Multistate business income and franchise tax update

Reputation, Birthday Presents and Insurance

Reputation is a nebulous thing, but it seems that having a good reputation is a good idea. The great American polymath, Benjamin Franklin, once said “it takes many good deeds to build a good reputation, and only one bad one to lose it”. A true observation, but I also like Oscar Wilde’s comment that “one can survive everything, nowadays, except death, and live down everything except a good reputation”.

But what is reputation? One can trawl the internet dictionaries and come up with many answers, but I think the following sums it up nicely:

The estimation in which a person or thing is held, especially by the community or the public generally.

One can also add to this that the expectations that we have of an individual’s behaviour will also have an impact. For example, one would expect Ozzy Osbourne to behave like a rockstar, throwing televisions out of hotel bedrooms, biting the head off a bat[1] and such like. However, if Theresa May were to do so, then one may take a dim view of it. That said, it would sure as hell liven up the Brexit negotiations…

But what are the consequences of a negative event on reputation? In the business world, if a commercial entity suffers an adverse event that customers are unhappy with, chances are that they will vote with their feet – they will change their allegiance and take their business elsewhere.

This is most commonly seen in data breaches. For example, the Talk Talk breach saw it lose nearly 100,000 customers post incident because these same customers no longer trusted Talk Talk to keep their personal data safe. This will clearly result in a reduction in revenues and therefore profit – Talk Talk quoted a £15m trading impact.

Compare and contrast with this, possibly hypothetical, example. Like most men, I have sometimes left buying a present for my wife’s birthday to the last minute. This may, or may not, be because I have forgotten. I therefore need something and I need it quickly so I go to as I know they have some cool ideas. Probably because I had to do the same thing last year.

However, has suffered a system outage. This is annoying, but I know I can get something on, so I do[2].

Being male and therefore a slow learner, yes, you guessed it, I do the same thing again when Mother’s Day comes around and I need to get something from the kids. Now, I still like, they have always had really good ideas and swift delivery. However, based on my recent experience with, I know that they have some good gift ideas, so I buy something from there instead.

Now, this transfer of trade is undoubtedly the result of the system outage at But is it because I no longer trust them or I think less of them because of the outage? My view is no – all that has happened is that I have discovered another online retailer. If anything, have lost a sale because of the good reputation of!

The insurance market has launched a number of products in recent years that provide cover for PR costs during an event that causes adverse publicity, which then impacts reputation. I know of one insurer that launched their product at the same time that Tiger Woods’ infidelity was first discovered and he crashed into a fire hydrant. One man’s loss of reputation proving to be great marketing material for someone else…

However, the market has been wrestling with how it deals with reputation and business interruption. Makes sense, given the Talk Talk numbers. But, there are a couple of questions linked to the above example: 1) whether the Mother’s Day transaction affecting is an example of reputational loss and 2) how this loss should be measured.

Dealing with the second question first, there has been an awful lot of discussion as to why using share price could be a measure of loss. Firstly, the challenge with adopting this measure would mean that policies could not be sold to companies that are not quoted on the stock exchange, which rather restricts the target market. Secondly, academics have proven that share price is, in itself, a measure of the expectation of future profits. Therefore, a loss of profit leads to a reduction in share price. On that basis, the traditional loss of profit models can be used in a reputation context. Also, given its an expectation of future profits, the initial reaction may be a fall in share price, only to see a later correction, as it becomes evident future profits will be just fine.

As for the first question, the debate would be assisted by further analysis of claim scenarios to understand what has driven the loss of profit. In addition, a review of how non-financial KPI’s, such as customer churn in the above Talk Talk example, is also required to understand how this data can be used as part of the quantum analysis. A link between financial and non-financial data needs to be drawn.

When launching a new product, this proof of concept analysis is critical in demonstrating that the product will work. However, the challenge is going to be finding a company that has suffered a reputation event and is prepared to share its data - nobody likes others to know the full extent of a bad situation.

That said, it may help that company’s reputation if, in the spirit of altruism, it shares its data and experiences to help develop a reputation/business interruption insurance product that everyone can buy. The greater good and all that – just a thought!

As to my reputation with my wife, I’m hoping it’s about to improve – 3 weeks before her birthday and I already have all gifts purchased. I might still do the wrapping last minute though…

[1] The television bit may not be true, the bat story is – see Ozzy’s autobiography!

[2] Other online gift retailers are also available!

Ben Hobby

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