Risk Insider: Nir Kossovsky

Stop the Silliness

By: | February 19, 2015 • 2 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 nkossovsky@steelcityre.com.

While short of issuing a full-blown rant, I am frustrated by the ongoing subversion by marketing of the word “reputation” and its risks. Executives are putting companies at risk, government officials are embarrassing themselves and small businesses are suffering.

The silliness persists because “reputation” — a core driver of value created by expectations in the modern world of behavioral economics — has been hijacked by a handful of marketers to mean as much as a Facebook “Like.”

The Reputation at Risk survey by Deloitte late last year reported “76 percent of executives interviewed believed their company’s reputation to be better than average.” But the survey also reported “only 19 percent of those executives would give their company an “A” grade for their capabilities to manage reputation risk.”

Confounding reputation risk with social concepts such as likability and cultural acceptability is “doing it” wrong.

Those numbers worry me. It’s like saying 76 percent of restaurants believe they serve above average meals when only 19 percent score themselves highly on ensuring chef competence, food safety and quality of customer service.

Reputation is an expectation of behavior. Reputation risk is when behavior falls short of expectations. Reputation risk is created by setting expectations too high or by executing below par.

Execution is what companies do – deliver solutions safely, securely, sustainably and ethically.  If the majority of the 300 executives surveyed by Deloitte are deluded about how well they deliver solutions when they admit they could manage risk better, the firms’ market values are then behavioral economic bubbles.

There’s another worrisome side to this misunderstanding: The Department of Justice’s Operation Choke Point.  Since 2009, the DOJ and bank regulators have been forcing banks and other third-party payment processors to refuse services to companies that are deemed to pose “reputation risk.” The list of dubious industries is populated by enterprises that are generally legal.

Last year, start-up condom company Lovability learned that JPMorgan Chase would not handle its credit card transactions. Lovability’s founder, Tiffany Gaines, whose business discreetly sells condoms to women, said a bank representative told her that they would not work with her because doing so posed a “reputation risk” to the company.

This bizarre initiative, only now being challenged in Congress with the Financial Institution Customer Protection Act (H.R. 766), comes from a misunderstanding of orders from the Office of Comptroller of Currency (OCC) to manage financial risk due to “reputation risk.”

This is reputation risk in the behavioral economic sense — a risk of negative future expectations — which in the financial sector, means liquidity risk. It is what underpins contagion and leads to runs on banks and Lehman moments.

“In a market system based on trust,” Alan Greenspan said during the market meltdown precipitated by Lehman, “reputation has a significant economic value.”

Confounding reputation risk with social concepts such as likability and cultural acceptability is “doing it” wrong.

If awareness is the first step to redemption, then I take comfort in the Deloitte survey’s observation that 9 out of 10 executives are explicitly focusing on reputation risk as a key business challenge. But it is time to stop the silliness.

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Reputational Risk

Framing Reputation for Risk Managers

Implementation of controls, policies and processes helps reduce reputational risk.
By: | February 19, 2015 • 2 min read

News headlines today come peppered with organizations and what they have done wrong. Cyber security breaches. Product recalls. Corruption and scandal.

Reputations and brands — and in case of public companies, market caps — may be wrecked in a wave of Tweets.

In this context, the risk management community has turned its attention to reputational risk like never before.

For the first time in its 11-year history, the Risk and Insurance Management Society (RIMS)/Marsh Excellence in Risk Management Survey revealed that both risk professionals and other executives put reputational risk in their top-10 exposures list.

Another RIMS report advocates the use of a strategic risk management framework to tackle reputational risk.


The key benefit of such a framework is that it can allow organizations to leverage their reputation to both protect and create value, said report author Andrew Bent, a senior risk adviser with Suncor Energy Inc. and a member of RIMS Strategic Risk Management Development Council.

Take the example of a company whose competitor suffers a product recall. That recall could tarnish the entire industry, unless a company uses the opportunity to proclaim and demonstrate its better controls and strengthen its reputation as a trustworthy industry member.

Such a tactic also places risk managers in the center of reputational risk efforts.

“As risk managers, we often use a framework for managing our risks … but we also need to take into account a range of other topics such as governance, regulation, [and] public and investor relations as we’re managing the risk,” Bent said.

“We may not have the expertise or insight to fully understand these risks … so we need to make sure that we bring the right people to the table for those conversations,” he said.

The greatest cause of reputation risk, said Robert F. Hurley, professor and director of the Consortium for Trustworthy Organizations at Fordham University, is the “drift” of individuals, then whole organizations, toward the darker side of human nature in their everyday rules and practices.

“The real reputational risks are cases of deviance that have been rationalized and normalized,” he said.

“Seeing these and taking action requires leaders who can step out onto the balcony and see and feel what others do not see because they are trapped in their thinking.”

