“It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.” These well-known words were spoken by that giant of the insurance industry, Warren Buffett. Reputational risk is a peril that goes under the radar when thinking about traditional insurance classes. However, it is one that Malaysia Airlines will wish that they had considered.
On 1 June, Malaysia Airlines CEO, Christoph Mueller, declared the company “technically bankrupt”. In not quite five minutes, but over the course of an annus horribilis in 2014, Malaysia Airlines became in the words of their CEO, a “tarnished brand”.
The mystery of flight MH370, that most experts agree is somewhere at the bottom of the southern Indian Ocean, and then the shooting down of flight MH17 over Ukraine has so seriously damaged the reputation of Malaysia Airlines that they plan to announce a rebrand from September in an effort to save the company.
After these tragic events, the ensuing loss of customer confidence gave way to a dramatic drop in bookings and according to its last publicly reported results in December 2014 the carrier continues to make large losses as it struggles in a highly competitive marketplace.
This link between a cause – being the negative publicity arising from two incidents, and an effect – a reduction in bookings, is perhaps the simplest distillation of reputational damage.
At Tokio Marine Kiln, insurance has been developed to cater for these very scenarios. The idea being that if a company can identify its main reputational threats and they subsequently occur, insurance can repair the associated fall in sales by paying for lost profit.
Demand for such insurance is increasing rapidly with clients embracing this new style of underwriting not bound by the need for physical loss or damage.
HM Treasury estimates that, in 2011 UK businesses invested £126.8bn in knowledge assets, compared with £88bn in tangible assets with approximately 15% of such spending on brand equity. So why not protect that investment?
Malaysia Airlines may never recover, because to rebuild the brand the business needs significant investment. And yet without passengers, funding that investment becomes extremely difficult. An insurance policy covering reputational harm could reimburse a company experiencing similar challenges for the decrease in sales, and fund a PR campaign to repair the reputational damage, helping to maintain solvency through such a difficult time.
For Malaysia Airlines which is now focusing on its rebrand in September, it might be too late to repair their tarnished brand, but it’s not too late for everyone else. For those who like to hope for the best but plan for the worst, there’s the option to do things differently and put in place cover to help protect their brands.