Over the past 40 years business risks have moved from mainly tangible to predominately intangible Sinéad Browne, Allianz Global Corporate & Specialty chief regions and markets officer, urges companies and insurers to tackle this weak spot in risk management.
A company’s brand, technology and supply chain are sources of great value - and, therefore, risk. The global economy has fundamentally changed over the past four decades in a way that has gone relatively unnoticed. So-called intangible assets such as brand, intellectual property and data now account for the majority of many companies’ individual value and around $20trn in wealth worldwide. But as recent events show, associated risks and losses are increasing. How can companies prepare for these threats?
In 1975, more than 80% of a company’s assets were invested in property, plant, and equipment. Over 40 years later, according to analysis of the market value of Oceantomo’s S&P 500 companies, this ratio has been reversed: the share of these ‘tangible’ assets has fallen to 16%. Today, it’s primarily intangible assets that determine the value of companies including: patents and IP, customer data, IT and software, networks and supply chains, reputation and brand image.
With the exception of property, virtually all economic growth is driven by intangible assets. Yet, most companies only have a limited grasp of the extent of these assets and consequently overlook the need to protect themselves. This changing risk landscape is reflected in the Allianz 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 and cyber incidents.
Transforming the risk landscape
The value of intangible assets 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. 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 like Uber, 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 goods, 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 and businesses to take risks for society to progress. Before the emergence of these disruptor companies, the insurance industry was learning from more traditional companies with intangible assets, such as stockbrokers and offshore IT contractors 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 with the use of Big Data, predictive analytics, data mining and artificial intelligence. The insurance market has also developed innovative products to protect intangible assets and support the insured in the event of a crisis with consulting services designed to mitigate any impact. 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 won’t do in these instances. Companies 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.
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