Matthew Brodsky is editor of Wharton Magazine. He can be reached at riskletters@lrp.com.
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Sponsored: Lexington Insurance

What Is Insurance Innovation?

When it comes to E&S insurance, innovation is best defined as equal parts creativity and speed.
By: | March 2, 2015 • 4 min read

SponsoredContent_LexingtonTruly innovative insurance solutions are delivered in real time, as the needs of businesses change and the nature of risk evolves.

Lexington Insurance exemplifies this approach to innovation. Creative products driven by speed to market are at the core of the insurer’s culture, reputation and strategic direction, according to Matthew Power, executive vice president and head of strategic development at Lexington, an AIG Company and the leading U.S.-based surplus lines insurer.

“The excess and surplus lines sector is in a growth mode due, in no small part, to the speed at which our insureds’ underlying business models are changing,” Power said. “Tomorrow’s winning companies are those being built upon true breakthrough innovation, with a strong focus on agility and speed to market.”

To boost its innovation potential, for example, Lexington has launched a new crowdsourcing strategy. The company’s “Innovation Boot Camps” bring people together from the U.S., Canada, Bermuda and London in a series of engagements focused on identifying potential waves of change and market needs on the coverage horizon.

“Employees work in teams to determine how insurance can play a vital role in increasing the success odds of new markets and customers,” Power said. “That means anticipating needs and quickly delivering programs to meet them.”

An example: Working in tandem with the AIG Science team – another collaboration focused on innovation – Lexington is looking to offer an advanced high-tech seating system in the truck cabs of some of its long-haul trucking customers. The goal is to reduce driver injury and fatigue-based accidents.

SponsoredContent_Lexington“Our professionals serving the healthcare market average more than twenty years of industry experience. That includes attorneys and clinicians combining in a defense-oriented claims approach and collaborating with insureds in this fast-moving market segment. At Lexington, our relentless focus on innovation enables us to take on the risk so our clients can take on the opportunities.”
— Matthew Power, Executive Vice President and Head of Regional Development, Lexington Insurance Company

Power explained that exciting growth areas such as robotics, nanotechnology and driverless cars, among others, require highly customized commercial insurance solutions that often can be delivered only by excess and surplus lines underwriters.

“Being non-admitted, our freedom of rate and form allows us to be nimble, and that’s very important to our clients,” he said. “We have an established track record of reacting quickly to trends and market needs.”

Lexington is a leading provider of personal lines coverage for the excess and surplus lines industry and, as Power explains, the company’s suite of product offerings has continued to evolve in the wake of changing customer needs. “Our personal lines team has developed a robust product offering that considers issues like sustainable building, energy efficiency, and cyber liability.”

Most recently the company launched Evacuation Response, a specialty coverage designed to reimburse Lexington personal lines customers for costs associated with government mandated evacuations. “These evacuation scenarios have becoming increasingly commonplace in the wake of recent extreme weather events, and this coverage protects insured families against the associated costs of transportation and temporary housing.

The company also has followed the emerging cap and trade legislation in California, which has created an active carbon trading market throughout the state. “Our new Carbon ODS product provides real property protection for sequestered ozone depleting substances, while our CarbonCover Design Confirm product insures those engineering firms actively verifying and valuing active trades.” Lexington has also begun to insure new Carbon Registries as they are established in markets across the country.

Lexington has also developed a number of new product offerings within the Healthcare space. The Affordable Care Act has brought an increased focus on the continuum of care and clinical patient safety. In response, Lexington has created special programs for a wide range of entities, as the fast-changing healthcare industry includes a range of specialized services, including home healthcare, imaging centers (X-ray, MRI, PET–CT scans), EMT/ambulances, medical laboratories, outpatient primary care/urgent care centers, ambulatory surgery centers and Medical rehabilitation facilities.

“The excess and surplus lines sector is in growth mode due, in no small part, to the speed at which our insureds’ underlying business models are changing,” Power said.

Apart from its coverage flexibility, Lexington offers this segment monthly webcasts, bi-monthly conference calls and newsletters on key risk issues and educational topics. It also provides on-site risk consultation (for qualifying accounts), access to RiskTool, Lexington’s web-based healthcare risk management and patient safety resource, and a technical staff consisting of more than 60 members dedicated solely to healthcare-related claims.

“Our professionals serving the healthcare market average more than twenty years of industry experience,” Power said. “That includes attorneys and clinicians combining in a defense-oriented claims approach and collaborating with insureds in this fast-moving market segment.”

Power concluded, “At Lexington, our relentless focus on innovation enables us to take on the risk so our clients can take on the opportunities.”

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

Lexington Insurance Company, an AIG Company, is the leading U.S.-based surplus lines insurer.
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