Risk Insider: Nir Kossovsky

2015: Resolve to Reframe Reputation Risk

By: | January 9, 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.

Reputation risk is not going away. For the fifth consecutive year, managing reputation risk tops surveys of C-suite imperatives such as the recently published report from Deloitte Touche Tohmatsu Limited (DTTL) / Forbes Insights.

Even Warren Buffett cited it in his Dec. 19, 2014 letter to his top executives to remind them that the “top priority — trumping everything else, including profits — is that all of us continue to zealously guard Berkshire’s reputation.”

Few today would challenge the fact that managing reputation risk is paramount for a company’s long-term success.

Even skeptics now have a clear and compelling business case: For the median company, the upside measure of success is an expected additional 4.3 percent annual return on equity. The scoring, discussed further on, is the product of building value with both a strong defense and an effective offense.

Executed properly, reputational continuity yields stakeholders who will forgive a company for an operational failure and its one-time extraordinary costs.

Playing defense is fundamental to enterprise risk management. The heart of the strategy is operational risk control because reputational consequences often follow operational failures — especially in the areas of human behavior.

At high maturity levels, traditional ERM seeks to prevent adverse events or mitigate their consequences through such strategies as enterprise-wide risk awareness, scenario modeling, and technology-generated actionable intelligence.

But adverse events will happen. As Buffett noted in his December letter, it’s “inevitable … the chances of getting through the day without any bad behavior occurring is nil.”

So continuity management is also very important — not only operational continuity, but reputational continuity.

Executed properly, reputational continuity yields stakeholders who will forgive a company for an operational failure and its one-time extraordinary costs.

That is why Buffet has been saying for more than 25 years, “We can afford to lose money — even a lot of money. But we can’t afford to lose reputation — even a shred of reputation.”

Reputational continuity is a product of good governance. It manifests in strategy, resource allocation, and controls, which are all reflections of culture, mission and leadership. “Culture, more than rule books, determines how an organization behaves,” says Buffett.

On offense, taking the strategy to the stakeholders can create value. When stakeholders can appreciate improvements in governance, controls and risk management that upgrade their long-term expectations, equity values will rise.

The reputation value metrics we use at Steel City Re reflect this appreciation. The annual equity portfolios distilled from the S&P500 (RepuSPX) on the basis of our metrics have returned an excess of 9.5 percent per year on average (4.3 percent median).

The 12-year result as of Jan. 1, 2015 is a 367.12 percent return, which compares favorably with the S&P500’s 12-year return of 79.27 percent.

The increased equity value reflects both cost savings and revenue enhancements. Better reputations lead to stakeholder behaviors that create greater enterprise value through better terms from employees and vendors for services, and better terms for capital from creditors and equity investors.

Regulators are guided by law to be more lenient. For customers, better reputations create shorter sales cycles, larger unit volumes, and customer willingness to accept premium product pricing.

Resolve this year to manage reputation, not merely its risk, for success.

Read all of Nir Kossovsky’s Risk Insider contributions.

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Reputational Risk

Social Media: A Double-Edged Sword

Risk managers must manage social media’s risks while harnessing its speed and efficiency.
By: | December 10, 2014 • 2 min read
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Something as simple as a hashtag can launch an event onto a national stage in a matter of hours. For companies and organizations harnessing social media as a business tool, that kind of attention can go both ways.

In Target’s massive cyber breach last year, customers unleashed their fury on Facebook and Twitter, at a pace too overwhelming for a corporate response to counter. The company has slashed its profit outlook for 2014 as it struggles to regain consumer trust.

Earlier this year, the New York Police Department started the hashtag #myNYPD, encouraging people to tweet friendly photos of themselves with officers. The marketing ploy backfired, however, when people shared photos of police brutality instead.

The pendulum can swing the other way, like the ALS Ice Bucket Challenge. The Facebook campaign prompting users to donate to the ALS Association — or record themselves dumping a bucket of ice water over their heads — raised more than $100 million and boosted awareness of the debilitating disease, according to the association.

While Facebook, Twitter and LinkedIn are the most common channels used by companies, more social media forums are emerging, and executives and risk managers must consider how to deal with the reputational and legal risks of those new channels while taking advantage of the communication breadth and speed of social media.

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The top social media risks are brand reputation; disclosure of proprietary information; corporate identity theft; and legal, regulatory or compliance violations, according to a survey and report by audit and advisory firm Grant Thornton, “Social Media Risks and Rewards.”

Of the 111 executives surveyed, 38 percent said their companies use social media to raise brand awareness, while 27 percent use it for recruiting. Fifty-five percent said social media will be an important component of future corporate efforts.

However, only one-third had a defined social media policy, and only 36 percent provided social media training for employees.

“A number of companies are adopting social media policies,” said Melissa Krasnow, certified information privacy professional and corporate partner with Dorsey & Whitney LLP.

But the language within those policies must comply with state and national regulations. For example, states have different laws governing whether employers can demand log-in information for employees’ private accounts.

In addition, the National Labor Relations Board has been aggressive in scrutinizing employer social media policies that appear too restrictive of employees’ speech and the “right to come together to discuss work-related issues for the purpose of collective bargaining or other mutual aid or protection.”

