Examining the importance of reputational risk for SMEs

Many small and medium sized businesses in the UK are ignoring or under-estimating the potential risks of reputational damage. That’s according to The Chartered Insurance Institute (CII), which claims that brokers should "become far more proactive" when discussing reputational risks with their clients.

Reputational damage can come from a number of sources. It could be directly caused by the actions of the company itself, via actions or practices that consumers view in a negative light. It could be caused by the actions of employees or partners and suppliers. Reputational damage could also be a serious consequence of a cyber-security breach.

According to Nick Kincaid, project manager at CII member Willis Towers Watson, the widespread use of social media and global connectivity is now exacerbating the extent to which reputation-damaging events affect a business.

Most high-profile cases of reputational damage that make the headlines involve large businesses and well-known brands but smaller businesses can also be susceptible to the issue.

According to the recently published third annual Data Breach Preparedness study from Experian, SMEs estimated the average cost of a data breach to be £179,990. Government figures put the true cost closer to £310,000, a difference of more than £130,000.

There are various different elements associated with this total cost but reputational damage is one that is often overlooked. Where elements such as repairing the breach itself can represent one-off costs, the cost of reputational damage can be ongoing and a company suffering from this sort of damage could find itself requiring turnaround management if it cannot recover from the reduction in business that often accompanies an issue.

According to the Experian study, nearly two thirds (64%) of consumers say they would be put off from using an SME’s services following a data breach. Despite this risk, less than a quarter (23%) of small businesses surveyed acknowledged the extent of this risk.

The CII report suggests that the market should develop a comprehensive solution comprising a number of distinct elements. These should include prevention risk management, crisis cost and containment, indemnity protection for loss of revenue and post-loss consultancy.

By Phil Smith

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