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A recent article in the Washington Post puts a very clear spotlight on the idea and concept of reputational risk.
It starts with the following billboard:
Personally, I think it's a great ad. Of course, it plays to my somewhat offbeat sense of humor and love of irony. Nevertheless, it makes a pretty universal statement: if you're going to do this, do it properly.
The campaign was well received at first. Then social media got involved:
Initial reactions to the billboard, he said, were overwhelmingly positive. But the mood quickly changed after one disgruntled driver pulled over on the Charlton, Mass., road, snapped a photo and posted it to Facebook, accusing the ad of “being racist.”
At this point, the jeweler is in a no win situation. He's smack-dab in the middle of an internet flame war and a deeply political controversy -- exactly where no sane business owner wants to be.
This is a great example of reputational risk, which may seem ephemeral but is quite real. Let's start with a definition: "reputation" is "a place in public esteem or regard." It's an elusive idea but very important. It occurs when the public -- or, more specifically, your potential customers -- trust you and believe you're working in their best interest. It takes forever to develop and can be lost in an instant.
We can best understand it from a negative perspective -- fact patterns that show how events can damage our reputation. The Tylenol crisis of 1982 is probably my generations best example. Someone started putting poison in Tylenol, leading to several deaths. Then we have the "Corona beer contains urine" PR disaster from 1987 where
Rival beer distributors had allegedly whispered that Mexican workers used beer containers destined to be exported to the U.S. as urinals. Supposedly, this was the way the irate workers took vengeance on their northern neighbors and fiercest rivals. Or something to that effect.
A more recent example is the Deepwater Horizon oil spill from 2010, which put BP in a terrible PR bind that they're still trying to mitigate.
Here are a few key paragraphs on reputational risk from my old ARM 54 text that explain it from an insurance perspective:
Returning to our jeweler, he now has to repair his reputation. He'll probably need to hire a PR firm to develop and implement a campaign that helps to reverse the unintentional damage done by this controversy. This is the same course of action taken by Tylenol, Corona, and BP in the above referenced situations.
So, can you underwrite this risk? You bet! It can be a standalone policy. But it's usually part of a larger policy like cyber or legal liability.
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