The emerging risks of social networking

The Net Generation

Businesses are engaging with social media for numerous reasons including marketing, communicating with customers, and collecting information. But, using social media can also have unexpected consequences, potentially exposing an organisation to regulatory, legal and reputational risks.

A recent report by Deloitte into the use of social networking by the life sciences industry warned that firms using social media for marketing and research were taking significant risks. The report notes that life sciences and healthcare companies are highly regulated and that communicating with patients and doctors through social media was not exempt from such oversight. Deloitte also says that companies are accountable for content on social networks, even when it is created by others.

Despite these risks, Deloitte found that life sciences companies do not appear to be establishing clear, written policies for social networks. Only half of the life sciences companies it surveyed have a social networks policy and 43% percent had no guidelines for managing adverse events.

Insurers develop solutions

Companies in almost every industry are exploring the potential benefits of using social networking platforms for marketing and research, says Pat Donnelly, managing director at Aon Financial Services Group.

This opens them up to exposures that may not be present in their core business or fully covered by their existing insurance, he says. For example, a company could find it is facing a claim for the release of personal data, defamation or breach of intellectual property rights through their social media activities.

When properly tailored, traditional insurance can respond to social media exposures, but most products were designed before such technologies existed and so they may have limitations or broad exclusions. However insurers are now responding to the risks of social networks and specific products are being developed. Lloyd’s insurers, among others, are looking to develop a product that covers a company’s social networking exposures under one policy, says Donnelly.

Emerging risks

The increasing use of social media by companies presents new challenges to underwriters, says Alan Thomas of Hiscox, which specialises in writing insurance for technology,

media and marketing companies. Companies that use social media are exposed to emerging risks, in particular those around issues like privacy, intellectual property infringement and defamation. Also, the legal and regulatory environment has struggled to keep pace with developments in the Internet, he says.

However, Hiscox has been working with lawyers and clients to understand these emerging risks and the likely direction of regulation, and has adapted its media insurance to respond to social media exposures where possible.

Social networking sites are something of an emerging risk for insurers, says Paul Bantick of Beazley. They do buy insurance but this remains a tough class for underwriters, he says. Litigation from ‘click fraud’ - where automated software generates false hits in pay per click online advertising - showed that claims can come from unexpected areas.

Employees need clear guidance
Companies are also exposed to risk when their employees use social networking sites for work or pleasure, says Paul Skinner, technology underwriter at Chubb Lloyd’s syndicate. Companies should give training and have clear processes in place for the use of social networking sites by employees, he says.

For example, professionals and scientists use social networks in research and development, such as to exchange ideas or to source information. However, ideas gleaned from a social network could be considered intellectual property and could be subject to copyright, says Skinner.

Claims made easy

The social media phenomenon also reaches beyond those companies using networking technologies and is already affecting liability insurance lines like employers’ liability, motor, public liability, directors’ and officers’ and product recall insurance.

Social networking sites are raising consumer awareness, helping to identify ‘soft targets’ and assisting people to make a claim, says Kip Berkeley-Herring, a partner in the Communications, Technology & Media Practice Group at Jardine Lloyd Thompson. For example, consumers can learn how to claim for faulty goods, for personal injury claims like whiplash, or against a company as part of a shareholder class action..

Opportunity knocks

Risk managers are increasingly aware of how social networking is affecting risk, but they are still figuring out how best to respond, says Berkeley-Herring, a former risk manager at telecommunications company BT.

Insurers do offer specialist coverage for cyber risks such as data breach and hacking, but internet related risks are creeping into many less obvious areas of insurance. However, social networking trends represent an opportunity for insurers and brokers to innovate and develop their product, he says.

“The Internet is not necessarily creating new risks, but existing risks are materialising in a different way. If this view is correct then the insurance solutions are already out but they will need changes.”

For example insurers have extended directors’ and officers’ insurance to cover the cost of mitigating and dealing with reputational damage from the release of sensitive corporate data through a social networking site.