Manage Expectations, Manage Reputation
The art of managing reputation risk really comes down to shaping the expectations of shareholders, customers, vendors, creditors and investors.
“Not an easy thing to do,” said Nir Kossovsky, chief executive officer, Steel City Re, speaking at the annual RIMS conference in San Diego on April 12.
“Managing expectations involves behavioral economics – shaping what people expect from you and then meeting those expectations.”
He said expectations typically revolve around six key areas: safety, ethics, quality, security, sustainability and innovation. Failing to meet any of those expectations creates vulnerability for a company, opening up an opportunity for shareholders or special interest activists to come after the board of directors as the culpable party.
Increasingly, directors and officers are the true casualties of reputation damage.
Dissatisfied customers or partners know that “the court of public opinion is much more effective than the court of law,” Kossovsky said, so they will bring allegations against the board and force a public response.
“Managing expectations involves behavioral economics – shaping what people expect from you and then meeting those expectations.” – Nir Kossovsky, chief executive officer, Steel City Re
The best way to mitigate reputation risk, then, is to proactively communicate the board’s awareness of a company’s exposures, and acknowledge its duties to deliver on expectations related to the six key areas.
“Communication is critical,” said Todd Marumoto, director of risk management, Mattel, Inc. “There needs to be some sense of a plan for how the board will respond to a reputation event.”
Without a quick response, the silence is filled by the white noise of unsubstantiated opinion, Kossovsky said. That weakens the board’s credibility.
“Facts are available without much of a down payment. Allegations brought against the board don’t necessarily have to be true and can’t always be validated.”
Conflicting expectations make reputation risk management even harder.
Customers expect, for example, near impossible standards of quality and customer service, while shareholders expect strong profit and growth, and creditors expect swift payment.
While many believe that marketing and press coverage can be the tool for the messaging needed to mold expectations through public perception, the most effective way to mitigate reputation risk is through enterprise risk management that strives for excellence, the speakers said.
In other words, expectations should be set by a company’s performance.
Kossovsky offered the example of BP, which claimed to be “beyond petroleum.”
Despite impressive initiatives to use cleaner energy, BP was still, in fact, heavily reliant on petroleum. The Deepwater Horizon spill of 2010 sparked so much anger because people expected BP to be above such environmentally dangerous accidents.
ExxonMobil, on the other hand, acknowledged to its shareholders that a spill was always a real threat, but demonstrated the steps it was taking to minimize the risk. Shareholders thus had more realistic expectations of the company and are harder to disappoint.
Presenting to the C-Suite
Risk managers can bring the importance of reputation risk to the C-suites’ attention by demonstrating its financial impact.
“Expenses could come from having to replace a vendor, from a government penalty, litigation and class action lawsuits, or having to implement a new management process,” Marumoto said.
Overall, costs associated with remediating a reputational event can be two to seven times higher than costs related to the operational failure that caused the reputation damage in the first place.
“With reputation risk, it’s not always about right or wrong, but about getting the right outcome to satisfy shareholders and customers.” — Todd Marumoto, director of risk management, Mattel, Inc.
“It affects every line item of the P&L,” Kossovsky said.
The impact on D&O effectiveness will also certainly grab senior management’s attention.
“A typical board member makes about $250,000 per year to sit on the board for a term usually of about three years, and he’s usually sitting on three different boards,” Kossovsky said.
“He’s looking at a personal loss of over $2 million” if a reputational hit leads to him being asked to step down from those boards.
According to Marumoto, risk managers can influence outcomes of a reputational event by working internally with investor relations and marketing to ensure the company is sending a consistent message, and to develop a coordinated response plan.
“Ultimately, you have to be responsible for all things that pass in front of you,” he said. “Partner with vendors you trust, be transparent in your efforts to mitigate risks, and develop relationships with government agencies.
“With reputation risk, it’s not always about right or wrong, but about getting the right outcome to satisfy shareholders and customers.”
Captives See Growth for Terrorism Risk
An advance look at the “2016 Marsh Captive Benchmark Review” revealed a substantial growth in the number of captives targeted to terrorism coverage.
In the last three years, nearly 40 captives by Marsh clients were created to cover risks excluded from conventional terrorism policies and/or to provide access to reinsurance to cover the potential gap under the Terrorism Risk Insurance Act, said Ellen Charnley, San Francisco-based managing director, captive solutions, during a RIMS luncheon session on April 12.
