Reputational Crises Put CEOs at Risk

When reputational crises hit, market cap, sales, margins and profits are all on the line. And these situations are becoming more frequent—and more costly—than ever, with a recent study showing an increase in losses from reputational attacks increasing by more than 400% in the past five years.

But it is not only the corporate entity facing challenges, individuals in leadership—particularly CEOs—face personal risk as well. It has become clear that CEOs need tools to protect themselves as well as their companies’ reputations. Since damage from reputational attacks takes place in the court of public opinion, traditional liability solutions, such as directors and officers coverage, are not effective. But new tools are available in the form of a reputation assurance solution that can help deter attacks from even happening and bundled insurances to mitigate the damage when they do occur.

Research by Steel City Re has found that:

  • Financial losses related to reputational attacks have increased by more than 400% in the past five years, a trend that continues.
  • There is an increase in public anger and, as a result, more blame is being cast upon recognizable targets, such as CEOs.
  • Anger by stakeholders is fueled by disappointment—the gap between expectations and reality—which is all too often fueled by the company’s own actions.

Against that backdrop, the turnover rate among CEOs is increasing, with 58 of the S&P 500’s CEOs transitioning out of their jobs in 2016 according to SpencerStuart (although not all as a result of reputational crises). That is the highest number since 2006, a 13% increase over 2015, and a 57% increase over 2012.

If that weren’t enough reason for concern, history shows that when strong companies and their brands come under fire, their reputations eventually recover, despite the initial and medium-term impacts. Individual reputations of those companies’ leadership are not nearly as resilient, however, especially at a time when society; be it the media, social media, politicians or direct stakeholders; seems intent on personifying crises and affixing blame on individuals in positions of authority. And for CEOs, a reputational crises can affect their career and compensation for many years ahead.

In this environment, it is essential that risk managers understand the tools that are available to protect both companies and senior executives personally. Serving as a third-party warranty and available only to highly qualified insureds, reputation insurance attests to the efficacy of the company’s governance and operational practices, as adopted and overseen by the board and implemented by the CEO. Such coverage can deter reputational attacks in much the same way as a security sign on the front lawn deters burglars. It is a sign of quality governance. And when incidents do occur, it provides a built in alternative narrative to counter the attacks that are bound to occur. Finally, it gives the company and key individuals financial indemnification to mitigate any damage that ultimately does take place.

Just as “doing the right thing” did not protect directors and officers from liability in the era before the wide adoption of D&O insurance, it is no guarantee that attacks in the court of public opinion won’t take a significant financial toll. But it is one of the few solutions proven in the court of public opinion. In today’s culture, reputations are in jeopardy as never before and risk managers must utilize all tools available to protect those on the front lines.

Second Quarter Sees 1% rise in Commercial Lines Rates

Closer attention to underwriting and losses has led to premium increases averaging 1% in the second quarter of 2017, continuing an upward trend this year. The transportation sector, most notably auto-related exposures, is seeing the highest increases, up to 4%, according to a report released today by MarketScout.

“We now have two consecutive quarters of composite rate premium increases. Insurers are adjusting pricing as they should, based upon losses incurred, expense loads and targeted returns on equity,” Richard Kerr, CEO and Founder of MarketScout said in a statement.

By account size, organizations smaller to medium-size saw the highest premium increases. Small accounts (under $25,000 premium) increased from up 1% to up 2%, medium accounts ($25,001 – $250,000) went from flat to plus 1%, large accounts ($250,001 – $1 million) were unchanged and jumbo accounts (more than $1 million) were down 1% compared to a drop of 2% the prior quarter.
By coverage class, commercial property and inland marine adjusted from down 1% in the first quarter, to up 1% in the second quarter. Commercial auto rates rose from up 3% to up 4%. EPLI also went from up 1% to up 2%. Fiduciary adjusted downward to flat or no increase compared to up 1% in the prior quarter. All other coverage classifications were unchanged from the previous quarter, according to the report.
By industry class, public entity rates moderated from up 1% to flat. Transportation risks experienced slightly lower rate increases with second quarter rates up 4% compared to 5% first quarter.

Telemetry Data: What Information Works Best?

Direct measurement of driving behavior, the heart of usage-based insurance (UBI), is the best way to match risk to premium. Insurers offer insurance discounts to safe drivers via UBI in order to acquire and retain the best risks. As a result, safer driving is promoted among these customers, which can amount to savings for organizations insuring drivers.

UBI is among the first attempts by insurers to adopt state-of-the-art technology for the underwriting process. Insurance companies and other service providers have struggled with some essential questions including those about the kind, resolution, frequency, and duration of data to collect, as well as what sensors to use. Indeed, many companies underwent independent efforts to establish data collection methodologies, generally resulting in a lack of any industry standard data “dictionary” or shared methodology for UBI. Still, it is possible to identify common approaches to collecting UBI data and how they are likely to evolve in the future.

