Risk Insider: Elizabeth Carmichael

Reputational Risk – What Is It? Can We Manage It?

By: | October 25, 2016 • 2 min read
Elizabeth Carmichael is president of Carmichael Associates LLC. She formerly was director of compliance and risk management for Five Colleges Inc. She can be reached at [email protected]

Reputational risk is a category unto itself in the enterprise risk management basket. Everyone knows what it means — it’s common sense, right?

Something bad happens and your company or institution gets trashed in the press or on social media. There could be some fallout; sometimes it happens immediately and sometimes the fallout takes years to emerge.

As risk managers, we may often feel there is nothing we can do to address it until it happens — after all, how can we predict what the public and media will do? But, the more important questions are, why does it happen and how can we prevent it?

I would like to posit the idea that most reputational risks arise when the behavior or actions of the company or institution (or their employees) is not aligned with either its stated values or what the public thinks its values ought to be.

The solution is therefore quite simple: Practice what you preach. Follow the rules and play fairly.

The greater the incongruence between what the organization says it will do vs. what happens, the greater the reputational risk and likely fallout.

If an organization consistently and completely aligns its actions with its stated or expected values, even a wrongful act by a rogue employee is mitigated when the organization can demonstrate that the act was unprecedented and the employee was truly a loose cannon.


If only it were as easy as it is simple. I’ll illustrate using an example from higher education.

The public and congress believe that universities should keep students safe and that they should fight sex discrimination. Most institutions have statements of non-discrimination based on gender and statements on harassment prevention.

In addition, the Higher Education Act, Title IX and its subsequent and related reenactments, revisions, regulations and guidance require that institutions not discriminate based on sex and stipulate how they must respond to reports of sexual assault or harassment.

Failure on the part of many institutions to do this has resulted in more than 280 investigations by regulators, lower admission applications for some institutions and increased regulation for the industry overall.

This often boils down to compliance. Baylor University has been in the news quite recently over this — their policies said that they would responsibly investigate and manage claims of sexual assault filed by students.

But when allegations involved star athletes, they backed down, prevented their Title IX coordinator from doing her job and protected the athletes instead of the victims. The scandal (reputational risk) has resulted in the ousting of coaches, athletes and even the president of the university, as well as multiple claims and litigation.

Root cause: the institution’s actions did not align with their stated policies and values.

The greater the incongruence between what the organization says it will do vs. what happens, the greater the reputational risk and likely fallout. Compliance gaps in organizations are the harbingers of reputational risk as well as compliance risk.

Risk managers need to be aware of these gaps and build them into the ERM process for the success and reputation of our organizations.

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Risk Insider: Nir Kossovsky

Wells Fargo, Reputation and the Wisdom of Crowds

By: | October 24, 2016 • 3 min read
Nir Kossovsky is the Chief Executive Officer of Steel City Re. He has been developing solutions for measuring, managing, monetizing, and transferring risks to intangible assets since 1997. He is also a published author, and can be reached at [email protected]

My firm relies on prediction markets to inform indices of reputation that provide a quantitative measure of governance, risk and compliance as perceived by stakeholders. We call them reputational value metrics.

In mid-2014, Wells Fargo’s metrics were getting notably more volatile, indicating that members of the crowds of Wells Fargo stakeholders, in their wisdom, were worried.


Between June and December 2014, Wells was losing in the courts in a number of mortgage-related matters, including additional lawsuits from home lending practices thought to have been settled in 2012; new suits for “equity stripping;” discrimination against pregnant applicants; federal insurance fraud and newly discovered compliance failures.

While publicly there was no mention of the underlying issue of the current reputation crisis, which stems from Wells Fargo’s aggressive cross-selling program, it is fair to speculate that many stakeholders were both experiencing and signaling discomfort with it.

Now, with the benefit of hindsight, there are three pieces of evidence pointing to the inevitability of this crisis.

Wells Fargo lost track of the financial importance (and therefore risk) of cross-selling, misunderstood reputation risk, and mismanaged risk management at the board level.

Disclosed in unusual detail in Wells Fargo’s 10Ks of 2013 and 2014–but not 2015-was the operational risk of…

…’cross-selling’ efforts to increase the number of products our customers buy from us …[which] is a key part of our growth strategy… [with the risk being that] we might not attain our goal of selling an average of eight products to each customer.

