Reputational Risk

Star-Studded Risk

Celebrity spokespersons can significantly elevate a brand, as long as they stay on their best behavior.
By: | October 1, 2016 • 6 min read

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.

Quantifying Losses

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.

Alan Norris, head of contingency, Talbot Underwriting

Alan Norris, head of contingency, Talbot Underwriting

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. &

Alex Wright is a U.K.-based business journalist, who previously was deputy business editor at The Royal Gazette in Bermuda. You can reach him at [email protected]
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Risk Management

Stopping Supply Chain Slavery

Governments are cracking down on the use of slave labor in supply chains. Companies risk their reputations if they don’t find the practice on their own and end it.
By: | October 1, 2016 • 7 min read
R10-1-16p54-56_11 Reputation.indd

Modern day slavery is alive and well.

And with large food companies such as Nestle, Archer Daniels Midland Co. and Cargill under legal fire for selling products that were allegedly made in part by slave labor (often unpaid child labor), it’s critical that all companies know the score throughout their ever-expanding global supply chains.


In the latest example of the U.S. government attempting to stop — or at least greatly reduce — modern slavery, U.S. Customs and Border Protection seized low-calorie sweetener stevia imported from China by PureCircle Ltd. The plant extract is used to sweeten Coca-Cola Life, Pepsi True and other soft drinks. The U.S. alleged that PureCircle sourced the Stevia rebaudiana plant (from which the sweetener is extracted) from a company accused of using forced labor, Reuters reported in early June.

It’s the third time the U.S. has cracked down using a new law that bans imports of products made by forced labor. The importer had three months to prove its innocence, according to Reuters.

There is growing pressure on risk managers to have a much more focused approach to supply chain management, said Andrew Boutros, a former U.S. attorney and partner in the Chicago office of Seyfarth Shaw.

“It really comes down to compliance professionals making judgment calls,” he said. “Compliance often is viewed as a cost center, so companies spend their dollars on the highest litigation risks. But as these new statutes become more enforced, there will be more attention paid to them.”

“It’s very hard to verify with confidence that [a product component] … made its way to the U.S. without slavery, corruption, bribery, falsification, etc.,”  – Andrew Boutros, partner, Seyfarth Shaw

Boutros said determining if there is a slave labor component in the supply chain is more often than not an incredibly complex endeavor.

Andrew Boutros, partner, Seyfarth Shaw

Andrew Boutros, partner, Seyfarth Shaw

“Imagine being able to know with a high degree of confidence if the beans in your coffee were collected using forced labor,” he said. “And that’s just coffee. What about parts in computers or tech gadgets? Or minerals and certain metals? Or the fishing industry?

“It’s very hard to verify with confidence that it made its way to the U.S. without slavery, corruption, bribery, falsification, etc.,” he said.

The scope of modern day slavery is devastating.

According to the Walk Free Foundation’s Global Slavery Index 2016, there are about 45.8 million people working as slaves globally, with 58 percent in India, China, Pakistan, Bangladesh and Uzbekistan. That number includes sex trafficking, which would not be part of supply chain data.

For example, as of 2014, the United Nations estimated 21 million slave labor victims worldwide. Also, a 2014 report from the UN’s International Labor Organization (ILO) estimates that $150 billion in illegal profits are made in the private economy each year through modern slavery.

Modern slavery and forced labor is not as openly or frequently mitigated as other regulatory supply chain risks — such as foreign corrupt practices or conflict minerals, according to Kris Hutton, head of product management at ACL, a Vancouver, B.C.-based global compliance and audit software firm and consultancy.

“Slavery is a much more diverse, complex issue to govern, monitor, detect and regulate.”  — Kris Hutton, head of product management, ACL

And that’s a primary reason why major Western nations like the U.S. and the United Kingdom only recently enacted anti-slavery legislation (2015 in the U.S.), unlike the Foreign Corrupt Practices Act (FCPA) enacted in 1977.

“Based on maturity of legislation alone, jurisdictional regulators, such as the Department of Justice in the U.S., are far more likely to issue punitive fines against abuses of FCPA and Dodd Frank than those of anti-slavery regulations,” Hutton said.

Kris Hutton, head of product management, ACL

Kris Hutton, head of product management, ACL

This focus will change in the future, due to pressure from external social forces — such as consumer protests.

Modern slavery is also much more difficult to detect compared to other crimes, he said.

Corruption involving an electronic trail of payment or expense, for example, can be monitored by the organization and the regulator. Modern slavery, however, has to do with the conditions surrounding the workforce, which often rely more on qualitative evidence such as interviews and observation than documentation.

“Slavery is a much more diverse, complex issue to govern, monitor, detect and regulate,” Hutton said.

Finally, modern slavery carries a more serious social stigma compared to either corruption or conflict minerals.  Many companies look the other way to avoid having to act on the knowledge.


