Floods and insurers: what are the reputational risks?

On 19 February, The Times columnist Ross Clark wrote an opinion piece entitled “Profits soaring, the insurance industry must love floods”. Mr Clark pointed to rising share prices among insurers since December’s storms and pointed to the opportunity to “jack up” premiums. While general insurance premiums have fallen in 2013, and October’s St Jude storm did knock the share price of insurers, Mr Clark’s piece accurately reflects a broader sentiment of cynicism towards insurers over whether or not they will use the floods as an opportunity to increase premiums beyond reason. The point was further invigorated by talk of Flood Re – an agreement between insurers and the government to introduce a cap on premiums in flood risk areas in return for a £10.50 levy across the board.

In terms of reputation management, the recent floods present something of a quandary for the insurance industry. Beset by falling margins, declining share prices, dividend cuts and write-downs in recent years, 2013 has been a year of marked improvement for insurers’ efforts to “turn around” through extensive restructuring efforts. For example, a strategic drive in Asia, string of M&A deals and extensive cost-cutting have been matched by recovering share prices and attractive financial forecasts for 2014. But with recovery far from complete, the growing media spotlight on product and service issues – including home insurance premiums in the wake of February’s floods – could present a real reputational risk. It is critical that insurers find ways to effectively manage the interests of different stakeholders.

Which is why Mr Clark makes an interesting point. The need to appease investors without neglecting a company’s duty to its customers risks a conflict of interest – and ever more so at a time when insurers are maintaining their foot on the “turnaround accelerator” while trying to safely manoeuvre a minefield of consumer issues relating to premiums, mis-selling, consumer campaigns and regulatory compliance. For example, negative sentiment towards insurers over pension plans and annuity rates grew significantly over the fourth quarter of 2013, with no life insurance firm spared the heat of an intensifying media spotlight. The Sunday Times’ recently-launched petition calling for an end to “the pensions rip-off” reflects public sentiment on the issue, which is justified by the initial findings of an FCA probe into the annuities market.

The year ahead will no doubt challenge insurers to find new ways to meet stakeholder demands. But it will also offer the opportunity of a “reputation return” by meeting the challenge head-on and identifying risks to manage potential conflicts early on.