Wells Fargo thought reputation risk and adverse publicity could impair cross-selling. It did not appreciate that cross-selling could give rise to reputation risk, notwithstanding a scathing LA Times expose in December 2013.

The company’s blindness to the risk resulted from the distribution of risk oversight among board committees.

Wells Fargo lost track of the financial importance (and therefore risk) of cross-selling, misunderstood reputation risk, and mismanaged risk management at the board level.

At Wells Fargo, Reputation Risk is under the purview of the Corporate Responsibility Committee; Enterprise Risk is under a separate Risk Committee to whom the Chief Risk Officer is also attached; Ethics/Business Conduct Risk is under the Audit Committee, and Compensation Risk is under the purview of Human Resources Committee.

This means that the reputational crisis that emerged from Wells Fargo’s cross-selling strategy with inherent compensation risk, ethical risks and operational risks sprouted and blossomed under the watchful eyes of at least four separate board committees.

The tipping point came in early September 2016 in a public disclosure that the Consumer Financial Protection Bureau (CFPB), the Los Angeles City Attorney and the Office of the Comptroller of the Currency (OCC) fined the bank $185 million.

The regulators alleged that as the result of perverse incentives, unethical behaviors and ineffective operational oversight, more than 2 million bank accounts or credit cards were opened or applied for without customers’ knowledge or permission between May 2011 and July 2015.

The classical manifestations of a reputational crisis then materialized, as customers broke off relations, employees sued, customers sued, investors sued, the stock price fell at least 7 percent, executives lost their heads and the regulators piled on.

One wonders how many Wells Fargo board members are concerned about finding themselves testifying before one of the legislative body’s many oversight committees.

One way to communicate authentic rehabilitation is to share with its competitors its strategy for mitigating this “industry-wide” risk.

While damage to the personal reputations of John Stumpf and others may be permanent, companies have a way of recovering. Wells Fargo has acknowledged the error and within a week of the September reveal, terminated the cross-selling program.

The last and most critical steps are still to come. First, the company must streamline its risk oversight process to account for the interplay between operational risks, liquidity risks, and reputational risks.


To capture the benefits of improved governance, Wells Fargo then needs to communicate its changes to the many stakeholders that now view the bank with a jaundiced eye. One way to communicate authentic rehabilitation is to share with its competitors its strategy for mitigating this “industry-wide” risk.

Another way is to communicate to those who look for vulnerabilities in governance (read, activists) that third parties are attesting — dare I say warrantying — the new improved governance processes at Wells Fargo.

Unfortunately, odds are that Wells Fargo will follow a time-honored tradition of putting the cart before the horse by first engaging in an expensive communications campaign while hiring an expensive law firm to discover what went wrong.

Time will tell.

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Sponsored: Berkshire Hathaway Specialty Insurance

Why Marine Underwriters Should Master Modeling

Marine underwriters need better data, science and engineering to overcome modeling challenges.
By: | October 3, 2016 • 5 min read

Better understanding risk requires better exposure data and rigorous application of science and engineering. In addition, catastrophe models have grown in sophistication and become widely utilized by property insurers to assess the potential losses after a major event. Location level modeling also plays a role in helping both underwriters and buyers gain a better understanding of their exposure and sense of preparedness for the worst-case scenario. Yet, many underwriters in the marine sector don’t employ effective models.

“To improve underwriting and better serve customers, we have to ask ourselves if the knowledge around location level modeling is where it needs to be in the marine market space. We as an industry have progress to make,” said John Evans, Head of U.S. Marine, Berkshire Hathaway Specialty Insurance.

CAT Modeling Limitations

The primary reason marine underwriters forgo location level models is because marine risk often fluctuates, making it difficult to develop models that most accurately reflect a project or a location’s true exposure.

Take for example builder’s risk, an inland marine static risk whose value changes throughout the life of the project. The value of a building will increase as it nears completion, so its risk profile will evolve as work progresses. In property underwriting, sophisticated models are developed more easily because the values are fixed.

“If you know your building is worth $10 million today, you have a firm baseline to work with,” Evans said. The best way to effectively model builder’s risk, on the other hand, may be to take the worst-case scenario — or when the project is about 99 percent complete and at peak value (although this can overstate the catastrophe exposure early in the project’s lifecycle).

