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The Reputational Risk and IT Relationship

With more visibility and vulnerability in today’s business landscape due to social media, online commerce and doing business through mobile devices, it only makes sense that there would be more potential risks to a company’s reputation and brand. In fact, now more than ever, executives are attempting to protect their brands from these security threats by being more proactive and looking for blindspots in their risk management program. That’s according to findings from the “2012 IBM Global Reputational Risk and IT Study,” conducted by the Economist Intelligence Unit, which analyzed responses from 427 senior executives from around the world, representing nearly all industries.

Respondents indicated that cybercrime is more of a reputational threat than systems failure — a finding that clearly illustrates how cybersecurity is a growing concern among executives, as shown in the following graph from the report.

What’s more, 64% say their company will put additional effort into managing its reputation in the future while 75% of respondents say their IT budget will grow over the next 12 months due to reputational concerns. “Underestimating the cost of reputational risk greatly exceeds the cost of protection,” said one U.S.-based study participant. “Being proactive is preferable to being reactive.”

As the report states:

Going forward, assessing potential blind spots and new technologies will likely be accelerated through the use of case studies and scenario analysis rather than waiting for direct experience. “To use new technologies like cloud you need trust,” says Andrea MacIntosh, director of quality with Alpha Technologies in British Columbia, Canada. “How do you build trust? Either by demonstrating performance or through looking at comparable organizations that are using it with good success. I think there’s a lot of referential data for companies like ours, but as with any new technology, you’ve got to be cautious.”

So how does a company avoid data breaches and strengthen the public’s trust in its brand? The respondents feel that integrating IT into reputational risk management, along with having a strong IT risk management capacity, is the best bet.

Gone are the days when a customer inherently trusts that a company’s IT capabilities are sufficient. In fact, customers are taking a more proactive approach when it comes to understanding a current or potential business partner’s IT infrastructure. “We’re seeing more requests from our customers for details of our IT infrastructure and security, along with on-site audits, as part of the supplier qualification process,” said MacIntosh.

Organizations of all sizes across all industries are devoting more time and attention to potential cyber threats that could harm their reputation. “This concern is reflected in more integrated, enterprise-wide approaches to risk management led from the C-suite and increased attention being paid to the direct reputational impacts of IT risks,” the report states. This study, along with many others, point to the conclusion that cyber and data security has earned top billing in the list of biggest risks posed to businesses. How is your company responding?

Retaliation in the Workplace

The “Timeline” portion of the November issue of Risk Management (online and in print November 1) features a disturbing sequence of workplace homicides based on retaliation, from the first Post Office shooting that coined the term “going postal” to the more recent shooting near the Empire State Building. All instances focused on employees retaliating against managers, supervisors or coworkers.

But retaliation can manifest itself in many ways, including managers firing or demoting an employee due to that employee doing what they feel is the right thing — whistleblowing. A recent workplace retaliation report by NAVEX Global found that this type of retaliation is occurring now more than ever in the workplace, and that “only 15% of respondents said organizations inform employees about retaliation trends and reporting — a low and concerning statistic.”

The survey also found that the definition of retaliation is maturing. The graph below illustrates what both staff and executives define as retaliation.

The study found that the majority of respondents (72%) agreed that whistleblowers who report issues to the government have already reported the issues internally and felt it wasn’t adequately addressed. In addition, 35% said executives are coached after they engage in retaliation, as opposed to more formal disciplinary measures, and 12% reported that no action is taken.

So how do we curb retaliatory in the workplace?

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Using whistleblower reporting data to strengthen ethics and compliance programs is a starting point.

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Just last week, the Obama administration extended whistleblower protections to national security and intelligence employees in a Presidential Policy Directive, signaling just how important protection against retaliation has — and will likely continue — to become.

In other, lighter news, the 168th edition of the Cavalcade of Risk was published this morning.

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Check it out here for links to the best insurance and risk management blogging.

An Alarming Trend in the Fed’s Economic Outlook

Perhaps nothing has a larger bearing on risk management than the future of the economy. Corporate revenues, insurance pricing, staffing and perhaps even social unrest all hinge on a continued recovery and all the (relative) progress made since 2008 could be washed away by a receding economic tide if, say, the euro zone crisis deepens or the U.

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S. economy double-dips back into recession.

But, really, who has the time to understand the economy?

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I barely passed high school math and now I’m supposed to figure read the tea leaves of a $16 trillion greenback trail? Please. Can’t someone just tell me what’s happening as if I’m a third-grader?

Oh. Why thank you, Wall Street Journal and Goldman Sachs. (via @WSJ)

The chart below is pretty self-explanatory — and fairly alarming. I’ll let them explain.

Wall Street loves numbers — always has, always will. That makes the Federal Reserve’s periodic beige book report (a/k/a “Current Economic Conditions by Federal Reserve District”) a bit frustrating. It’s all words: “Economic activity generally expanded modestly since the last report,” the latest version said. So is that good or bad? More or less? A lot or a little?

Enter the clever economists at Goldman Sachs: They have turned the Fed’s words into numbers.

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“Our approach is simple,” this said this week. “We compile a list of ‘good’ and ‘bad’ words frequently used in Beige Books to describe economic conditions and search historical reports for their relative occurrence over time. Although very simple, this word-counting exercise allows us to interpret the qualitative information in the Beige Book quantitatively.”

Simple? Sure. Then again, so am I.

The Insurance Industry Needs More Dynamic Models

Simpler, but more dynamic capital models are what the insurance industry needs in order to avoid suffering some of the same problems it did during the financial crisis that began in 2008, according to the Willis Economic Capital Forum (WECF), a Georgia-State-University-based initiative from the academic and analysis arm of Willis Group.

Markus Stricker, director of the WECF, said in a statement that “everyone in the industry would be interested in reducing the complexity of models, making things more transparent and thus easier to understand. We ought to have learnt in the years since the financial crisis that our economic capital models need to be more dynamic and more insightful.”

He went on, explaining that looking at economic capital models in a static manner is not very helpful. Instead, he suggests insurers develop models that are simpler, yet still useful and easier to use. Stricker suggests learning from other industries that have such models in place. For example, airplane manufacturers run stress tests to find out how much pressure they can put on a wing before it breaks off, while pharmaceutical companies have a rigorous, structured process they must go through to get a medication validated.

“I think we need a similar set of standard procedures to validate the methods that financial companies use to calculate solvency related key figures,” said Stricker. Currently, standardized processes do not exist for validating economic capital models. It seems insurance companies, regulators and brokers could all benefit from a validation process that is transparent and efficient.