In this 4th Industrial Revolution, platforms have supplanted traditional companies as wealth creators while intangible assets have replaced heavy machinery. Comprising 90% of S&P 500’s $28.94 trillion market value, intangible assets present an immense, largely untapped opportunity for insurance industry to develop new and complementary products and services. Currently, the industry offers intellectual property insurance and key person life insurance. Research and development is underway to develop newer products to protect the full range of intangible assets, including a company’s intellectual capital, processes, patents, trademarks, goodwill and brand.
The intangible value of a business, covering its people (human capital), relationships (relational capital), and everything else (structural capital) constitute intangible assets. All three categories are critical for most organizations, regardless of sector. Some of these assets are accounted for in organizations’ balance sheets while others are hidden and only considered when valuing the future potential of the business.
With the corporate sector becoming richer in terms of intangible assets, demand for insurance solutions is evolving from asset covers to protection for business risks that were previously uninsurable like earnings and cash flow losses. The source of the losses range from disruption to business, cyber, product recall and reputation to energy price risks. The evolution of triggers, indemnity structures, and modelling advances are making available coverages to handle hitherto uninsurable earnings or cash flow losses.
Insurers will need a significant amount of capital to support these growth opportunities. Carriers will have to decide how much capital they want tied up to service the tail against potentially more lucrative opportunities. The opportunities that lie ahead will require thinking about risks in terms of the known and measurable. Intangible risk exposure is not geographically contained like a natural catastrophe or not as explicitly calculable as a burning building.
Aon Plc has arranged a bespoke intellectual property collateral insurance policy in excess of $100 million. The coverage, arranged for the lender, allows IP-rich agritech Indigo Ag to borrow this amount with intellectual property as collateral. The value of the collateral is insured by a group led by Markel Specialty, with Hudson Structured Capital Management as the biggest capacity provider. The IP-backed lending transaction with Aon’s rollout of its IP capital market solution is a pioneering development, featuring their proprietary valuation tools.
Parametric Insurance for Intangibles
Parametric insurance is yet another solution to the intangible challenge and can bring insurance products for a range of intangible assets, including cyber into the mainstream. Parametric triggers are well suited for this kind of insurance since they there is no requirement of precise calculation of asset values. Pay-outs are based on clearly defined parametric triggers that are agreed between the insurer and the insured at the onset of the contract. RYSKEX is currently developing just such a product. Investors tend to be comfortable with parametric triggers, given they have often had some experience of them through their investments in instruments like equity options. So the increasing use of parametric triggers could help reinsurers unlock more alternative capital.
As with traditional insurance products, insurance consumers will need to be clear on what is and isn’t covered under their policy. While intangible assets can represent high values, assigning an accurate financial value isn’t straightforward. By comparison, tangible assets are relatively easy to insure. Undoubtedly, the insurance industry has evolved to create solutions for intangible risks such as cyber, intellectual property and employee negligence covers. However, with the current macro winds unlikely to subside, the industry will increasingly need to develop covers to protect the economic value derived from intangibles. Clever use of data and analytics will be key to develop such solutions, especially as the industry starts to move away from generalized products towards those which can be tailored according to a customer’s specific needs. The attendant benefit would be such data facilitating the development of security incentives across different product lines, similar to telematics data used in motor policies.
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