This content is copyright to www.artemis.bm and should not appear anywhere else, or an infringement has occurred.

Steel City Re is the world’s only provider of parametric reputation insurance offerings, leveraging a reputational value index that delivers more stable and higher returns for reinsurers and insurance-linked securities (ILS) investors, according to co-founder and CEO Nir Kossovsky.

Pittsburgh, Pennsylvania-headquartered Steel City Re is a reputation risk specialist, and the world’s only source of parametric, ESG, and reputation insurance solutions.

Founded in 2007, the company has been engaged in reputation measurement since 2001. It acquires data from a commercial data aggregator, which it then transforms into synthetic measures of reputational value through computer-driven algorithms that involve no human subjective influence. They are currently indexing reputation values for around 7000 public companies each week.

All of the firm’s insurance solutions are based on their reputation value index, and with demand for reputation insurance on the rise, we spoke with CEO Kossovsky about the index, how it works for protection buyers, and how the returns could be attractive to reinsurers and ILS investors.

Kossovsky explained that until recently, reputation insurance was shunned the same way as D&O liability insurance was in the past, in that directors of companies understood that it provided protection from real liability risk, but simply didn’t want to let anyone think that they might actually have a liability risk. Eventually, this attitude changed, and demand for liability insurance surged and led to the $25 billion market it is today.

“Fast forward 40 years, reputation insurance, the lesser cousin of liability insurance is now finding its place in the sun,” said Kossovsky. “Board members have moved beyond talking about reputation risk. In the past few months, reputation insurance has become a major topic of conversation.”

Like bankruptcy, attitudes change at first slowly, then suddenly. Interest first took hold during the 90s when that financial crisis of liquidity was triggered by a reputation crisis. This led regulators to realise how big the risk is to financial institutions, designated reputation risk a “named peril,” and subsequently demanded that banks report on reputation risk and how they manage it.

The issue then was how to accurately measure the risk, which is where Steel City Re came into the fold. Building on principles of behavioural economics and epistemology, it defined reputation value as the value created by stakeholders in the expectation of a benefit, and reputation risk as a threat to that value. The company created an index that captures that notion of value through forward-looking financial measures that are sensitive to issues of reputational significance: ethics, innovation, safety, security, stability, and quality. It created a measure of risk by quantifying the volatility of the value measure.

“We formalized a long-held tacit understanding that in the modern finance where intangible asset value dominates, reputation value usually rhymes with stock price,” he said, “while ensuring our insurance products did not become financial derivatives.”

This index provided Steel City Re with an independent measure of the intrinsic value of a firm based on the expected cash flows, which empirically did not always align with the stock price. This created an unexpected opportunity for arbitrage where value would be realised when those metrics converge.

“That’s how we first turned our model of reputation value into a business. We started selling data of reputation value and allowed various hedge funds to arbitrage,” explained Kossovsky.

“The next step was to do our own arbitrage. We designed an equity index comprising up to 57 companies—three companies from each of the 19 sectors. The key feature was that the companies had high reputation values and low stock prices. We named it the RepuStars Variety Corporate Reputation equity index (REPUVAR), which is now calculated by S&P Global,” he continued.

While the company’s model of reputation value made for an interesting investment thesis, the performance of the index over time affirmed the value of the metrics that came to underpin Steel City Re’s parametric insurance products.

“The algorithms for our reputation value index, our equity portfolio long and short indices, and our parametric insurance loss indices have been stable for two decades. The engineering begins with the raw data. We started with about 5500 companies that qualified for reputation value index calculation. At this point, we are averaging about 7200 companies each week whose data are incorporated into our system. We have an actuarial base of almost 9 million measures of reputation value,” said the CEO.

“When applied to insurance loss determination, our models operate like any other index. There’s a historic volatility to each individual company’s measures, which creates the normal operating boundaries, and if an insured company’s value falls below the normal operating boundaries, then they’re by definition impaired. The degree to which we allow an impairment before it triggers a loss—like a deductible— is a major factor for pricing an insurance solution. At the technical level, we offer a routine, run-of-the-mill, indexing-based insurance solution,” he added.

So, how might the index-based solutions be attractive to reinsurers and ILS investors? According to Kossovsky, this is threefold.

“We can price to target loss ratio. First, there’s much more stable returns because of lower loss variance. That’s because we have insight into the risk of each company individually, as well as on a portfolio basis. The single name risk data enable objective discriminatory underwriting, which means we can exclude outsized risk, objectively. Second, we see higher returns because our single-name data helps us with more precise pricing that dynamically adjusts for risk. And the third reason is that we can maintain underwriting discipline to sustain that target loss ratio. Our proprietary underwriting and pricing tools—our intellectual properties—are hard barriers for a competitive market to overcome.

“So, sustained loss ratios: stable returns, higher returns, and IP-protected extended returns over years,” explained Kossovsky.

