With public anxiety about companies running high after crashes, contaminations, cyber attacks and leadership failures, insurance buyers and sellers agree on the need for insurance solutions to protect reputations.
But they are still figuring out what should be covered, when coverage should be triggered, where to set insurance limits and how to pay out benefits.
There’s no denying the cry of need for reputation risk insurance — worries about brand and reputation are the top threats keeping executives up at night, according to the most recent “Aon Risk Solutions Survey.” But the take-up rate on the handful of current stand-alone policies has been “almost immeasurably low,” said Randy Nornes, executive vice president, Aon Risk Solutions and an author of the survey.
The failure so far of stand-alone products to catch on doesn’t mean risk must be left uncovered, said Tracy Knippenburg Gillis, global practice leader, Marsh Risk Consulting’s reputational risk and crisis management practice.
“As carriers figure out the optimal combination, many existing policies — including directors and officers, umbrella, cyber and property — currently have endorsements available for crisis response,” she said.
Examples of companies currently offering stand-alone policies, include:
- Only losses (Munich Re and Steel City Re)
- Only crisis and/or communications management (Zurich and Lloyd’s)
- Both, but with relatively low limits (AIG)
The policies that cover only crisis management and communications are a placeholder while the industry develops a more complete solution, said Ty Sagalow, chief executive officer and founder of Innovation Insurance Group and a 30-year C-suite alumnus of AIG General Insurance and Zurich North America. “Nobody thinks crisis management products that pay a couple hundred thousand are the answer, but where there’s a need, a solution will follow.”
Chief among the challenges for stand-alone policies that cover losses, Nornes said, is quantifying potential and actual losses. Another is that reputation damage itself is the result of other risks, which divert companies’ attention from reputational damage to the issues that drive them.
The issues most driving them are ethics and integrity; security, both physical and cyber breaches; product and service risks (such as those related to safety, health and the environment); and third-party relationships, with companies increasingly held accountable for the actions of their suppliers and vendors, according to Deloitte’s “2014 Global Survey on Reputation Risk.”
Working the Numbers
Quantification of reputational risk is “an inexact science,” reported a 2013 ACE Group reputation study, subject to vagaries stemming from an organization’s pre-crisis reputation, its response to the crisis, and how quickly it reassured stakeholders that the underlying problems had been addressed.
“These subtleties mean that quantification of reputational risk will inevitably rely on a number of assumptions, and that could generate a false sense of precision, leading companies to rely on estimations that may ultimately turn out to be wide of the mark,” it said.
Hart Brown, vice president, organizational resilience, HUB International, agreed that a mature insurance solution is around the corner.
Its development, he said, is inhibited by still-developing data analysis and predictive modeling tools, but the technology is “getting closer” to supplying a solution that will give actuaries more precise projected losses from reputation-damaging events.
Identifying possible risks starts with common sense — Emily Freeman, risk management, cyber and professional liability specialist, Lockton Cos.
Some industry players believe the solution is already at hand. Nir Kossovsky, co-founder and chief executive officer, Steel City Re, built his company, and his company’s reputation, on those very data analysis and predictive modeling tools.
Steel City Re, which provides reputation assurance solutions, measures the implied reputational values of 7,500 companies every week using metrics, many of which predict what will appear on profit and loss statements: revenue, employee expenses, credit costs, supplier costs, and fines and penalties associated with regulatory action.
Value also manifests in shareholder actions, merger and acquisition scenarios and equity investor optimism.
When stakeholders are disappointed in an organization, Kossovsky said, they jump ship. Customers leave, price points fall, suppliers charge more, credit is withdrawn, employees disengage and regulations are imposed. Typically, those consequences can equal two to seven times the cost of the original operations failure.
For example, Penn State University acknowledged a financial impact of $171.5 million two years after the 2011 Jerry Sandusky scandal, in which the former assistant football coach was convicted of assaulting young boys. That may not include such items as lost research grants and decreased out-of-state applications, which could push the bill higher.
The total number, Kossovsky said, could be derived from “very big data” — Penn State’s average resource allocations over the years compared to other institutions.