“That’s a big growth area,” she said.
In addition, more than 20 other captives were formed to address international terrorism risks, she said.
Typically excluded perils include nuclear, biological, chemical and radiological risks, as well as cyber terrorism, and the captives provide access to the government backstop.
Other non-traditional coverages that are seeing captive growth are medical stop loss, cyber, international employee benefits, political risk, supply chain and crime, she said.
“We see a continued growth in non-traditional coverages,” Charnley said.
Chris Lay, London-based president, Marsh captive solutions, said the brokerage is seeing “a lot of activity tailoring captive programs to address cyber risks.”
In addition to evolving cyber risks and terrorism, other top risks being addressed by captives were catastrophic earth/weather events, economic downturn and political unrest, Lay said.
The top industry sectors that form captives remain financial institutions; health care; auto/manufacturing; retail/wholesale; and communications, media and technology.
However, Charnley noted, if premium dollars were used to rank the industries, communications, media and technology companies would probably rank second, below financial institutions.
Top-ranked unique or emerging industries forming captives were construction; energy; real estate; education; and sports, entertainment and events, she said.
For construction, the increased number is probably the result of improved economic conditions, she said.
For education, it’s more likely the reason is to seek access to reinsurance programs, said Art Koritzinsky, managing director, captive solutions, in New York.
He said Marsh expects to see continued growth in the number of 831(b) small captives, which have increased by 35 percent.
“That’s where a lot of the growth [in the captive market] is,” Koritzinsky said.
In December, the IRS rules regulating 831(b) captives increased the limit on direct premium from $1.2 million to $2.2 million and removed the ability of such captives to be used for estate planning, among other changes.
As for predictions, Marsh anticipates increased growth of captives for international employee benefits; terrorism, small captives; non-traditional risk; and in emerging markets such as Latin America and Asia Pacific.
They also anticipate companies beginning to use cash surpluses in captives for sophisticated investment strategies.
Marsh manages about 1,250 captives worldwide, with about $42 billion in premium. About 1,000 captive owners participated in the benchmark survey. Final results will be released in May.
Commercial Auto Warning: Emerging Frequency and Severity Trends Threaten Policyholders
The slow but steady climb out of the Great Recession means businesses can finally transition out of survival mode and set their sights on growth and expansion.
The construction, retail and energy sectors in particular are enjoying an influx of business — but getting back on their feet doesn’t come free of challenges.
Increasingly, expensive commercial auto losses hamper the upward trend. From 2012 to 2015, auto loss costs increased a cumulative 20 percent, according to the Insurance Services Office.
“Since the recession ended, commercial auto losses have challenged businesses trying to grow,” said David Blessing, SVP and Chief Underwriting Officer for National Insurance Casualty at Liberty Mutual Insurance. “As the economy improves and businesses expand, it means there are more vehicles on the road covering more miles. That is pushing up the frequency of auto accidents.”
For companies with transportation exposure, costly auto losses can hinder continued growth. Buyers who partner closely with their insurance brokers and carriers to understand these risks – and the consultative support and tools available to manage them – are better positioned to protect their employees, fleets, and businesses.
Liberty Mutual’s David Blessing discusses key challenges in the commercial auto market.
“Since the recession ended, commercial auto losses have challenged businesses trying to grow. As the economy improves and businesses expand, it means there are more vehicles on the road covering more miles. That is pushing up the frequency of auto accidents.”
–David Blessing, SVP and Chief Underwriting Officer for National Insurance Casualty, Liberty Mutual Insurance
More Accidents, More Dollars
Rising claims costs typically stem from either increased frequency or severity — but in the case of commercial auto, it’s both. This presents risk managers with the unique challenge of blunting a double-edged sword.
Cumulative miles driven in February, 2016, were up 5.6 percent compared to February, 2015, Blessing said. Unfortunately, inexperienced drivers are at the helm for a good portion of those miles.
A severe shortage of experienced commercial drivers — nearing 50,000 by the end of 2015, according to the American Trucking Association — means a limited pool to choose from. Drivers completing unfamiliar routes or lacking practice behind the wheel translate into more accidents, but companies facing intense competition for experienced drivers with good driving records may be tempted to let risk management best practices slip, like proper driver screening and training.
