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Innovative Use of
Captives to Assure
Reputational Value
Delaware Captive Insurance Association
Peter Gerken, Steel City Re, and
John Kelly, Hanover Stone Partners
Executive Summary
☑Reputation risk is omnipresent and its management
a corporate imperative.
☑ It is a complex risk with potential loss on a going
forward basis that impacts the P&L.
☑Captives can insure this and satisfy regulatory
requirements to qualify as true risk transfer.
☑Captives can increase enterprise value through
strategic assurance of controls.
Reputation risk in the age of hyper-
transparency
“Reputation risk is an amplifier risk that layers on or attaches to other risks – especially ESG risks – adding
negative or positive implications to the materiality, duration or expansion of the other risks on the affected
organization, person, product or service.”
Source: Andrea Bonime-Blanc. The Reputation Risk Handbook.
4
Sources: Nir Kossovsky. Reputation, the Stock Market and You
REPUTATION RISK IN THE AGE OF HYPER-TRANSPARENCY
II:
WHY SHOULD COMPANIES CARE?
REPUTATION RISK IS ABOUT MEETING, EXCEEDING OR FAILING STAKEHOLDER EXPECTATIONS
Operational and Strategic Costsof failures can persist indefinitely
Adverse events and missed expectations can
• wreck a company’s income statement
• damage a company's reputation
• stain personal reputations of executives and board members.
Image source: The Global Trademaster Company
SOURCE: Andrea Bonime-Blanc. The Reputation Risk Handbook. Oxford, UK: DŌ Sustainability (2014). 6
MITIGATING
REPUTATION
RISK
AND
BUILDING
REPUTATION
RESILIENCE THIS IS WHERE THEREPUTATION RISK
EQUATION TAKES PLACE
REPUTATION AND VALUE
In a market system based
upon trust, reputation has
significant economic value
ALAN GREENSPAN
OCTOBER 2008
Image source: : The Australian, 22 Sept 2012
• disloyal customers
• disengaged employees
• distracted suppliers
• distrustful creditors
• dismissive investors
• determined litigators and
regulators
Copyright 2015 Steel City Re
Mechanics of going-forward loss of Reputation
Value
• Strategic costs
• Threshold 0.2% Market Cap
• Reputation Value
Loss=Operational loss is
magnified 2-7X
• Director and Officer personal
costs
– Psychological
– $2.2 million in forgone
opportunities
Copyright 2015 Steel City Re
Quantification of going-forward loss of
Reputation Value
• Intensity of dis:
– Point failure (rogue)
– Process failure
– Governance failure
• Intensity of det:– Mitigation value
– 40% reduction in average
2014 FCPA fine of $160
million
Copyright 2015 Steel City Re
Qualitative features of going-forward loss of
Reputation Value
Reputation Insurance Marketplace
• Crisis
Management/Public
Relations endorsements
– Attach to various types of
policies
• Stand-alone Crisis
Management
– AIG-Reputation Guard
– Zurich-Brand Assurance
• Financial Loss Cover
– Allianz-Reputation Protect
– Kiln-Reputational Harm
– Munich Re-Reputation
Risk
– Steel City Re-(Kiln)
Reputation Assurance
Products by Type
• Reimburse/indemnify
crisis communications
costs
– All
• Post-event by design
– All except Steel City Re
• Risk mitigation by design
– Only Steel City Re
• Quantify reputational
value
– Only Steel City Re
• Strategic solution that
protects against going
forward loss of
Reputational Value
• Kit of quantitative tools
for:
– Managing reputation risk
– Indemnifying/absorbing loss
of Reputational Value, and
– Protecting personal
reputation of responsible
D’s and O’s
April 2, 2014
Reputation Assurance
Reputational Value MetricsAs of 1 July 2015
• Underlying raw data
– Indications of expected
economic value created by
key stakeholders
– 704 continuous weeks
– 4,766,723 unique values
– Average of 6771 public
companies per week.
• The actuarial models
– 337,039 reputation value loss indemnification years,
– losses were triggered
• RVM depressions at Gaussian-based proximities ranging from 0.5 to 6 standard deviations
• Historic mean of values over 104 continuous weeks.
– The simulation data set contains 28,648,230 pairs of RVM and loss measures.
Copyright 2015 Steel City Re
Role Reprise
• Captives’ historical role is
helping to address
material risks that are
difficult or costly to insure
in the commercial
insurance market.
Loss
gates
Loss
Source: Steel City Re
This objective approach
positions captives to
satisfy appropriate
statutory and tax
requirements and
overcome obstacles that
confronted them in the
past.
• Measurements enable
management
– Measurements are
indicators of status
– Measurements over time
are indicators of progress
– Measurements compared
to standards are indicators
of quality
July 2015
Statistical Process Controls
STANDARD
STANDARD
QUALITY
ISSUE
• Internal Standards
– Defined by a statistical
analysis of prior measures
July 2015
Setting Standards 2
INTERNAL STANDARD: NEVER ABOVE 2
STANDARD DEVIATIONS OF THE AVERAGE VALUE
FROM LAST WEEK
AVERAGE VALUE
FROM LAST WEEK
INTERNAL STANDARD: NEVER ABOVE 3
STANDARD DEVIATIONS OF THE AVERAGE VALUE
FROM LAST WEEK
– SCRe’s solution is very flexible with Captives
• attaching on standard basis, or
• CAT level such as 6 standard deviations, or
• much closer to the risk, enabling higher premium flow to the
captive
– Flexible reinsurance of Reputation Assurance by Kiln-led
facility. Kiln leads the Line Slip with $25 million p/o $100
million. Aon Benfield is Line Slip Manager
– Steel City Re RVM are in place at about 100 captives so far
this year
Copyright 2015 Steel City Re
Captive Mechanics
Thank you
Contact information
• Peter J. Gerken
– Steel City Re
– 917-821-2836
• John Kelly
– Hanover Stone Partners
– John.kelly@hanoverstone
partners.com
– 914-924-3213