Insuring Intangible Assets
In a recent online article (https://www.linkedin.com/pulse/insuring-intangible-assets-new-frontier-risks-thomas-holzheu), Thomas Holzheu, chief economist at Americas, described how the changing economy is changing the risk landscape. Current business models prioritize intellectual capital over physical assets, research and development over capital spending, and services over manufacturing. The implications for insurers and insureds are that insurance programs designed for “brick and mortar” risks are obsolete.
Some of Holzheu’s examples:
- In 1975 S&P 500 market values were 83% tangible and 17% intangible assets. In 2015 tangible assets were only 13% of values; the remaining 87% were intangible.
- In 1992 the three most valuable public companies were Exxon Mobile, Wal-Mart and General Electric; in 2018 they are Apple, Microsoft and Amazon.com.
As companies have shifted from manufacturing to information and services, new risks are evolving – supply chains, cyber, product recall, weather, and commodity or energy prices. Formerly, these risks were either uninsurable or like cyber not on underwriters’ radar. With advances in data availability, analytics, modelling, and product innovation they can at least partly be insured.
The growth of the sharing economy creates a need for insurance products to cover the players, employees and end consumers/users. The demand for insurance solutions is moving from covering assets and balance sheets to earnings and cash flow.
Examples of perils requiring innovative coverage:
- Non-physical damage business interruption. With longer and more complex supply chains, businesses need contingent business interruption to cover loss of a major supplier or client. The next step is to insure earnings when there is no physical damage. This includes utility interruptions, political risks, regulatory actions or bankruptcy. In the past there have been specialized insurance products for individual risks, but in the future there could be “named peril earnings insurance” for some or all of them.
- Cyber insurance is now becoming a separate field of insurance, with many variations in coverage forms. Today almost every organization needs at least a “cyber” extension to traditional policies, if not a full package of first and third party coverages. However, according to the Ponemon Institute only 15% of potential cyber loss is covered, compared to 59% of physical asset loss.
- Product recall. Some insurers offer sub-limits for product recall expense, but third party claims still require specialized insurance.
- Reputational risk. Policies frequently include some coverage for “crisis management” expenses or loss of brand value. The scope and limits vary widely and should be carefully reviewed.
- Weather and energy price risks insurance are still in the development stage.
Many policies addressing these risks are custom made. Expansion of risk cover requires progress in modelling and underwriting.
A personal observation: Last September I marked 50 years in the insurance business. During that time I have seen great changes in policy forms, and whole new areas of coverage. I am sure the next 50 years will bring greater and more rapid changes. Insureds and their advisers must be prepared.