Distracted driving, whether it’s as a result of using a phone, eating, or reading directions, is another factor contributing to the number of accidents on the road. Recent findings from the National Safety Council indicate that as much as 27% of crashes involved drivers talking or texting on cell phones.
The factors driving increased frequency in the commercial auto market.
In addition to increased frequency, a variety of other factors are driving up claim severity, resulting in higher payments for both bodily injury and property damage.
Treating those injured in a commercial auto accident is more expensive than ever as medical costs rise at a faster rate than the overall Consumer Price Index.
“Medical inflation continues to go up by about three percent, whereas the core CPI is closer to two percent,” Blessing said.
Changing physical medicine fee schedules in some states also drive up commercial auto claim costs. California, for example, increased the cost of physical medicine by 38 percent over the past two years and will increase it by a total of 64 percent by the end of 2017.
And then there is the cost of repairing and replacing damaged vehicles.
“There are a lot of new vehicles on the road, and those cost more to repair and replace,” Blessing said. “In the last few years, heavy truck sales have increased at double digit rates — 15 percent in 2014, followed by an additional 11 percent in 2015.”
The impact is seen in the industry-wide combined ratio for commercial auto coverage, which per Conning, increased from 103 in 2014 to 105 for 2015, and is forecast to grow to nearly 110 by 2018.
None of these trends show signs of slowing or reversing, especially as the advent of driverless technology introduces its own risks and makes new vehicles all the more valuable. Now is the time to reign in auto exposure, before the cost of claims balloons even further.
The factors driving up commercial auto claims severity.
Data Opens Window to Driver Behavior
To better manage the total cost of commercial auto insurance, Blessing believes risk management should focus on the driver, not just the vehicle. In this journey, fleet telematics data plays a key role, unlocking insight on the driver behavior that contributes to accidents.
“Roughly half of large fleets have telematics built into their trucks,” Blessing said. “Traditionally, they are used to improve business performance by managing maintenance and routing to better control fuel costs. But we see opportunity there to improve driver performance, and so do risk managers.”
Liberty Mutual’s Managing Vital Driver Performance tool helps clients parse through data provided by telematics vendors and apply it toward cultivating safer driving habits.
“Risk managers can get overwhelmed with all of the data coming out of telematics. They may not know how to set the right parameters, or they get too many alerts from the provider,” Blessing said.
“We can help take that data and turn it into a concrete plan of action the customer can use to build a better risk management program by monitoring driver behavior, identifying the root causes of poor driving performance and developing training and other approaches to improve performance.”
Actions risk managers can take to better manage commercial auto frequency and severity trends.
Rather than focusing on the vehicle, the Managing Vital Driver Performance tool focuses on the driver, looking for indicators of aggressive driving that may lead to accidents, such as speeding, sharp turns and hard or sudden braking.
The tool helps a risk manager see if drivers consistently exhibit any of these behaviors, and take actions to improve driving performance before an accident happens. Liberty’s risk control consultants can also interview drivers to drill deeper into the data and find out what causes those behaviors in the first place.
Sometimes patterns of unsafe driving reveal issues at the management level.
“Our behavior-based program is also for supervisors and managers, not just drivers,” Blessing said. “This is where we help them set the tone and expectations with their drivers.”
For example, if data analysis and interviews reveal that fatigue factors into poor driving performance, management can identify ways to address that fatigue, including changing assigned work levels and requirements. Are drivers expected to make too many deliveries in a single shift, or are they required to interact with dispatch while driving?
“Management support of safety is so important, and work levels and expectations should be realistic,” Blessing said.
A Consultative Approach
In addition to its Managing Vital Driver Performance tool, Liberty’s team of risk control consultants helps commercial auto policyholders establish screening criteria for new drivers, creating a “driver scorecard” to reflect a potential new hire’s driving record, any Motor Vehicle Reports, years of experience, and familiarity with the type of vehicle that a company uses.
“Our whole approach is consultative,” Blessing said. “We probe and listen and try to understand a client’s strengths and challenges, and then make recommendations to help them establish the best practices they need.”
“With our approach and tools, we do something no one else in the industry does, which is perform the root cause analysis to help prevent accidents, better protecting a commercial auto policyholder’s employees and bottom line.”
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Liberty Mutual Insurance. The editorial staff of Risk & Insurance had no role in its preparation.