to public expectation would put both the sponsor’s and their own value at risk.
“In Sharapova’s case it was ethics — the drug enhancement issue,” he said. “It was the impairment of her value to her sponsor resulting from a failure to meet her public’s expectations in terms of her behavior.”
Lori Shaw, GAMES practice leader at Lockton’s Charlotte office, said that because reputation accounts for 25 percent of a company’s market value, choosing the right brand ambassador is critical.
“Companies need to be aware of what they are getting into when they take on a talent or celebrity to promote their brand, as well as protecting their balance sheet against the exposures that brings,” she said.
One of the biggest problems for insurers is determining what constitutes a disgraceful act and how to price that risk accordingly.
Broadly speaking, a death, disability and disgrace policy is triggered by “an offense against public taste or decency,” ranging from criminal acts to offensive statements.
Both Kossovsky and Symons noted that the loss of value often depended on that one individual’s expected behavior.
Celebrities with an existing reputation for being controversial are less of a risk than those with a squeaky clean image.
“Perversely, that means the most sensitive risk is often the individual with the best reputation because the impact of their actions can be felt far more disproportionately than someone who has a track record,” said Symons.
Death, disability and disgrace insurance can be bought either as a stand-alone product or as part of a broader policy.
In addition to covering the costs associated with having to change or drop a campaign altogether, a standard policy can also be used to protect against a loss in sales linked to the death or disgrace of the individual concerned.
Often, however, it’s difficult to quantify the size of a potential loss in revenue or damage to the brand associated with an endorsement when things go wrong.
“With a death, disability and disgrace policy you can only really insure the actual costs associated with that campaign, but what you can’t insure against is the financial damage to the brand because it’s an intangible asset,” said Norris.
Shaw said that even before assessing the impact of a celebrity’s behavior on a company’s market value, you’ve got the upfront costs of scrapping the campaign or starting a new one.
Initial costs can include hiring a replacement spokesperson, removing a celebrity’s image from packaging, reshooting or reproducing new advertising material or reimbursing the money paid to secure the endorsement in the first place.
It can also extend to money spent on TV or radio commercials and advertising space.
Edel Ryan, partner and head of media and entertainment at JLT Specialty Ltd., said that the onus was on the policyholder to prove that the celebrity had committed a disgraceful act according to the contract.
“The underwriter will start by looking at the morals clause within the contract and the celebrity’s past history to determine if the policy should be triggered,” said Lockton’s Shaw.
Some acts, though considered outrageous, might be excluded if they are deemed to be within the bounds of the celebrity’s normal behavior.
All things considered, the benefits of a celebrity sponsorship must be weighed against the potential pitfalls.
“It’s critical to have the right cover in place to protect against the loss of value to their product or service,” said Kossovsky. &
Withstanding the Storm
The impact of a hurricane or severe windstorm can be devastating.
The risk of damage to your property is even greater if you’re in a hurricane-prone state like Florida, as in the case of Miami-Dade County Public Schools (M-DCPS).
Between 2004 and 2014, M-DCPS, which owns $10 billion worth of property, received more than $30 million in assistance from the Federal Emergency Management Agency (FEMA) for damage caused by windstorms or hurricanes.
But last year, FEMA published new guidance that essentially reduced funding for properties that had received assistance in the past. If damage was caused by the same peril, FEMA would reduce its assistance by the amount required for the previous disaster, regardless of the deductible.
That’s where Scott Clark, the recently retired risk and benefits officer of M-CDPS, stepped in. To plug the gap, Clark drew up a three-year program with Swiss Re based on a parametric model of coverage.
The new “storm policy,” effective from May 1, provided a limit of $10 million per loss, with a three-year aggregate limit of $20 million. The policy is triggered by wind speeds in excess of 87.5 mph on a weighted basis.
M-DCPS is believed to be the only public entity in the U.S. that has purchased such coverage to address its FEMA shortfall.
This was in addition to a rolling three-year base windstorm property policy that provided a 10 percent to 15 percent no-claims bonus for every storm-free year, net of commissions.
“The problem was that at the time we didn’t have the ability to secure coverage for every property, and we were already spending $25 million to $30 million on property insurance as it was,” said Clark, who is a former Risk and Insurance Management Society president and director.
“So we started looking at the alternatives and that is where we brought in Swiss Re. They came up with a solution that would monitor wind speeds across all of the ZIP codes that our properties were in.
“Provided there was a sustained wind speed of 87.5mph in that area and we could provide out of pocket expenses, the policy would be triggered and pay out $10 million per loss.”
“The problem was that at the time we didn’t have the ability to secure coverage for every property, and we were already spending $25 million to $30 million on property insurance as it was.” — Scott Clark, recently retired risk and benefits officer, Miami-Dade County Public Schools
He added: “Over the last years, since there have been no significant windstorms, year after year we have made savings of 10 percent to 15 percent in the property marketplace through the no-claims bonus.
“On top of that, we have seen a 10 percent to 12 percent increase in the total insurable value of our properties, translating into an overall saving of 20 percent every year.”
“Scott is one of those amazing people who can jump from topic to topic,” said Kathy Silver, vice president at Insurance Consultants. “One minute he can discuss a complex health insurance problem, then walk into a property insurance meeting and not miss a beat. He consistently challenged himself and the people he worked with to consider new solutions and ideas.” &
Risk Management’s Sweet Spot
Mars Inc. is one of the biggest and most successful confectioners in the world.
But when Christopher de Wolfe, global director of risk management, took over the corporate risk management (CRM) group at the start of this year, risk management was often the last thing on people’s minds.
Sites would only reach out with questions or issues immediately before insurance deadlines, or in many cases, after the event. The result was more time and energy spent on getting people to comply with the basics.
de Wolfe, who was with Aon prior to moving to the U.S. with Mars risk management, realized that he needed to educate his company on the integral role of risk management.
“The CRM group had a lot to offer but was severely underutilized, which led to high insurance premiums, a high risk profile, and a significantly reduced resiliency and recovery capability,” he said.
Reflecting on how Mars as a business became a major success, de Wolfe decided that he needed to market and promote his own department in the same way.
Partnering with Lootok, a risk management consultancy firm, he developed a strategy to engage with the employees in a fun yet educational way.
He devised a 5- to 10-year plan, broken into 12- to 18-month strategies and individual project plans by mapping out all of the products and services that risk management offers.
He conducted a perception survey and drew up a program based on the ABCs of risk management.
“The ABCs allowed people to understand that risk management not only provides insurance, but it also ensures that the business continues,” said de Wolfe.
“Once this message was communicated, people became a lot more interested in what we do.”
de Wolfe used Mars’ marketing materials to develop a distinct brand for the risk management program.
“We created a logo, posters, stickers, catch phrases and other swag that created a fun, engaging, consistent, recognizable and highly visible face for the program,” he said. “By using games and activities instead of interviews and PowerPoint presentations, we were able to collect the data we needed, and keep people engaged and interested.”
“The cost of maintaining the program has decreased substantially per site, which allows us to focus on growing the program.” — Christopher de Wolfe, global director of risk management, Mars Inc.
The results of the program have been outstanding, said de Wolfe.
“The cost of maintaining the program has decreased substantially per site, which allows us to focus on growing the program.
“Crucially, though, associates now involve us much earlier in the risk management process and contact us to let us know their risks, request help managing impending events, and help strategize ways to improve overall resiliency at their sites.”
Sean Murphy, CEO and founder of Lootok, said of de Wolfe: “I’ve known Chris for 10 years and what differentiates him is that he treats his program as a business.
“He had a good program before but he wasn’t satisfied with it so he completely revamped it and is now reaping the benefits.” &