“Then you ask, ‘After the Sandusky scandal, did Penn State’s behavior relative to the average or control group change substantially?’ If it did, you could reasonably argue that the change reflects the Sandusky event.”
The scandal prompted an FBI investigation, shook up the university’s top leadership and resulted in a post-season ban of the football team. Headlines called out “Penn State” and “child sex abuse” in the same phrase.
But in fiscal year 2011-2012, the school received donations of $208.7 million — the second-highest annual amount in its history — according to the university.
The reason, Kossovsky said, was the institution’s reputation resilience. While out-of-state stakeholders might send their children to other storied universities until the incident faded from memory, Pennsylvania residents and fervently loyal alumni were willing to approach the indiscretion as an anomaly and move on.
Of course, most organizations lack Penn State’s mythology, which produced its reputation resilience.
“It doesn’t matter if it’s a data breach or product recall. We can come to a good approximation of what it will cost.” — Randy Nornes, executive vice president, Aon Risk Solutions
For others, quantifying losses is a “math problem” requiring a decision tree based on a series of questions about the event, Nornes said.
“It doesn’t matter if it’s a data breach or product recall. We can come to a good approximation of what it will cost.”
First is the magnitude of the event. Was it widely reported? Did litigation or liabilities follow? Was it a data breach that disclosed personal information? How will it affect future sales? Then there are subcategories. Was it a safety event? What kind?
Stop the Bleeding
A company’s response to a crisis — the purview of crisis management and communications insurance coverage — profoundly affects losses.
“A mismanaged crisis response will bring down a company faster than anything else,” said Mike Swenson, president, Crossroads, a public relations and crisis communications management firm that represents numerous food manufacturers.
In the age of Twitter and Facebook, that requires a lightning-fast response, which in turn means having a well-practiced crisis plan and wholehearted buy-in from the C-suite and the board of directors.
“There are no longer any news cycles,” Swenson said. “After an event, you have no planning time with social media. If something goes wrong, you have minutes, not hours, to respond.”
To be effective, he said, the plan must:
- Identify the team that will leap into action in a crisis.
- Identify all the imaginable and unimaginable risks, and all possible variations facing the company.
- Map a response to each crisis.
- Develop key messages consisting of three to five talking points for each crisis.
Some carriers align their policies with a selected panel of agencies, vetted and retained for their experience, reputation, cost, service package, geographical scope and industry expertise, said Emily Freeman, risk management, cyber and professional liability specialist, Lockton Cos. Carriers may consider vetting and pre-approving a client’s own external PR or crisis management firm.
AIG’s ReputationGuard is one of the products that uses a panel of crisis management and communications agencies.
Typical of its peer products, coverage responds to extraordinary events, not day-to-day business operations, such as a crime by an executive or on the company’s premises, said Jeanmarie Giordano, chief underwriting officer, professional liability, AIG.
Atypically, coverage is triggered when the insured contacts the agency either to prepare a response to a still-hypothetical threat or to an actual one that may go public. The firm helps the company respond through social media, publicity, public appearances and image monitoring.
Plan for the Worst
Identifying possible risks starts with common sense, Freeman said. “If the company has exposure to children, it needs to think about personal safety. If it offers public facilities, it needs to think about violence. If it’s involved in transportation, it needs to think about accidents.”
A lot of tangential issues emerge in the process, said Aon’s Nornes, such as climate change. A company might ask, ‘Are we good environmental stewards?’
“You can make a pretty good list of risks,” he said. “The question is, are you running exercises and drills around situations you thought about? Not every company does the second piece.”
Eerily, he said, when Aon mapped out risk scenarios by industry in 1999, its aviation category contemplated two 747s flying into the World Trade Center.
The ACE study advises companies to listen, engaging in “more frequent dialogue with stakeholders to understand their views and monitoring the external environment more systematically to identify the emerging reputational threats that put their relationships at risk.”
Commitment starts at the top. Boards of directors should take time at board meetings to discuss customer satisfaction, brand identity, customer loyalty and elasticity measures.
This organizational soul-searching makes companies “better firms and better prepared” for crises, said Nornes, because it “translates to changes in both process and traditional insurance related to perils that drive reputational risk.”
Publicity about poor customer service or some mishap can be repeated multiple times over social media. “There’s a high value in thinking the response through,” he said.