Hutton expects this will start to change with more social awareness and increased regulatory enforcement; one thing that will drive organizational behavior is a combination of monetary and reputational damage that influences consumers and investors.

“Companies are responsible not only for their own integrity and ethics, but also for acts of their third-party suppliers,” said Scott Lane, CEO at The Red Flag Group, an independent corporate governance and compliance firm in Tempe, Ariz.

“A company that uses suppliers engaged in actions such as forced migrant or child labor, or human trafficking, could sustain significant fines and reputational damage,” he said.

Lane cited the example of Nestlé, which revealed late last year that poor workers from developing countries such as Thailand, Myanmar and Cambodia often ended up trapped in illegal and brutal working conditions as part of the company’s supply chain.

“A company that uses suppliers engaged in actions such as forced migrant or child labor, or human trafficking, could sustain significant fines and reputational damage.”  — Scott Lane, CEO, The Red Flag Group

He added that modern laws place an obligation on companies to assess whether or not it is happening, or could happen, in their supply chain. And if the answer is yes, is it being taken care of?

Finally, they need to report how they are doing in that process.

Scott Lane, CEO, The Red Flag Group

Scott Lane, CEO, The Red Flag Group

“These laws are creating an obligation on companies to do these things,” Lane said. “It’s less about the risk of fines and litigation and more about the reputational damage to the extent you don’t do anything once you find it.”

“It’s safe to say there is not a single company in the world within the Fortune 1000 that knowingly wants to violate these laws,” says Jeff Hunter, a partner in PricewaterhouseCoopers’ U.S. risk assurance services practice.

“With the expansiveness of today’s supply chain, there are much deeper ways to monitor and surveil third-party suppliers,” he said. “In the past, there was word of mouth, trust and the transparency of how they did business before. But that is changing, and the lead companies will have to look deeper into their supply chains.”

Some proactive steps

There are three critical areas that need to be addressed within organizations looking to reduce supply chain risks connected with slave labor, ACL’s Hutton said.

First, organizational leadership and the board need to make it part of their corporate mandate and be committed to educating, training and building awareness.

“One concrete way this is done is by including anti-slavery culture into the Code of Conduct — create policy and training for procurement professionals and enforce it,” he said.

Next is including prevention and detection controls in the supply chain vetting process, not just internally using vendor pre-approval, but by extending the obligations and awareness of the anti-slavery mandate to all vendors.

“Insist on supply chain traceability,” he said. “Make the key indicators of slavery highly visible — age and mobility of the workforce, fair wages (absent of fees or indentures) and working hours, and humane treatment to name a few.”

Point-scoring systems can be created where certain criteria would raise a red flag — such as vendors located in known conflict regions.

Finally, invest in auditing, monitoring and/or investigative measures — hold procurement and risk professionals accountable internally and hold vendors equally accountable.

Provide a whistleblower hotline so grievances can be reported.

As for data, Hutton said, the best angle is to create preventive controls that use a scoring model to indicate a higher risk for slavery. For instance, when a procurement professional wants to buy from a new vendor, the vendor has to be approved.

“If it is in a region that is in an emerging market or is a conflict region, the score should reflect that higher risk,” he said.

It’s still too early to tell if the new laws will have a positive impact on reducing the world’s slave labor market, Hutton said.


On the one hand, there is much more social awareness and pressure for ethically and socially responsible corporate behavior.

On the other, the global supply chain is complex and it’s not an easy problem to solve by just running a data analytic monitoring program.
“It’s going to take time and it’s going to take pressure from regulators with punitive enforcement around the globe,” he said. “From that perspective, it’s early in the transformation to socially responsible outsourcing and procurement.”

According to Seyfarth Shaw’s Boutros, risk managers should always look for one key indicator when it comes to supply chain purchasing.

“If the price is too good to be true, there probably is a reason for it,” he said. “It’s not necessarily always a red flag, but it certainly needs to be investigated.” &

Tom Starner is a freelance business writer and editor. He can be reached at [email protected]
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Sponsored: Lexington Insurance

Sparking Innovation and Motivating Millennials

What started off as a one-off project for Lexington Insurance evolved into an annual program that sparks innovative solutions and helps develop millennial talent.
By: | October 3, 2016 • 5 min read

Two trends in the insurance industry, if they continue, could compromise its vitality in today’s fast-paced, technology-driven business world: slow innovation and a scarcity of millennial talent.

The quests to develop innovative solutions and services and to recruit young people to the field have raised concerns in the industry for several years, causing some insurers to think about how they will stay viable in the future when senior-level managers begin to retire.

But Lexington Insurance Company, a member of AIG, may have found a way to spark innovation that also engages millennial minds.

Innovation Boot Camp started three years ago as a one-off project meant to identify young, high-potential employees, give them exposure to senior management and evaluate their teamwork and leadership capabilities.

