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
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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.

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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: Liberty Mutual Insurance

2015 General Liability Renewal Outlook

As the GL insurance cycle flattens, risk managers, brokers and insurers dig deeper to manage program costs.
By: | February 19, 2015 • 5 min read
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There was a time, not too long ago, when prices for general liability (GL) insurance would fluctuate significantly.

Prices would decrease as new markets offered additional capacity and wanted to gain a foothold by winning business with attractive rates. Conversely, prices could be driven higher by decreases in capacity — caused by either significant losses or departing markets.

This “insurance cycle” was driven mostly by market forces of supply and demand instead of the underlying cost of the risk. The result was unstable markets — challenging buyers, brokers and carriers.

However, as risk managers and their brokers work on 2015 renewals, they’ll undoubtedly recognize that prices are relatively stable. In fact, prices have been stable for the last several years in spite of many events and developments that might have caused fluctuations in the past.

Mark Moitoso discusses general liability pricing and the flattening of the insurance cycle.

Flattening the GL insurance cycle

Any discussion of today’s stable GL market has to start with data and analytics.

These powerful new capabilities offer deeper insight into trends and uncover new information about risks. As a result, buyers, brokers and insurers are increasingly mining data, monitoring trends and building in-house analytical staff.

“The increased focus on analytics is what’s kept pricing fairly stable in the casualty world,” said Mark Moitoso, executive vice president and general manager, National Accounts Casualty at Liberty Mutual Insurance.

With the increased use of analytics, all parties have a better understanding of trends and cost drivers. It’s made buyers, brokers and carriers much more sophisticated and helped pricing reflect actual risk and costs, rather than market cycle.

The stability of the GL market also reflects many new sources of capital that have entered the market over the past few years. In fact, today, there are roughly three times as many insurers competing for a GL risk than three years ago.

Unlike past fluctuations in capacity, this appears to be a fundamental shift in the competitive landscape.

SponsoredContent_LM“The current risk environment underscores the value of the insurer, broker and buyer getting together to figure out the exposures they have, and the best ways to manage them, through risk control, claims management and a strategic risk management program.”
— David Perez, executive vice president and general manager, Commercial Insurance Specialty, Liberty Mutual

Dynamic risks lurking

The proliferation of new insurance companies has not been matched by an influx of new underwriting talent.

The result is the potential dilution of existing talent, creating an opportunity for insurers and brokers with talent and expertise to add even greater value to buyers by helping them understand the new and continuing risks impacting GL.

And today’s business environment presents many of these risks:

  • Mass torts and class-action lawsuits: Understanding complex cases, exhausting subrogation opportunities, and wrangling with multiple plaintiffs to settle a case requires significant expertise and skill.
  • Medical cost inflation: A 2014 PricewaterhouseCoopers report predicts a medical cost inflation rate of 6.8 percent. That’s had an immediate impact in increasing loss costs per commercial auto claim and it will eventually extend to longer-tail casualty businesses like GL.
  • Legal costs: Hourly rates as well as award and settlement costs are all increasing.
  • Industry and geographic factors: A few examples include the energy sector struggling with growing auto losses and construction companies working in New York state contending with the antiquated New York Labor Law

David Perez outlines the risks general liability buyers and brokers currently face.

Managing GL costs in a flat market

While the flattening of the GL insurance cycle removes a key source of expense volatility for risk managers, emerging risks present many challenges.

With the stable market creating general price parity among insurers, it’s more important than ever to select underwriting partners based on their expertise, experience and claims handling record – in short, their ability to help better manage the total cost of GL.

And the key word is indeed “partners.”

“The current risk environment underscores the value of the insurer, broker and buyer getting together to figure out the exposures they have, and the best ways to manage them — through risk control, claims management and a strategic risk management program,” said David Perez, executive vice president and general manager, Commercial Insurance Specialty at Liberty Mutual.

While analytics and data are key drivers to the underwriting process, the complete picture of a company’s risk profile is never fully painted by numbers alone. This perspective is not universally understood and is a key differentiator between an experienced underwriter and a simple analyst.

“We have the ability to influence underwriting decisions based on experience with the customer, knowledge of that customer, and knowledge of how they handle their own risks — things that aren’t necessarily captured in the analytical environment,” said Moitoso.

Mark Moitoso suggests looking at GL spend like one would look at total cost of risk.

Several other factors are critical in choosing an insurance partner that can help manage the total cost of your GL program:

Clear, concise contracts: The policy contract language often determines the outcome of a GL case. Investing time up-front to strategically address risk transfer through contractual language can control GL claim costs.

“A lot of the efficacy we find in claims is driven by the clear intent that’s delivered by the policy,” said Perez.

Legal cost management: Two other key drivers of GL claim outcomes are settlement and trial. The best GL programs include sophisticated legal management approaches that aggressively contain legal costs while also maximizing success factors.

“Buyers and brokers must understand the value an insurer can provide in managing legal outcomes and spending,” noted Perez. “Explore if and how the insurer evaluates potential providers in light of the specific jurisdiction and injury; reviews legal bills; and offers data-driven tools that help negotiations by tracking the range of settlements for similar cases.”

David Perez on managing legal costs.

Specialized claims approach: Resolving claims quickly and fairly is best accomplished by knowledgeable professionals. Working with an insurer whose claims organization is comprised of professionals with deep expertise in specific industries or risk categories is vital.

SponsoredContent_LM“We have the ability to influence underwriting decisions based on experience with the customer, knowledge of that customer, and knowledge of how they handle their own risks, things that aren’t necessarily captured in the analytical environment.”
— Mark Moitoso, executive vice president and general manager, National Accounts Casualty, Liberty Mutual

“When a claim comes in the door, we assess the situation and determine whether it can be handled as a general claim, or whether it’s a complex case,” said Moitoso. “If it’s a complex case, we make sure it goes to the right professional who understands the industry segment and territory. Having that depth and ability to access so many points of expertise and institutional knowledge is a big differentiator for us.”

While the GL insurance market cycle appears to be flattening, basic risk management continues to be essential in managing total GL costs. Close partnership between buyer, broker and insurer is critical to identifying all the GL risks faced by a company and developing a strategic risk management program to effectively mitigate and manage them.

Additional insights



For more information about how Liberty Mutual can help you manage the total cost of your GL program, visit their website or contact your broker.

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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.




Liberty Mutual Insurance offers a wide range of insurance products and services, including general liability, property, commercial automobile, excess casualty, workers compensation and group benefits.
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