Imagine, for a moment, that your organization is suddenly confronted with an embarrassing crisis of monumental proportions. A crisis so severe, in fact, that you believe you need to hire Public Relations (P.R.) professionals to help you cope with the demands of an outraged public.
A few years ago, as you may recall, this was the type of crisis that confronted AIG, the global insurer that churned out billions of dollars of financial weapons of mass destruction. When AIG’s senior officers decided to pay themselves substantial performance bonuses after receiving taxpayer-financed government bailout funds, angry American citizens pressured those officers to voluntarily return their compensation.
AIG undoubtedly could have used some P.R. advice at that time. Surprisingly, the insurer is now helping to provide such advice to firms in crisis today.
Reputation Guard: Is It Insurance?
AIG’s service, provided through its Chartis subsidiary, is called Reputation Guard. It is designed to help small and mid-size organizations that cannot afford to hire permanent P.R. staffs, but that may nevertheless require P.R. expertise in times of crisis. For an annual fee, AIG arranges for such organizations to receive advice from Madison Avenue P.R. firms; it also reimburses these organizations for various out-of-pocket expenditures related to crisis management activities.
But instead of structuring Reputation Guard as a simple prepaid contract, AIG has decided to design it as a complex insurance policy. According to the policy, a public relations crisis is defined as a rare but costly insurable event. A policy holder pays an annual premium to protect himself against the risk that he will suffer a loss from reputation damage as a result of a crisis.
The insurance policy does not reimburse a policy holder for the direct costs of “fixing” the problem that caused the crisis; nor does it cover the legal costs of fighting or settling litigation. Furthermore, the primary benefit of the policy does not involve any loss reimbursement at all, but rather arranges for the delivery of a limited array of P.R. advisory services.
This unusual contractual arrangement raises the following simple question: can this truly be labeled an insurance policy? Indeed, how can we differentiate between an insurance policy and a prepaid service contract? And why should we care?
As far back as the 1700s, the global insurance industry agreed to require that a policy holder maintain a quantifiable insurable interest in any object of insurance. A property owner, for instance, could only purchase an insurance policy if he could demonstrate and quantify the extent to which he would incur losses if his property were to be destroyed. Likewise, a family relative could only purchase a life insurance policy if he could demonstrate a personal relationship with the insured party, one that would likewise lead to losses if his relative were to lose his life.
Furthermore, the level of the benefit was historically defined by (and limited to) the level of the projected financial loss, a value that could be estimated through standard actuarial processes. Thus, by requiring that any policy holder possess a bona fide insurable interest in an insured asset or person, and by defining the payment benefit in terms of the projected loss, regulators could prevent speculators from developing gambling contracts that masquerade as insurance policies.
Otherwise, gamblers who wish to pace wagers on the deaths of total strangers could simply purchase insurance policies on those persons’ lives. In fact, morbidly speaking, they might even be tempted to cause the death events that would trigger the insurance payments!
Concerns about insurable interests have reverberated throughout various contemporary debates as well. Industry critics have complained, for instance, that credit default swaps allow financial speculators to bet on the “death” (i.e. the bankruptcy) of corporations without requiring them to own stock in those firms. And the United States Securities and Exchange Commission continues to receive appeals to strengthen regulations of firms that purchase life insurance policies from total strangers in the pursuit of profits.
Buying A Sales Pitch?
Measured against these standards, one cannot help but wonder whether AIG’s Reputation Guard should be classified as an insurance policy at all. Although companies do indeed incur losses when their corporate reputations are damaged in times of crisis, AIG’s actuaries have not estimated those projected financial losses and established premium and benefit levels that purport to cover them. Instead, the firm has simply developed a prepaid referral service that can be accessed in time of need, something akin to an Employee Assistance Program in the Human Resources field.
And what does a policy holder actually receive when, in a time of crisis, he accesses the service of the P.R. firm? At best, he may indeed receive the valuable advice of a highly qualified P.R. professional. At worst, though, he may instead receive an unwanted sales pitch to purchase additional services that fall outside of the scope of the Reputation Guard benefit package.