Insurers’ Reputations on The Line

Warren Buffett once said, “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently.” It’s more true today than ever for the insurance industry.

Looking at recent headlines you could be forgiven for thinking that the insurance industry has a big reputation problem. Revelations of insurers pushing back on pandemic claim payments, or doing business with fossil fuel companies, have vied with lurid stories from the London market about firms subjecting their staff to bullying and tolerating sexism.

A paper from the UK’s Association of British Insurers summed it up succinctly saying, “Tackling the poor reputation of the insurance industry is a key priority for the CEOs of the major UK insurers who do not believe insurers should be keeping politicians, bankers and journalists company at the bottom of public opinion surveys in the decades to come.”

But are insurers really any worse than other areas of commerce – or is reputation risk heightened for everyone in business today?

Karim Derrick is Product and Innovation Director at Kennedys IQ, a unit of the global law firm that provides machine learning tools and data-powered analytics to insurer claims functions and large corporates.

He believes that the pandemic amplified the issues that can hurt reputations, as personal and professional lives experienced a step change in digitisation: “Social media grew in importance to the extent that monumental moments that included events on Capitol Hill were triggered by social media, as well as the twists and turns of corporate fortunes that were determined by the whims of billionaire tweets” Derrick says. “Social media has increased the speed and reach in publication of events, given every smartphone-user has the potential to be a citizen journalist.”

Any insurer or reinsurer that is held up to the (social) media spotlight, rightly or wrongly, will inevitably face serious consequences.

Rory Knight, Chairman of Oxford Metrica, the strategic advisory firm that’s worked closely with leading re/insurers, says that reputational damage can be longlasting.

“Our evidence is that cash flow will be hit, as consumers’ perception turns negative; staff leave and that all adds up to a fall in the share price. Investors will re-evaluate where the cashflows of the business will be [after the event]. They’re real effects that start with perception and questions over the company’s ability to survive.

“[In our research] we saw that companies who were slow to respond survived, but never really recovered and suffered a permanent impairment of value,” Knight warns.

It’s not only customers and investors who are likely to vote with their feet. Kennedys’ Derrick says that a damaged reputation makes talent recruitment and retention more challenging at an already difficult time.

“Research from [health insurer] Bupa at the beginning of the year indicated that two in three young people are anxious about environmental issues, with 64% saying it’s important that employers act on environmental issues, for example. One in three (31%) would turn down roles in companies with poor ESG credentials, and over half (54%) would take a pay cut to work for a business that reflects their ethics,” Derrick says.

“ESG issues are also likely to be a huge draw for job candidates, many of whom will take advantage of transferable skills to work for companies they morally agree with — and there is a cost attached. A Harvard Business Review article cites that a bad reputation costs a company at least 10% more per hire.”

It’s possible that the image of insurance companies as being old fashioned doesn’t help in the reputation stakes. Do insurtech disruptors have a built in advantage over their established insurer competitors? Not necessarily, Knight says.

“There are examples of where you don’t have a reputation to lose — and it follows that if you are an incumbent [then] you do have a reputation to lose. Newcomers are able to quickly establish themselves, say with a new technology and effectively damage your reputation by making you look out of date.

“On the other hand, while digital disruptors have the entry advantage, if there is a cyber security cock-up that reputation will disappear faster than it will for an incumbent dealing with the same issue. So being an incumbent is part your armoury in that sense.”

Reputation is an intangible asset and Derrick thinks that companies will increasingly wish to place their business with insurers that align to their own ESG values and strategies. Insurers and brokers may be exposed to economic loss as well as reputational harm where they fail to articulate and embed their own ESG strategies: “This will apply to all insurers alike. It is not just insurers that will pay attention to their supply chains but corporate insureds also.”

A new insurance business model that adopts a more technology-powered data approach is not immune, he adds. “For example, harms arising from data bias in AI models are well publicised, from racism in healthcare systems to algorithmic hiring practices. These resulted in reputational harms that fell squarely within the ‘S’ of ESG and apply for both the incumbents and new entrants alike.”

What can insurers do to manage or minimise reputation risk? The first step toward management is measurement, Derrick says: “That means bringing reputation into data; technology is the means by which measurement must be sought. That can be through sentiment measurement of traditional and social media, or through the assessment of legal protection through the assessment of contracts, processes, and capacity.

“In an uncertain world, events cannot always be anticipated, but we can do more to prepare for them,” Derrick says.

Rory Knight agrees, saying that companies who have suffered an impairment least in a crisis and even strengthened their reputation usually had a preparatory programme in place. But he stresses that the board must take responsibility. “As a non-executive board member, my experience is that you must continually ask the question, ‘What is our exposure to a bad event we haven’t thought of?’”

“You must continually discuss the five or six big things that could happen, and your response. But you must also accept that when the event happens it probably won’t be on that list!”

But who should own reputation risk management: should insurers consider appointing a chief reputation manager?

“Both internal and external communications play a significant role, so the chief communications officer or someone holding a comparable role is important,” Derrick says. “But it is not all about communications… workplace culture is not static, and all employees have a responsibility to ensure reputation is managed at both an individual and company level .”