Since the initial trials of UBI, the three cost factors—hardware, data, and analytics—have been the primary considerations as to how and what data elements each company collects. And even though prices of all three generally continue to decrease, the typical cost of setting up a full UBI program with filed predictive models remains significant. In the absence of industry-wide standards, it can be difficult to outline the breadth of the types of data collected. Even so, the following list covers most of the UBI data types found in the auto insurance market:

Verified mileage: This most basic mean of UBI is based on the well-validated assumption that more driving means more exposure to risk. Still, the advantage of verified mileage over declared mileage alone usually doesn’t justify a UBI operation for many companies.

Trip timing: A small advancement over verified mileage is trip timing. This goes beyond the pure mileage factor to estimate risk by studying when a driver is on the road, on the premise that some time slots tend to be riskier than others (Friday night, for example, with associated risk characteristics such as fatigue or drunk driving).

Driving events: Basic, yet powerful, behavioral aspects of driving are measured through collection of driving event data, mostly braking, accelerating, and turning. Sometimes absolute speeding events (exceeding 80 mph) and relative speeding events over the posted speed limit are recorded. Note, however, that onboard telematics units have relatively limited accuracy in collecting such data.

Full data log: As dongles came to market, they introduced improved collection capabilities, such as advanced GPS modules, CPU, accelerometers, OBDII, and large storage. With the falling cost of mobile data, companies started collecting full data logs and compressed them on dongles. Full data logs may provide endless analytics opportunities.

Smartphone data: The first technology to break the cost paradigm centering on device, data, and analytics is that operating from smartphones. Smartphones are also smart telematics devices owned by many, offering great collection and storage capabilities and data transfer at practically no additional cost. Unfortunately, smartphone data introduces many analytic challenges, including not knowing whether an insured is a driver or a passenger, whether the phone is turned off, and whether a driver operates an insured car.

What should we expect in the future? Against the background of rapidly changing technology and growing analytic complexity, future UBI is likely to rely on some of the following data elements:

Mobile data: As mobile apps become more sophisticated and reliable and as phone sensors become more accurate, more insurers are likely to use data obtained from mobile apps as a low-cost solution.

OEM data: Connected cars are growing in number (Gartner forecasts that by 2020, some 250 million cars will be connected). Data sets collected by connected cars aren’t as rich as those collected by dongles and provide more basic attributes (such as verified mileage, trip timing, and driving events). Nevertheless, they allow insurers to consume data more easily through data exchanges, where original equipment manufacturers (OEMs) take responsibility for the data collection process. Clearly, OEM capabilities will probably become even more advanced as manufacturers see more value from their investment.
Distribution of projected connected cars (source Business Insider)

Advanced Driver Assistance Systems (ADAS) data: ADAS can provide driving alerts and override driver inputs in certain situations. To date, these devices haven’t become part of the UBI ecosystem but can potentially contribute tremendous value to analytics for driving behavior and may play a significant role in the future.

A final question about autonomous cars: Will they render UBI obsolete? Probably not, and for two reasons. First, penetration of autonomous cars and shared vehicles may well be slow and gradual. Second, many events currently measured by UBI will probably remain important when autonomous driving is used (for example, time and destination of journeys). UBI is likely here to stay.

Lessons from Distracted Driving Awareness Month

June is Distracted Driving Awareness Month, and while it is quickly drawing to a close, the message remains: Distracted driving is escalating, with 25% more vehicle accidents resulting from drivers talking or texting on cellphones. More cars on the road, especially during summer months, also translates to more accidents.

Organizations with fleets should take note as motor vehicle crashes are the number-one cause of work-related deaths, accounting for 24% of all fatal occupational injuries, according to the National Safety Council (NSC). On-the-job crashes are also costly, with employers sustaining costs of more than $24,500 per property damage crash and $150,000 per injury crash.

Zurich sums up NSC statistics:
Employers can and are being held liable for damages resulting from employee accidents. “We might expect an employer to be held liable for a crash involving a commercial driver’s license holder who was talking on a cell phone with dispatch about a work-related run at the time of an incident—especially if the employer had processes or a workplace culture that made drivers feel compelled to use cell phones while driving,” the NSC said.

The lines believed to exist between employment-related and personal or private life get blurred in some cases involving:

  • Cell phones owned by employees as well as employer-provided equipment
  • Vehicles that were employee-owned as well as employer-owned or leased
  • Situations where employees were driving during non-working hours or were engaged in personal phone calls

To protect themselves and their employees, the NSC recommended that organizations implement and enforce a total ban policy.

“The best practice is to prohibit all employees from using any cell phone device while driving in any vehicle during work hours or for work-related purposes. Regarding off-the-job hours, precedent has been set by lawsuits. Thus employers may want to extend their policies to cover off-the-job use of company-provided wireless devices, use of personally-owned devices that are reimbursed by the company, and use of devices in company-provided vehicles. All work-related cell phone use while driving should be banned 24/7,” the NSA advised.

Companies should also pay attention to other common distractions that can lead to accidents, Zurich adds: