Reputational Damage High on Risk Agenda for Luxury Goods Companies

Luxury goods companies regard their reputational risk as greater than those in other industries, according to a report by insurer ACE Group in Europe.

Based on a concentrated sample of 45 European luxury goods firms and a series interviews, the report also concludes that environmental, business travel and directors’ and officers’ liability (D&O) are three emerging risks for the industry to watch, although reputation is the hardest risk to manage.

Three-quarters of senior risk executives from the industry sample agree that reputation is their company’s greatest asset and 80% agree that reputational risk is the most difficult individual risk category to manage. Nearly 60% of respondents report that globalisation has increased the interdependency of risks they face. They cites a lack of risk management tools and processes, insufficient budget and lack of management time as well as human resources and skills as the greatest barriers to effective management of reputational risk.

“Despite a recent slowdown, growth of the luxury goods industry has been impressive,” said Olivier Roussel, director, major and international accounts for ACE in France. “However, with growth has come new exposure and unexpected risks. In our globalised world events do not respect neat categories.

“Today’s risk challenges demand a cross-disciplinary approach. A factory fire in India or China can set off a chain of events leading to financial loss and personal liability for individual directors, as well as significant brand damage. These risks have been exacerbated by social media and the 24/7 news cycle. This scale of the threats demands highly sophisticated risk management.”

The survey indicates that three emerging risk categories likely to cause luxury goods companies significant financial impact over the next two years are environmental, business travel and D&O liability.

More than seven out of ten respondents agree that their customers and shareholders are taking environmental risk more seriously. Companies must demonstrate that they are taking the right steps to manage environmental risk exposures. Key areas of concern are air pollution, the destruction of habitats and protected species and water scarcity.

Nicolas Givelet, environmental engineering manager for ACE in continental Europe said: “Many European luxury goods companies have invested heavily in the world’s emerging consumer markets over recent years. Expanding or opening a new market typically means acquiring new property, which may have an unknown environmental history. It is very important then that companies undertake strict due diligence on assets, and evaluate the current and future environmental regulatory regime.”

More than nine in ten respondents say that, despite new technologies such as videoconferencing, their company’s reliance on business travel remains high. At the same time, luxury goods firms are expanding into new markets such as Asia, Latin America and the Middle East. As European employees build business relationships in these less familiar markets, they face an increasing volume and complexity of travel risks.

More than 70% of survey respondents agree that directors feel increasingly exposed and are placing the company’s D&O insurance arrangements under greater scrutiny. Despite this increased level of scrutiny, around two-thirds of the companies polled say that they do not have a specific D&O policy in place, and do not know if it the risk is covered by another policy.

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