Katie Siegel is a staff writer at Risk & Insurance®. She can be reached at ksiegel@lrp.com.
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Sponsored: Liberty International Underwriters

From Coast to Coast

Planning the Left Coast Lifter's complex voyage demands a specialized team of professionals.
By: | January 7, 2015 • 5 min read

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The 3,920-ton Left Coast Lifter, originally built by Fluor Construction to help build the new Bay Bridge in San Francisco, will be integral in rebuilding the Tappan Zee Bridge by 2018.

The Lifter and the Statue of Liberty

When he got the news, Scot Burford could see it as clearly as if somebody handed him an 8 by 11 color photograph.

On January 30,  the Left Coast Lifter, a massive crane originally built by Fluor Construction to help build the new Bay Bridge in San Francisco, steamed past the Statue of Liberty. Excited observers, who saw the crane entering New York Harbor, dubbed it the “The Hudson River Hoister,” honoring its new role in rebuilding the Tappan Zee Bridge over the Hudson River.

Powered by two stout-hearted tug boats, the Lauren Foss and the Iver Foss, it took more than five weeks for the huge crane to complete the 6,000 mile ocean journey from San Francisco to New York via the Panama Canal.

Scot took a deep breath and reflected on all the work needed to plan every aspect of the crane’s complicated journey.

A risk engineer at Liberty International Underwriters (LIU), Burford worked with a specialized team of marine insurance and risk management professionals which included John Phillips, LIU’s Hull Product Line Leader, Sean Dollahon, an LIU Marine underwriter, and Rick Falcinelli, LIU’s Marine Risk Engineering Manager, to complete a detailed analysis of the crane’s proposed route. Based on a multitude of factors, the LIU team confirmed the safety of the route, produced clear guidelines for the tug captains that included weather restrictions, predetermined ports of refuge in the case of bad weather as well as specifying the ballast conditions and rigging of tow gear on the tugs.

Of equal importance, the deep expertise and extensive experience of the LIU team ensured that the most knowledgeable local surveyors and tugboat captains with the best safety records were selected for the project. After all, the most careful of plans will only be as effective as the people who execute them.

The tremendous size of the Left Coast Lifter presented some unique challenges in preparing for its voyage.

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The original intention was to dry tow the crane by loading and securing it on a semi-submersible vessel. However, the lack of an American-flagged vessel that could accommodate the Left Coast Lifter created many logistical complexities and it was decided that the crane would be towed on its own barge.

At first, the LIU team was concerned since the barge was not intended for ocean travel and therefore lacked towing skegs and other structural components typically found on oceangoing barges.

But a detailed review of the plan with the client and contractors gave the LIU team confidence. In this instance, the sheer weight and size of the crane provided sufficient stability, and with the addition of a second tug on the barge’s stern, the LIU team, with its knowledge of barges and tugs, was confident the configuration was seaworthy and the barge would travel in a straight line. The team approved the plan and the crane began its successful voyage.

As impressive as the crane and its voyage were, it was just one piece in hundreds that needed to be underwritten and put in place for the Tappan Zee Bridge project to come off.

Time-Sensitive Quote

SponsoredContent_LIUThe rebuilding of the Tappan Zee Bridge, due to be completed in 2018, is the largest bridge construction project in the modern history of New York. The bridge is 3.1 miles long and will cost more than $3 billion to construct. The twin-span, cable-stayed bridge will be anchored to four mid-river towers.

When veteran contractors American Bridge, Fluor Corp., Granite Construction Northeast and Traylor Bros. formed a joint venture and won the contract to rebuild the Tappan Zee, one of the first things the consortium needed to do was find an insurance partner with the right coverages and technical expertise.

The Marsh broker, Ali Rizvi, Senior Vice President, working with the consortium, was well known to the LIU underwriting and engineering teams. In addition, Burford and the broker had worked on many projects in the past and had a strong relationship. These existing relationships were vital in facilitating efficient communication and data gathering, particularly given the scope and complexity of a project like the Tappan Zee.

And the scope of the project was indeed immense – more than 200 vessels, coming from all over the United States, would be moving construction equipment up the Hudson River.

An integrated team of LIU underwriters and risk engineers (including Burford, Phillips, Dollahon and Falcinelli) got to work evaluating the risk and the proper controls that the project required. Given the global scope of the project, the team’s ability to tap into their tight-knit global network of fellow LIU marine underwriters and engineers with deep industry relationships and expertise was invaluable.

In addition to the large number of vessels, the underwriting process was further complicated by many aspects of the project still being finalized.

“Because the consortium had just won this account, they were still working on contracts and contractors to finalize the deal and were unsure as to where most of the equipment and materials would be coming from,” Burford said.

Despite the massive size of the project and large number of stakeholders, LIU quickly turned around a quote involving three lines of marine coverage, Marine Liability, Project Cargo and Marine Hull & Machinery.

How could LIU produce such a complicated quote in a short period of time? It comes down to integrating risk engineers into the underwriting process, possessing deep industry experience on a global scale and having strong relationships that facilitate communication and trust.

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Photo Credit: New York State Thruway Authority

When completed in 2018, the Tappan Zee will be eight lanes, with four emergency pullover lanes. Commuters sailing across it in their sedans and SUVs might appreciate the view of the Hudson, but they might never grasp the complexity of insuring three marine lines, covering the movements of hundreds of marine vessels carrying very expensive cargo.

Not to mention ferrying a 3,920-ton crane from coast to coast without a hitch.

But that’s what insurance does, in its quiet profundity.

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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 International Underwriters. The editorial staff of Risk & Insurance had no role in its preparation.




LIU is part of the Global Specialty Division of Liberty Mutual Insurance.
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