“The original concept was fairly straightforward. We would bring together a group of about 30 high potential employees for some semblance of team project work and it would allow management to gauge and assess talent,” said Matt Power, Executive Vice President, Head of Strategic Development, Lexington Insurance.

Little did he know how well the program would not only generate a plethora of innovative ideas that would drive the company forward, but also reinvigorate younger employees.

Lexington_SponsoredContent“The boot camps would be focused on innovation, with the idea that if we ended up with a concept or product that we could commercialize, then the boot camp would have been effectively self-funded. When they came back at the end of the 12 weeks, we were absolutely shocked because they produced about half a dozen products that have since been commercialized and are in some phase of being rolled out.”
— Matt Power, Executive Vice President, Head of Strategic Development, Lexington Insurance

New Ideas Emerge

The inaugural Innovation Boot Camp began with a two-day kick off meeting for participants— consisting of six teams with five or six participants. Each team was tasked with developing a business plan, and began to connect virtually over the next 12 weeks. The plan would culminate in a presentation to a senior management judging panel at the program’s conclusion.

“The boot camps would be focused on innovation, with the idea that if we ended up with a concept or product that we could commercialize, then the boot camp would have been effectively self-funded,” Power said. “When they came back at the end of the 12 weeks, we were absolutely shocked because they produced about half a dozen products that have since been commercialized and are in some phase of being rolled out.”

Power credits the program’s success in part to the participants’ youth. They were tuned in to different trends and issues than their more experienced counterparts.

Cyberbullying, for example, was a problem that didn’t exist for Power and his contemporaries as they grew up, but was salient for millennials. Based on the presentation of one group, Lexington developed coverage on their personalized portfolio for exposures associated with cyberbullying.

Likewise, “they educated us on the emergence of the craft brewing industry and how rapidly it was growing in the U.S.,” Power said. “That led to us launching a whole suite of products for craft brewers.”

Another team brought forth the concept of how rapid sequencing laser photography could be used to create a three-dimensional picture of a construction work site. That would allow contractors or claims managers to virtually walk through the site at a given point in the construction process to identify deviations from the original blueprint plans.

The images could memorialize the building process down to the millimeter, to every screw and wire. If a loss emerges later on due to a construction defect, the 3D map would be a valuable investigation tool.

Innovation Boot Camp proved so successful that Lexington expanded it to other arms of AIG all over the world.

“Suddenly we started getting calls from London, Copenhagen, Brazil,” Power said. “We were doing these programs for our global casualty team, for our lead attorneys in New York, for our financial lines group, and so on. We recently embarked on the 16th iteration of this program in London, with additional programs in the works.

“It’s a journey that has evolved from trying different things and not being afraid to fail, not being afraid to try new ways of thinking about the business.”


Engaging Millennial Minds

In addition to generating new product ideas, Innovation Boot Camp also engages younger employees more fully by offering the opportunity to make meaningful contributions to the company through independent work that requires some creative thinking.

Past participants are often great crusaders for the program.

“A program like IBC is something rarely seen at a large corporate conglomerate, and really a concept for new age startup companies,” said Alyson R. Jacobs, Vice President, Broker and Client Engagement Leader in AIG’s Energy & Construction Industry Segment. “But we were given a chance to work with people of all different professional backgrounds, and that environment unearthed concepts and solutions that have made a significant impact in the lives of our insureds and their employees.”

The chance to do work that makes a difference, both for the success of their company as well as the clients its serves, is what attracts millennial employees to the program and motivates them to devote their best effort to the project.

“Millennials want to be able to share their ideas and make meaningful contributions at work,” Power said. “Innovation Boot Camp has evolved into the perfect forum for that.”

David Kennedy, Esq., Product Development Manager for Lexington Insurance and former Coach for two Innovation Boot Camps, said the program engenders an “entrepreneurial spirit of developing something new, of applying analytical rigor to emerging risks to create unique and timely solutions for our clients and the marketplace.”

Exposure to senior executives doesn’t hurt either.

“It provided a platform for me to not just interact with our Senior Executive leadership but present a concept that could potentially be adopted by our company in the future,” said Ryan Pitterson, Assistant Vice President, AIG. “It helps to build your internal network, elevate your profile in the company and connects you with our client base as well.”

At a time when recent college graduates choose employers based on how much opportunity they’ll be given to have meaningful input — as well as opportunities for advancement — projects like Innovation Boot Camp could be the answer to the insurance industry’s struggle to pull in millennials.

“We give them the time, space and resources to create something new,” Power said. “When employee engagement is done right, it inspires passion and creativity.”

As multiple arms of AIG adopt Innovation Boot Camp around the globe, both the quantity and quality of new ideas are bound to flourish.

“The bottom line is, many heads are greater than one, and AIG has figured out how to leverage this. AIG hears their employees’ voices and enables those ideas to take our company into the future,” Jacobs said.

To learn more about Lexington Insurance, visit


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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