A crisis response plan can shake a company out of the complacency that can leave exposures hiding in plain sight.
For example, Freeman said, “A company may have excellent cyber security and so neglect to put a crisis plan in place for a data breach even though it collects sensitive customer information and processes their credit cards.”
A thorough examination of risks and responses would catch that kind of exposure.
Scenario planning also picks up the slack left by failing attention spans, which — for people who use multiple digital devices — are now shorter than that of a goldfish, according to a recent Microsoft study.
“Who can actually forget a school shooting or an oil spill that kills 11 people?” said Leslie Gaines-Ross, chief reputation strategist, Weber Shandwick, which is on several carriers’ panels of crisis communications experts.
But people move on to the next threat. For example, Gaines-Ross said, privacy was the top threat on executives’ minds last year; this year it’s reputation risk, but privacy threats haven’t gone away, especially in the minds of miscreants.
A well-thought-out response can turn a bad story into a good one, said Swenson of Crossroads.
For example, he recalled, when the story of horse DNA in some of Taco Bell’s European locations hit the Internet, the result of a supply chain failure, the restaurant chain used the bad publicity to drive people to its website, which staunchly defended the purity of its American product.
“They created viral marketing to turn a bad thing into a good thing. It works both ways. You have to be prepared for an adverse event.”
A Bitter Pill
In February, New York Attorney General Eric T. Schneiderman asked GNC, Target, Walmart, and Walgreens to stop selling a variety of store-brand nutritional supplements after DNA tests indicated that only 21 percent of the products contained the plant species listed on the labels, and more than a third contained plant species not on the labels.
Now, a multistate coalition of attorneys general pursuing an expanded probe of the nutritional supplement industry is asking Congress to launch a comprehensive inquiry and to consider a more robust oversight role for the Food and Drug Administration (FDA).
The Council for Responsible Nutrition (CRN), a supplement industry trade group, is questioning the validity of the New York attorney general’s DNA tests.
CRN says the tests have been “roundly criticized by botanical scientists who question whether DNA barcoding technology is an appropriate or validated test for determining the presence of herbal ingredients in finished botanical products.”
According to CRN, DNA can be damaged or removed during the manufacturing process. And since DNA barcoding does not indicate the amounts of ingredients found in the products, any contaminants found may be within “well-established legal thresholds that allow for trace amounts of some ingredients.”
VIDEO: CBS reports on the claims by the New York attorney general that some store brand supplements could “significantly endanger” consumers.
Jim Walters, managing director of Aon’s life sciences industry practice group, said the controversy is “a lot to do about nothing.”
But more than a dozen lawsuits have already been filed in connection with Schneiderman’s findings.
The most immediate exposure could be product liability if there is evidence of bodily harm — for instance, an allergic reaction to one of the unlabeled ingredients.
Phil Walls, chief clinical and compliance officer at myMatrixx, thinks such liability would be relatively narrow and potentially hard to prove.
“The repercussions would be proportional to the harm done. So if the product caused death, that’s going to be severe. But if it simply didn’t do what it was supposed to do, then I would think that the class action would be much smaller,” Walls said.
Walters agreed that any litigation would likely focus on bodily injury.
“In order for their product liability carriers to have a claim, there needs to be bodily injury, there needs to be a problem that’s not just something like they wouldn’t have bought it if they had known this and they seek reimbursement. That’s outside the scope of insurance,” Walters said.
“Think of the billions of dollars a year spent on supplements for people trying to drive better health results.” — Mark Ware, senior vice president and managing director, technology and life sciences industry practice, IMA Financial Group
Others, including Mark Ware, senior vice president and managing director of the technology and life sciences industry practice at IMA Financial Group, said allegations of harm could focus on health benefits denied to consumers who took a product that was missing the labeled active ingredient.
“Think of the billions of dollars a year spent on supplements for people trying to drive better health results.
“If they’re not driving those health results and they feel they’ve been injured, there’s going to be people banging on the door claiming all types of bodily injury because they haven’t been getting the benefits of the … supplements that have been touted as a benefit to them,” Ware said.
Ware sees broader liability issues, as well.