Currently, interest in and demand for reputation insurance is on the rise, and this appears to be a national trend, as highlighted in a recent National Association of Corporate Directors blog, Directorship Online, which states that interest in early December 2024 was almost seven times higher than the trailing five-year average. Undoubtedly, this has been made that much more acute by the assassination of the UnitedHealth CEO in early December in New York, Kossovsky told Artemis.

“Two things are now destabilizing the Nash equilibrium for reputation insurance leading to a sudden and rapid rise in demand. First, a range of issues facing companies make the risk itself more unmanageable, ungovernable, and most important, unpredictable. And personal. Perceptions of the reputation risk have shifted from something that affects companies to something that affects individual corporate board members and executives.

“Second, concern by directors about telegraphing a potential reputation risk at their firm—like the fear about telegraphing a potential liability risk at their firm before the 1980’s—has been swept aside by the acute sense of personal risk by individual directors, and that capacity is relatively scarce. Only the better risks will be covered. As Nobel Laureate Michael Spence explained, objective discrimination and scarcity enable our reputation insurance solution to signal quality (of governance),” he said.

The new issues driving demand noted by Kossovsky include the corporate management and governance chaos that have been heightened by the US elections in 2024.

“Chaos is the right word. One hotbed of reputation risk involves climate and social issues. These are the things that companies once pledged to advance for global betterment, and now they’re retreating. Board members have linked their personal reputations to their firms’ ESG postures, so there’s a lot of cognitive dissonance and concern,” he said. “Especially among stakeholders. Many feel betrayed. The result is an emotionally activated populace willing an abler to target directors’ reputation through action: boycotts, strikes, social license withdrawals and more. An angry man who felt betrayed went further when he gunned down an executive in the streets of New York in December.”

Moreover, he explained, board members surveyed by PwC each year, in 2024, more than ever before, said they’re less likely to support a colleague who got in trouble. In fact, 25% of those surveyed said they’d be very happy to jettison two or more of their colleagues from their boards.

“Furthermore, key institutional investors in January declared that they want to punish leadership for reputation damage. And, on top of that, a recent survey found that key institutional investors are prepared to punish directors at some company if they’ve had a crisis at some other company.

“So, you put all of that together, and you can understand how a corporate director’s perspective would flip. Instead of it being somebody else who might have a reputation scandal, the average dutiful director doing their job can now see themselves being caught between stakeholders and shareholders—who cannot be collectively appeased —and for lack of a better word, be scapegoated,” said Kossovsky.

“The moment the risk shifts from “the other gal” to “it could be me,” it becomes viscerally real. What we’re hearing from our brokers is that Board members are recognising these factors, and they’re sensing that this has suddenly become a very personal, real risk that could impact their own economic security going forward,” he explained “They now understand that the going forward cost of lost future opportunities will not be covered by D&O liability insurance.”

Interestingly, Steel City Re started hearing from brokers earlier in 2024 when some of these factors became palpable, and after the election, the company started to receive more discrete outreaches.

“Can we buy this without it necessarily being known? Can we do this quietly because of that concern about the Nash equilibrium and triggering a “run-on-insurance” and a premium spike? So, it’s a very interesting time right now, which, of course, makes it very interesting for investors as well,” said Kossovsky.

Steel City Re predicts reputation risk for its clients via its Resilience Monitor, a predictive report, and the firm’s experienced consultants help firms manage the risk through business process modifications, captive insurance, and ultimately transfer it through the reinsurer’s parametric reputation insurance solution.

To end, Kossovsky highlighted some of the industry-wide benefits of parametric structures and what the future might hold for Steel City Re.

“Parametric models are a fundamental platform because they allow a rapid response to emerging risk. You don’t need to have a history of loss; you need to have a history of the parameter that correlates with a loss. If the insurance industry wanted, they could turn parametric technology into something like the MRNA technology for vaccines and initiate the insurance equivalent of the Covid vaccine’s operation warp speed.

“With parametric technology, you could respond to any emerging risk in weeks. If you stopped thinking about balance sheets and started thinking about how the client looks at the problem. If the board likes a solution because they think it will provide financial resilience, then surely everybody else in the company will be comfortable with parametric solutions and so on. This is what the brokers are trying to tell the insurers. Insurers want to see an example of how this plays out in reality, and I think we are that example,” he said.

Adding, “So, we’re fortunate that corporate governance is facing so many challenges and individual board members are deemed fair game for long-term economic harm by customers, employees, regulators and investors—none of which is covered by D&O liability insurance. When risk is unmanageable, ungovernable, and unpredictable, the only solution you can rely on is insurance.”

Steel City Re’s reputational value index offers stable, elevated returns for investors: CEO Kossovsky was published by: www.Artemis.bm
Our catastrophe bond deal directory
Sign up for our free weekly email newsletter here.