Using data to quantify reputational risk is the way forward: RepTrak

Today about 85 percent of a company’s market value is made up of intangible assets. One of these is reputation. A reputation-damaging event can be catastrophic for a company’s value, and there is clearly an appetite for an insurance product to address this risk.

“The credit rating agencies are including reputation in their assessment of companies, but today it is subjective.”

However, the insurance industry has struggled to bring a product to market, not least because of the challenge of measuring reputation and agreeing on a trigger that would prompt the insurance policy to pay out.

Another key challenge is finding a way to ensure the cover pays out quickly enough for the company to tackle the problem.

The RepTrak Company, a US-based reputation data and intelligence company, is working towards a solution. The RepTrak Program is the only cloud-based business intelligence platform to provide companies with actionable insights about their reputations, brands, and online media presences. Its methods include conducting detailed customer surveys to gauge public perception of each company, the data from which is broken down into seven measurable drivers.

Finding a solution
Every year The RepTrak Company rates more than 5,000 companies in 60 countries and has more than a million reputation data points in its database. It has been working with UK and US risk management associations Airmic and RIMS on a white paper, to be released at the Airmic conference on September 22 to 24, that explores the challenges risk managers face in bringing reputational risk into their risk management process. It also outlines a way forward.

“We got together with Airmic and RIMS about three years ago and decided to find out what the problems are,” says Kasper Ulf Nielsen, chief strategy officer for The RepTrak Company.

“Everyone agrees that reputation is important—the risk communities have put it as a top three concern for last five years—so we decided to carry out a global survey of risk leaders, the results of which will be published at the Airmic event.

“The expectation is that risk professionals can find a way to quantify this risk and to bring reputation into their enterprise risk management process.”

The survey revealed the five issues that are holding risk managers back. The first of these is an unclear definition of reputation. This lack of clarity makes reputation impossible to quantify.

The second point is a lack of consensus and clarity around the definition of reputational risk. “We believe it is consequential: there is a potential reputational impact from every event,” says Ulf Nielsen.

The third challenge is how, and which data, to access on how a potential scenario would impact a company’s business and estimate how much loss this would translate into.

“Many companies today are using a very basic measure, asking: if this were to happen, how much media coverage would it get? However, media coverage, although important, does not equal reputation,” says Ulf Nielsen.

The fourth challenge is the link—or lack of one—between strategic risk management, operational risk management and tactical risk management.
“If there is no framework for linking those three you are not able to manage reputational risk,” says Ulf Nielsen.

The fifth and final challenge is deciding who is responsible for reputational risk.

“You could argue it is the executive team, or the head of risk, or corporate communications and public affairs,” says Ulf Nielsen.

“This is a real conversation happening inside companies. They don’t agree who owns reputational risk. But it is not one of them—it belongs to all of them.

“What matters is the framework that ties it all together, because today, there seems to be a lack of communication between these parties; that is one of the biggest findings of this study.

New approach
“The good news is that we are launching our RepTrak risk approach, which combines the best from the enterprise risk management world with the ability to quantify reputation.”

This approach is broken into four stages: mapping the set of reputational risks; assessing these risks; prioritising them; and creating a response plan.

The RepTrak Company has formed a partnership with Lloyd’s of London and Airmic to develop an insurance product for reputational risk. This will provide a timely new solution for risks that are beyond the risk appetite of a company.

The work has involved scenario testing, establishing a consistent and meaningful way to measure the impact of an event on a company’s reputation, and working to create a product that will give instant access to the funds needed to tackle a reputation-damaging event.

“To date there has been frustration on both sides: insurance companies say they can’t insure a company’s reputation, they can insure only the reasons an event happens; the companies say they don’t know the rationale for this.

“With the RepTrak reputation intelligence and data points, significant progress has been made in enabling insurance companies to put an insurance product out there that will solve the needs of the companies.

“I’m encouraged by the work that’s being done in partnership with Lloyd’s of London’s innovation team and I am optimistic that by the end of the year we will achieve the first true data-driven reputational risk insurance product.”

This is not the only goal The RepTrak Company has in its sights. Ulf Nielsen predicts that in the next five years there will be demand from the financial markets for companies to integrate reputational risk measures into the way they report, with investors needing to know that companies are actively managing reputational risks with the same rigour they apply to other risks.

“There will be a demand from the financial markets and from governments because of the things that can go wrong overnight and put a company’s reputation seriously at risk,” he says.

“I predict that in the next five years it will be mandatory for companies to report on reputational risk and that is going to change the landscape. The intangible side of risk is going to have to be made tangible.”

He predicts that companies’ credit ratings will be heavily impacted by reputation.

“That is already happening; the credit rating agencies are including reputation in their assessment of companies, but today it is subjective, and in the future objective data is going to be key.

“We are going to see a demand for companies to report on reputation in a structured way and with the same rigour with which they report on other things.”

This is precisely where The RepTrak Company comes in. As reputational risk becomes ever-more important, Ulf Nielsen believes the company’s ability to give an objective measure will ensure it has a central role to play in the rating of companies based on reputational risk.

“RepTrak is already the standard for the business world; we want to make it a standard for the financial market also so that when an objective assessment is needed, The RepTrak Company can help the financial market with that criterion—the credit rating of the intangible,” he says.

“Our role in the future is to measure reputation so that companies and investors can make better decisions around risk. Our goal is to create transparency around reputational risk.”