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By DAN REYNOLDS, senior editor of Risk & Insurance®

Reputational risk has been that will-o'-the-wisp in insurance circles. It bites an AIG and the flits away again. Domino's Pizza gets rocked as a result of virulent YouTube videos (people butt-surfing on pizzas etc.), and then the wood demon disappears again into the professional collective consciousness.

It took a Tiger Woods to stamp the issue in stone. What happens when the biggest of the big guys, the Stanford man who can do no wrong, the man in the form-fitting red shirt who never loses, loses?

It's big time, as global risk management consultancy Accenture found out. About $200 million in advertising and other expenses were at stake, according to TNS Media Intelligence, as Accenture's one-man brand, for the time being at least, roasts in his own carnal flames.

When the scandal broke, DeWitt Stern, the New York-based insurance brokerage with specialties in advertising and entertainment, wasted no time. According to managing director LeConte Moore, the firm's directors had already voted to put together what it feels is the first reputational risk insurance product, with London markets as underwriters, months before Tiger's SUV hit that tree.

But when Tiger's brand went down, DeWitt Stern sprung into action. The company ramped up its communications efforts and announced the new product, and it soon found its employees quoted in the style pages of the Washington Post and on Fox News and other television outlets within a matter of days.

By the end of the first quarter of 2010, DeWitt Stern will be offering a product that will insure Fortune 1000 companies and their advertising partners for the crisis communications, public relations and other costs of a branding breakdown, plus any lost revenues that can be attributed to the branding debacle.

That's the tricky part, as Moore freely admits, and the place where the insured will have to do a very good job of telling and selling their story.

"We're describing it as a sudden and unexpected downturn in revenue, so it can't be because the economy is going down," Moore said.

But let's talk about other products and mechanisms, shall we?

TAMING TIGER

Nir Kossovsky >, the Pittsburgh-based CEO of Steel City Re, helms a risk management company that considers reputational and other intangible asset risk management its bread and butter.

< Kossovsky >'s scheme for taming a Tiger is fiendishly simple. He thinks it's a better mousetrap than the cash risk transfer product proposed by DeWitt Stern.

Going forward, when a company signs an agreement with a type-A star like Tiger, it should, in effect, make the star its primary insurer for reputational risk. You do something to harm my reputation, the company should say to its star, and I turn to you for payment.

But not to worry, < Kossovsky > said, the star gets a layer of reinsurance that is triggered if he has to make a payout. Now here's the clincher: The reinsurance agreement is much more specifically worded than the star's contract with his sponsor.

Do any of a list of prohibited things (drink too much, seek to become a second Casanova outside of your marriage, inject steroids) and you get no reinsurance, the agreement would say. Lie to your reinsurer and seek to collect on your claim anyway, and we find out that you did nasty things, and you go to jail for insurance fraud.

But you don't believe a star would agree to that, do you?

Keep in mind that insurance is the greatest and least acknowledged changer of behavior, said < Kossovsky >. Old Ben Franklin refused to insure wooden homes and people conformed. Johnson & Johnson suffered product tampering damage and became a leader in packaging security.

Athletes and other luminaries who want those big endorsement bucks will agree to these terms, or no money, honey.

"Once upon a time, insurers said, 'We are not insuring this building unless you put fire doors and sprinklers in it,' " < Kossovsky > said, and people conformed and now almost everybody has fire doors and sprinklers.

'When your reputation gets undercut because of something that has happened in the system and your system has been shown to be wanting, then you have to raise the bar for your entire system and say, 'We will now create the new standard,' and that is how your restore your reputation," said < Kossovsky.

For their part, they may have been whistling past the graveyard, but Accenture executives were almost blasé about any impact Tiger's disgrace had on their reputation in their first-quarter conference call with analysts on Dec. 17.

When pressed by a Citigroup analyst about the impact, Accenture Chairman and CEO William Green and his colleagues on the call laughed.

Then he said this: "Frankly we are very relaxed about this. It was sad and unfortunate, but we made a decision on behalf of our company," Green said, referring to the company's decision to drop Woods as an advertising partner.

"We have incredible material that you will start to see. We will start rethinking our strategy and how to raise our game and our message as we get into next year, but we don't see an economic impact of it at all. And frankly, we are incredibly excited about the opportunity to kind of rebrand and raise our profile in the market," Green said.

December 18, 2009

Copyright 2009© LRP Publications