innovative use of captives to assure reputational value
TRANSCRIPT
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