“This is going to trigger more than just potential product liability claims,” he said.
Companies that are publicly traded could see shareholder values impacted, potentially affecting directors and officers coverage, he said. There could also be allegations of false advertisement that could impact general liability policies.
“There are a lot of ways these claims could come about,” Ware said.
The manufacturers would likely be primary targets, but retailers may be exposed as well.
According to Ware, retailers are generally contractually indemnified and held harmless in the event of any claim or litigation due to a fault in a product.
But he pointed out, “As a retailer selling that product in your store, you will still have defense costs and could incur indemnification if [these manufacturers] don’t have the wherewithal to withstand the kind of class action suits that are coming their way.”
If the manufacturers are overseas, that may also make the retailers more attractive to plaintiff’s attorneys.
Either way, the party ultimately on the hook may be the manufacturer’s or retailer’s insurer. If the labeling discrepancies were due to outright fraud, as opposed to human error or equipment failure, that would trigger exclusions to coverage.
But such fraud may not be easy to prove.
“A court of law would have to judge that there was truly a fraudulent act and that they did it intentionally,” said Ware.
“Until fraud is proven, I don’t think these carriers are going to be able to walk away from it.”
“In any major litigation, carriers will point to exclusions to reserve their rights. So could you envision a situation where someone is reserving their right based on that? Yes. But I think that’s a stretch and I think they would have a hard time upholding that exclusion.”
And litigation could be quite costly.
“There’s a lot of ways these claims could come about, but I think in order to prove this, it’s going to take a little bit of time and a lot of litigation costs,” Ware said.
“I would imagine that the number of expert witnesses that are going be called in to testify for both sides would be lengthy, and it is simply a matter of who has the best experts. It’s just not an easy question to answer,” said myMatrixx’s Walls.
Ironically, if it comes down to a battle of expert testimony, the extensive resources that make the retail chains attractive targets for litigation would make them particularly formidable legal opponents as well.
The largest impact of the controversy could have to do with consumer perceptions of individual brands and the industry as a whole.
Walls, a former retail pharmacist, noted that, “If the company has a good reputation, you stock their products. If they don’t, you avoid them.
“People would always ask me the same question: ‘Which brand of supplements should I buy?’ And it always came down to nothing more than trust,” Walls said.
Even if retailers find different manufacturers for their store brands, any loss of consumer trust would likely be directed at the store-brand name on the front of the bottle rather than the manufacturer listed on the back.
GNC has already moved to mitigate any loss of trust by agreeing to implement a new national testing regimen that exceeds current FDA requirements — and uses some of the same testing methods criticized by CRN.
“People would always ask me the same question: ‘Which brand of supplements should I buy?’ And it always came down to nothing more than trust.” — Phil Walls, chief clinical and compliance officer, myMatrixx
Its agreement with the New York attorney general’s office stipulates that “GNC will perform DNA barcoding on the ‘active’ plant ingredients used in its products [and] implement testing for contamination with allergens.”
“It puts them in a better defensive position,” Ware said, “unless they don’t follow through with their own guidelines.”
Without that follow-through, the move could be a double edged sword.
“If they had had [a testing regimen] in place and this had still happened, I would think that would increase liability,” said Walls.
The controversy may also affect the supplement industry’s regulatory framework, largely defined by the Dietary Supplement Health and Education Act of 1994 and Good Manufacturing Practices established by the FDA in 2007.
Some, like Walls, think current oversight is too lax.
“With supplements, there are no regulations at the manufacturer level, no regulations at the distributor level, no regulations at the retail level.
“Only at the point of the consumer do the regulations come into play. … The only restriction on supplement manufacturers is that they cannot make false claims, and no one knows if they have made false claims until that product hits the market,” he said.
And while “false claims” might refer to claims of benefit or efficacy, they “could also refer to what the products actually are, and could trigger the FDA’s involvement.”
“The regulatory oversight is, I think, stronger than what common knowledge in the consumer world knows. FDA is strongly regulating.”
But, he added, most supplement manufacturers “believe very strongly in their reputations and their quality of manufacturing and ingredients, so to some degree I think many would welcome additional oversight.”
As for any negative impact on those insuring the supplement industry, Walters is unconcerned.
