Intangible Risks

EDGE
THE

INSURABILITY
OF

Covering intangible assets like patents, trade secrets and brand

reputation offers a challenge to insurers due to lack of claims data.
But the answer may not be in product offerings but in prevention
and risk management strategies.
by Kate Smith

J
ulia Graham understands what keeps risk
managers awake at night. It’s not floods and
fires that steal their sleep. At least not anymore.
Those perils, which once consumed risk managers’
thoughts, have been replaced by something far
murkier.

Kate Smith is a senior associate editor. She can be reached at

kate.smith@ambest.com

46 BEST’S REV)%7s!02),
 “If you look back 20 years ago, 80% of what Key Points
kept you up at night would be tangible,” said Asset Shift : Intangible assets have replaced physical
Graham, deputy chief executive and technical assets as the greatest source of market value for many
director of Airmic, a U.K.-based association companies.
of risk management professionals. “You’d be Fuzzy Numbers: Placing a dollar value on intangibles has
worried about fires and floods, explosions and proven tricky, but is essential for managing these new risks.
storms, much more visible things. Those things Baby Steps: With little data available on many intangible
are all still there, but they’ve been pushed farther risks, insurers are proceeding cautiously in their
down by other issues. They haven’t gone away; approaches to coverage.
they’ve been displaced.”
In the hierarchy of concerns, intangible
risks now reign supreme. Reputational damage, fire risk itself can be mitigated with something
loss of intellectual capital, regulatory changes, as simple as a sprinkler system—insurers
failure to innovate, network failures, political have struggled to create protections against
risk, protectionism—it’s those hard to define, intangible risks.
and even harder to quantify, risks that worry Of the top risks in Aon’s 2017 Global Risk
executives most. Management Survey, only 24% are deemed
For many companies, their value no longer lies insurable. The remaining risks are either partially
in bricks and mortar. It’s not the widgets they insurable (25%) or uninsurable (51%).
produce but the ideas they generate, the brand “Most of the risks would be considered
name they build and the customer loyalty they intangible,” Nornes said, “and more than 70% of
engender that add to their market cap. them are not easily insurable.”
“Even in the manufacturing world, is your Intangible risks don’t respect silos. They spill
biggest risk that your factory burns down? across business lines and geographic boundaries,
Probably not,” said Randy Nornes, executive often are intertwined and, when triggered, fall
vice president of Aon Risk Solutions. “Is it a big like quick-moving dominoes. On top of that, data
risk that someone hacks into your computers on these risks is scarce and quantifying their
and steals your intellectual property? Yes, that’s economic impact is tricky.
probably a big risk.” Still, insurers recognize they need to fight
Risks historically have revolved around this battle, uphill as it may be, in order to stay
people and property, equipment and products. relevant. And they are beginning to do so.
Now much of the value of a business is in its “This is an opportunity for the insurance
business model. Look no further than Uber and industry to be innovative and to be part of the
Lyft, which own no cars yet have disrupted the evolution in how you identify and address risks,”
transportation industry. Joan D’Ambrosio, a partner at Clyde & Co., said.
“You’re seeing an evolution in industry in “And I think they’re trying hard to do that.”
general,” said Angelos Deftereos, XL Catlin’s head
of operational risk for international financial Dollar Value
lines. “A huge element of our economy is driven Addressing intangible risks begins with
by companies that deal in intangibles.” identifying and quantifying them—both of which
According to investment group Ocean are tall tasks.
Tomo, 84% of the S&P 500’s market value is “It’s hard to have a conversation about risk if,
comprised of intangible assets. Patents, trade as a client, you don’t have a view on the value of
secrets and brand reputation are the lifeblood the risk,” Nornes said. “Being able to have a lot of
of many modern businesses. And in a world of insight into your business and how that business
cyberattacks and social media obsession, those is changing is crucial.”
things are easily jeopardized by one hacking The rise of enterprise risk management as a
incident or viral tweet. distinct discipline has led to greater awareness of
In this new dynamic, the most valuable aspects risks, which experts say is a good first step.
of a business are also the most vulnerable. Unlike “The intangible element is now better
physical assets, which are easily protected identified as a discrete component of the
through insurance risk transfer, intangible assets risk profile,” Deftereos said. “Once you’ve
are much harder to protect. Few solutions exist acknowledged there’s an issue there, the
for them. question becomes how to handle that.”
Whereas property insurance indemnifies And how to monetize its worth. Quantifying
companies for losses associated with a fire—and intangibles is a huge challenge.

