Protecting your intangible assets
February 2019 | PROFESSIONAL INSIGHT | RISK MANAGEMENT
Financier Worldwide Magazine
February 2019 Issue
A company’s brand, technology and supply chain are sources of great value and, therefore, risk. A fundamental change in the global economy has occurred over the past four decades which has gone relatively unnoticed. Intangible assets, such as brand, intellectual property (IP) and data, now account for around $20 trillion in wealth worldwide and the vast majority of many companies’ individual value. But as recent events have shown, the risks and losses associated with these intangible assets are increasing. How can companies prepare for these threats?
In 1975, more than 80 percent of a company’s assets were invested in property, plant and equipment, refineries, offices or ships and other means of transport. Over 40 years later, according to analysis of the market value of Oceantomo’s S&P 500 companies, this ratio has been reversed and the share of tangible assets has fallen to 16 percent. Today, it is primarily intangible assets that determine the value of companies, including patents and IP, customer data, IT and software, networks and supply chains, and reputation and brand image.
Virtually all economic growth is driven by intangible assets. Yet, most companies only have a limited grasp of the extent of their intangible assets and consequently overlook the need to protect themselves from new intangible risks. This changing risk landscape is reflected in our Risk Barometer survey, based on the insights of nearly 2000 risk experts across 80 countries, where seven out of the top 10 risks are intangible, such as business interruption (where a business suffers a loss of income as the result of being unable to trade due to an unexpected interruption) and cyber incidents.
Technological change will accelerate the transforming risk landscape
The value of intangibles can change rapidly. The value of a brand, built up over years, can be eroded overnight by a single corporate scandal. Risks associated with intangible assets can also undermine a company’s value rapidly, as shown by the recent data breach at credit-reference agency Equifax which could cost over $400m, according to recent regulatory filings and reports. Costs can also spiral after an event, with regulators and consumer groups across the world possibly preparing legal cases. An affected company may also have to spend millions on belatedly upgrading its technology and security infrastructure to protect its intangible assets.
Technological advancement has also led to the rise of new types of businesses, such as Uber, Lyft and Airbnb, which are overtaking traditional companies and creating new risks that must be addressed. More traditional companies have fully embraced technology too, selling services alongside engines, and monetising data collected by smart sensors. Further, as organisations become more global, supply chains have gotten longer and more complex, increasing business interruption concerns.
The changing risk landscape requires new ways of assessing, mitigating and transferring risk
Insurance has always been about enabling people to take risks so that business and wider society can progress. Before the emergence of these ‘disruptor companies’, the insurance industry was learning from more ‘traditional’ companies with intangible assets, such as stockbrokers, offshore IT contractors and legalised betting companies that faced a larger impact from an interruption of services compared to property damage. So insuring companies with intangible assets, while uncommon, is not a new concept for insurers.
The industry has already moved to embrace, understand and mitigate some of the risks associated with the use of Big Data, predictive analytics, data mining and artificial intelligence. The insurance market has also developed innovative products that go beyond this to protect intangible assets and support the insured in the event of a crisis with consulting services designed to mitigate any impact on intangible asset values. Alternative risk transfer customised multi-year multi-line, parametric or capital-market solutions can also be the answer for more emerging intangible risks which often cannot be covered adequately under traditional insurance.
Finding solutions to insuring intangible risks presents an opportunity for the insurance industry as traditional policies just will not cut it in these instances. Companies also need to recognise that intangible assets are the most important assets they control. Boards need to add intangible assets to their audit and risk committee’s agenda – to understand that the majority of assets are intangible. These are also where the largest and most significant risks will emerge from. Until insurers and their partners complete this transformation, intangibles will remain the weak spot in risk management.
Sinéad Browne is chief regions & markets officer and member of the board of management at Allianz Global Corporate & Specialty SE.
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Allianz Global Corporate & Specialty SE