“We believe adamantly that this should not affect rates, pricing or availability of coverage.
“This is something that should not be a big issue for the insurance underwriting community that underwrites this sort of business.”
Specialty Drugs Show No Signs of Slowing Down
A decade ago, high-cost specialty drugs were commonly referred to as “injectable drugs” and were used to treat conditions not typically covered in workers’ compensation, such as cancer, rheumatoid arthritis and multiple sclerosis.
“Today, however, new specialty drugs are emerging that will be used to treat other chronic and inflammatory conditions,” said Joe Boures, president and CEO of Healthcare Solutions, an Optum company providing specialized pharmacy benefit management services to the workers’ compensation market.
“Payers in the workers’ comp market are just beginning to feel the cost impact of greater utilization of these drugs, which come with expensive price tags.”
Specialty drugs are often manufactured using biologic rather than chemical methods, and they are no longer just administered by injections. New specialty drugs can also be inhaled or taken orally, likely contributing to the rise in their utilization.
“There isn’t a standard definition of specialty drugs, but they are generally defined as being complex to manufacture, costly, require specialty handling and distribution, and they difficult for patients to take without ongoing clinical support or may require administration by a health care provider,” said Boures.
In 2014, more than a quarter of all new therapies that the FDA approved were through its biologics division. Biologics, and similar therapies, are representative of a future trend in prescription drug spend.
“As the fastest growing costs in health care today, specialty drugs have the potential to change the way prescription benefits are provided in the future,” said Jim Andrews, executive vice president of pharmacy for Healthcare Solutions.
Workers’ Compensation payers may not recognize how specialty drugs are affecting their drug spend.
Specialty drugs like Enbrel®, Humira® and Synvisc® can be processed in conjunction with other medical procedures and, therefore, not recognized by payers as a pharmacy expense.
This leaves payers with little visibility into the costs of these medications within their book of business and a lack of tools to control these costs.
Due to the high costs of specialty medications, special due diligence should be utilized when claimants receive these medications, up to and including utilization review, said Andrews.
“Healthcare Solutions recommends that claimants using specialty drugs are monitored for proper medication handling and that the medication is administered appropriately, as well as monitoring the claimant to determine whether the medication is having its desired results and if there are any side effects,” he said.
“At $1,000 per pill for some of these specialty medications, making sure a claimant can tolerate the side effects becomes vital to making sure the claimant achieves the desired outcomes.”
Hepatitis C drugs have made their way to the workers’ compensation market, largely through coverage of healthcare workers, who have exposure to the disease.
“Traditional drug treatments that began in the 1990’s had a success rate of 6% and costs ranging from $1,800 to over $88,000,” said Andrews.
“The new Hepatitis C specialty medications have a treatment success rate of 94-100%, but cost between $90,000 and $226,000.”
Although the new treatments include higher drug costs, the payer’s overall medical costs may actually decrease if the Hep C patient would have required a liver transplant as part of the course of treatment without the drugs.
While the release of new Hepatitis C medications in 2014 demonstrated the potential impact specialty medications can have on workers’ compensation payers, there are some specialty medications under development that target more common conditions in workers’ compensation.
Pfizer Inc. and Eli Lilly and Company are currently developing tanezumab, a new, non-narcotic medication to treat chronic pain, which is common in workers’ compensation claims.
Tanezumab has demonstrated benefits of reducing pain in clinical trials and may provide non-addictive pain relief to claimants in the future. This may change how pain management is treated in the future.
Healthcare Solutions has a specialty medication program that provides payers discounted rates and management oversight of claimants receiving specialty medications.
Through the paper bill process, Healthcare Solutions aids payers in identifying specialty drugs and works with adjusters and physicians to move claimants into the specialty network.
A central feature of the program is that claimants are assigned to a clinical pharmacist or a registered nurse with specialty pharmacy training for consistent care with one-on-one consultations and ongoing case management.
The program provides patients with education and counseling, guidance on symptoms related to their medical conditions and drug side effects, proactive intervention for medication non-adherence, and prospective refill reminder and follow-up calls.
“The goal is to improve patient outcomes and reduce total costs of care,” said Boures.