BEST’S REV)%7s!02), 47
 “A lot of these intangibles are outside
of your control but clearly affect
Intangible Risks

business. They’re hard to quantify

because you don’t know where
they’re going to land. When things
become less physical, they don’t fit
neatly in the world we’ve built, which
is based around physical things.”
Randy Nornes
Aon Risk Solutions

“Intangible risks are traditionally harder to put means something different to everybody, including
a monetary value on,” Graham said. “So it makes everybody within an organization.”
monetizing the value of your assets quite difficult. Because the definition of intangible risks
“With tangible risks you traditionally have a can be subjective, insurers must start with
legacy of data and data sets made available by understanding how the client views and values
clever use of analytics that help you underwrite its risks.
them. Whereas with the intangible risks, they “If we start with that and the client can clearly
typically don’t have the legacy attached to them, define the problem they’re trying to solve for,
so if you’re trying to underwrite them there’s a insurers ultimately can create products out of
lot less to extrapolate forward because data about that,” Nornes said.
the intangibles just hasn’t been around very long. “But you almost need clients who are the
They are also much harder to anticipate because incubators for the ideas, and then we can scale
they behave more like amoeba than more them. That’s the only way we want to innovate—
sequential risks.” around a client problem.
That lack of data is a stumbling block for “The client needs to understand quantification
insurers. modeling and be able to price the risk themselves
“A lot of these intangibles are outside of your as a prerequisite to having a conversation with
control but clearly affect business. They’re hard an insurer,” Nornes added. “That’s a much more
to quantify because you don’t know where productive conversation. We wish the insurer
they’re going to land,” Nornes said. “When things would have better products, but we can’t explain
become less physical, they don’t fit neatly in what that means. So I think if someone has a
the world we’ve built, which is based around problem to solve, insurers will rally around that.”
physical things.
“Insurers have to manage their own risks,” Piecemeal Approach
Nornes added.“They rely a lot on models that show Picking apart the elements of an intangible
them what their risks are.That’s based on historical risk provides a starting point for covering it,
data. When you have new risks you can’t rely on said Shawn Ram, head of insurance at managing
historical data. So you have to limit how far you general agent Coalition.
can go, because you don’t want to bet the farm on “Often times when we look at a problem
something that’s unknown.” like intangible risk, we say, ‘how do I boil the
That doesn’t mean insurance solutions aren’t ocean? How do I insure every possible aspect of
feasible, though. But taking a product-first a particular risk category?’” Ram said. “Whereas
approach won’t work. Nornes learned that when if you take a deep dive into an intangible asset,
his team developed a reputation risk product you come to conclusions around where the
back in 2010-2011. claims are, where there’s data and where there
“The problem wasn’t that the products weren’t isn’t data. Then you can present it to a carrier in a
great,” he said,“but when you say reputation risk it meaningful way and use it to drive value.”

48 BEST’S REV)%7s!02),
Intangible Risks

“Intangible risks put greater emphasis

on response and recovery. If something
does go wrong, particularly with
intangible risks, it tends to occur
quickly and tends to escalate quickly.”
Julia Graham
Airmic

One of the most successful examples of “The increasing volume of data related to
that approach is in cyber coverage, which has intangible risks now allows us to design indexes
expanded to offer legal services and public that are correlated with the losses of our clients,”
relations experts. These add-ons are directed said Sebastien Piguet, business development
explicitly at intangible risks. manager and senior underwriter at AXA Global
“People think about how to mitigate an event Parametrics. “We can, for instance, use Twitter
so it doesn’t morph into a much larger financial data to design a reputation index. However, the
problem,” Deftereos said. “You saw the genesis main obstacle is that we lack a sufficiently long
of that in insurers providing access to PR and historic record of data to make us comfortable
legal expertise. That was an attempt to manage modeling the risk and therefore taking the risk on
intangible risk. ourselves as a carrier.”
“What they price is access to expertise that Until carriers are able to take on such risks,
can help them overcome a particular situation Piguet suggested captives as a solution.
when there’s a crisis. That’s an example “Instead of transferring the risk to an external
where insurance has moved away from pure insurer, the intangible risk can be retained inside
indemnification and more into finding ways to a captive,” Piguet said.
assist people in managing a risk and preventing it “AXA Global Parametrics is currently able to
from becoming a bigger issue.” support its clients in the design of innovative
Response services are increasingly valuable to indexes to cover intangible risks. AXA provides
companies, Graham said. these kinds of services to clients through its
“Intangible risks put greater emphasis on Alternative Risk Financing entity to address a
response and recovery,” Graham said.“If something multitude of intangible risks such as supply chain
does go wrong, particularly with intangible risk, regulatory changes, terrorism and epidemics.
risks, it tends to occur quickly and tends to “Until there is a sufficient record of data built
escalate quickly.They’re often the subject of up over the next few years to support robust
escalation through things like social media, and modeling, we believe a captive is the best option
you have to be on your toes to know how you’ll today to transfer intangible risks.”
react.Therefore, you have to have superb crisis Deftereos said the industry’s ability to get a
management. When those services are bundled handle on intangible risks “absolutely” affects its
into the insurance, they become great value-added long-term relevance.
solutions on the back of risk financing.” “What’s exciting about this is that it will be an
The expectation is that intangible risks will be ever-evolving landscape, so it will force us to stay
addressed more directly by insurers in the future. on our toes and stay fresh,” he said. “As businesses
AXA Global Parametrics, AXA’s center of expertise pivot away from traditional goods and services
for parametric insurance, already is in the early and toward the intangible space, it is a challenge
stages of exploring the potential for parametric and opportunity for us to stay engaged and fasten
insurance to be used to cover intangible risks. the pace of our own innovation.” BR

50 BEST’S REV)%7s!02),
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