Warehouse storage also poses modeling challenges for similar reasons. For example, the value of stored goods can fluctuate substantially depending on the time of year. Toys and electronics shipped into the U.S. during August and September in preparation for the holiday season, for example, will decrease drastically in value come February and March. So do you model based on the average value or peak value?

“In order to produce useful models of these risks, underwriters need to ask additional questions and gather as much detail about the insured’s location and operations as possible,” Evans said. “That is necessary to determine when exposure is greatest and how large the impact of a catastrophe could be. Improved exposure data is critical.”

To assess warehouse legal liability exposure, this means finding out not only the fluctuations in the values, but what type of goods are being stored, how they’re being stored, whether the warehouse is built to local standards for wind, earthquake and flood, and whether or not the warehouse owner has implemented any other risk mitigation measures, such as alarm or sprinkler systems.

“Since most models treat all warehouses equally, even if a location doesn’t model well initially, specific measures taken to protect stored goods from damage could yield a substantially different expected loss, which then translates into a very different premium,” Evans said.

Market Impact

That extra information gathering requires additional time but the effort is worth it in the long run.

“Better understanding of an exposure is key to strong underwriting — and strong underwriting is key to longevity and stability in the marketplace,” Evans said.

“If a risk is not properly understood and priced, a customer can find themselves non-renewed after a catastrophe results in major losses — or be paying two or three times their original premium,” he said. Brokers have the job of educating clients about the long-term viability of their relationship with their carrier, and the value of thorough underwriting assessment.


The Model to Follow

So the question becomes: How can insurers begin to elevate location level modeling in the marine space? By taking a cue from their property counterparts and better understanding the exposure using better data, science and engineering.

For stored goods coverage, the process starts with an overview of each site’s risk based on location, the construction of the warehouse, and the type of contents stored. After analyzing a location, underwriters ascertain its average values and maximum values, which can be used to create a preliminary model. That model’s output may indicate where additional location specific information could fill in the blanks and produce a more site-specific model.

“We look at factors like the existence of a catastrophe plan, and the damage-ability of both the warehouse and the contents stored inside it,” Evans said. “This is where the expertise of our engineering team comes into play. They can get a much clearer idea of how certain structures and products will stand up to different forces.”

From there, engineers may develop a proprietary model that fits those specific details. The results may determine the exposure to be lower than originally believed — or buyers could potentially end up with higher pricing if the new model shows their risk to be greater. On the other hand, it may also alert the insured that higher limits may be required to better suit their true exposure to catastrophe losses.

Then when the worst does happen, insureds can rest assured that their carrier not only has the capacity to cover the loss, but the ability to both manage the volatility caused by the event and be in a position to offer reasonable terms when renewal rolls around.

For more information about Berkshire Hathaway Specialty Insurance’s Marine services, visit https://bhspecialty.com/us-products/us-marine/.

Berkshire Hathaway Specialty Insurance (www.bhspecialty.com) provides commercial property, casualty, healthcare professional liability, executive and professional lines, surety, travel, programs, medical stop loss and homeowners insurance. The actual and final terms of coverage for all product lines may vary. It underwrites on the paper of Berkshire Hathaway’s National Indemnity group of insurance companies, which hold financial strength ratings of A++ from AM Best and AA+ from Standard & Poor’s. Based in Boston, Berkshire Hathaway Specialty Insurance has offices in Atlanta, Boston, Chicago, Houston, Los Angeles, New York, San Francisco, San Ramon, Stevens Point, Auckland, Brisbane, Hong Kong, Melbourne, Singapore, Sydney and Toronto. For more information, contact [email protected].

The information contained herein is for general informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any product or service. Any description set forth herein does not include all policy terms, conditions and exclusions. Please refer to the actual policy for complete details of coverage and exclusions.



This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Berkshire Hathaway Specialty Insurance. The editorial staff of Risk & Insurance had no role in its preparation.

Berkshire Hathaway Specialty Insurance (www.bhspecialty.com) provides commercial property, casualty, healthcare professional liability, executive and professional lines, surety, travel, programs, medical stop loss and homeowners insurance.
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