9. In groups discuss the following questions.

1. What kinds of risks are you incurring every day?

2. Which risks are you reducing through loss prevention programs? For example, do you lock home and car doors? Do you eat healthy foods and exercise?

3. For what risks are you self-insured? (Do you have money put away to cover such emergencies as car repairs, dental work, or loss of your job?)

4. What other insurance should you have? Do you have major disability insurance for long-term illnesses?

5. Are you insured against fire and theft?

6. Can you see that you are a risk manager already?

FINANCIAL TIMES OCTOBER 27 2004

A good name is everything

Jennifer Hughes says the action by New York's attorney-general illustrates key risks

The recent accusations of corruption in the US insurance industry have provided a stark reminder of the risk US companies now rate as one of the one of the most significant: reputational risk.

Eliot Spitzer, New York's attorney-general, contended earlier this month that insurers were rigging business, stifling competition and cheating customers.

He brought a lawsuit against Marsh, the world’s biggest insurance broker, and named four other companies as participants in the suit.

Within days of the charges, shares in Marsh & McLennan, its parent company, had lost nearly, half their value and the major credit ratings companies had downgraded its debt, citing concerns about the potential loss of business as its reputation suffered.

Moody’s Investor Services said moreover that the downgrade was also prompted by concern that the Marsh allegations came on the heels of trouble at asset manager Putnam, another Marsh & McLennan subsidiary, which ran foul of regulators last year over its trading practices.

“At its most straightforward, [reputational risk] is the risk that a company’s reputation might be eroded by adverse publicity, whether true or not, which could lead to a reduction in income because customers take their business elsewhere,” said Pricewater-houseCoopers, the consultants, in a recent report on risk management.

The ongoing series of corporate shocks in the US has brought the issue of reputational risk to the fore.

Since the spectacular collapse of Enron in 2001, the US has been home to a series of corporate scandals.

These have ranged from the dramatic blow-up at WorldCom to Wall Street banks accused of pushing stocks their analysts attacked in private.

“It’s not about the numbers involved, its about the fact the problem gets publicised,” says Harry Croydon, chief executive of Safeonline, the technology liability broker.

Arguing that reputational risk is a priority for businesses big and small, he outlines a scenario where a business with two or three rivals in a medium-sized town struggles to fix a loss of data affecting its customers. “That firm’s reputation is going to get hammered,” he says.

PwC’s report also noted the litigious nature of the US where costly legal challenges can undermine reputation further.

Followers of Mr Spitzer’s previous probes into tainted Wall Street research and questionable trading practices at mutual funds have noted how his attention on a single company in an industry encourages co-operation by others eager to avoid the spotlight and minimise the negative publicity.

“Increasingly the key stakeholders around a firm – the staff, regulators, shareholders and customers – are becoming much more sensitive to reputation,” says a senior risk manager at an investment bank.

“People are learning that even doing a plain vanilla transaction with an Enron or a WorldCom puts you in the frame for a multi-million dollar lawsuit.”

In May, Citigroup settled a lawsuit brought by WorldCom investors for $2.6bn and put aside $5.2bn to cover legal action related to its role in other financial scandals. In a bid earlier this month to restore its reputation, it ousted three of its most senior executives for failing to prevent regulatory problems in Japan.

The net result of the corporate scandals is a wave of new regulations.

Companies have often taken it on themselves to interpret rules in the strictest possible way to avoid further potential problems. But this comes at a potential cost. Risk managers have complained the focus on box-ticking compliance with the new rules can act as a sort of tax and leaves them with less time to guard against less quantifiable threats, such as risk to reputation.

“There is definitely a concern out there as to whether the culture of compliance that has been developed is serving to improve companies,” notes Don Bailey, head of the North American risk management practice at Willis, the insurance broker.

In its survey, PwC found that almost half of respondents said their companies used favourable comments on their risk management policies from analysts or regulators to vindicate their efforts in this area.

Mr Bailey, however sees complaints about companies’ seemingly obsessive focus on compliance as a red herring.

“I don’t think we’ve actually seen the compliance issue affect other risks,” he asserts. “If anything, companies are expanding their thoughts about risk and are becoming increasingly savvy about realising they should be more consistent about how they assume risk across all facets of their organisation.”

Since the September 11 2001 terror attacks on the World Trade Center in New York and the Pentagon, US corporate scandals have drawn attention to a broad spectrum of risk management challenges.

Companies have responded by developing new risk management controls. However, much work still needs to be done on defining the subject. “Whatever you do to manage your reputation, it still only ever takes one person to do something stupid,” says one senior manager.

He argues that the most reliable method of dealing with risk is still to concentrate on fostering a strong corporate culture based around reputation.

“Focus on the types of people you’re prepared to hire, ensure the mechanisms are appropriate – then you can focus on the supervisory and management processes,” says the manager.