Touching the void: insuring intangible assets

Taxi companies without cars, holiday rentals without property portfolios, and currency in the cloud: tech entrepreneurs have created immense value though intellectual capital, trust and brand reputation. Do insurers have the wit, agility and innovation to underwrite the intangible assets of these virtual giants?

The digitisation of the economy is changing the way successful companies generate their economic value. The evolution of business models can be seen in the rising importance of intellectual capital vs. bricks-and-mortar, research and development vs. capital spending, and services vs. manufacturing, etc. These businesses face a different risk landscape which requires adaptations of the commercial insurance product offering.

Once-uninsurable risks can now be at least partly insured thanks to advances in data availability, advanced analytics, modelling, indemnity structures and other product innovations. Key areas of evolution include supply chain risks, cyber-risks, product recalls, weather risks, and commodity and energy prices. Many of these modern risks remain challenging though, as they are more fluid, and thus require more active management and collaboration in the fields of loss prevention and mitigation. A recent article in The Economist featured this topic, referencing Swiss Re Institute's research in sigma 5/2017.

Out for the count
The corporate sector has undergone a number of changes in recent decades. As companies have shifted from making physical things to providing information and services, the composition of companies’ balance sheets has shifted too. Consequently, the value of firms has shifted from being predominantly tangible-asset derived, to being primarily based on intangible assets. For example, in 1975, tangible assets such as plant, property, equipment and inventory constituted 83% of the total market value of the S&P 500, according to estimates by Ocean Tomo.[1] By 2015, that share had fallen to just 13%, while intangible assets such as intellectual property, networks, platforms, data and customer relationships accounted for the other 87% of the market's value.

Tangible vs intangible assets as share of S&P 500 market value, 1975-2015


This shift is also reflected in the composition of the world's largest corporations. In the 1990s, the largest firms were mostly manufacturing and energy companies; in 2018, technology and service companies are the top giants. The FAANG tech companies (Facebook, Apple, Amazon, Netflix and Google) have been particularly successful at capitalising on the value of intangible assets such as software, data, and brands. Network effects create winner-takes-all types of economies of scale and ring-fence their businesses quickly against competitors,. A recent study by the McKinsey Global Institute concludes that relative to peers, companies that capture the largest share of economic value creation (the so-called "Superstars") share several common characteristics, including higher levels of digitisation, a greater skills base, higher innovation intensity, more globalisation and more intangible assets. [2]

Absence makes the firm grow stronger
New transportation firms like Lyft and Uber own no cars, and Airbnb owns no rental units, yet they are overtaking traditional players in their respective sectors in terms of growth and market capitalisation. Their value creation is mostly based on intangibles such as data, trust, brand recognition, scale and network effects etc. The use of a physical asset in the sharing economy challenges the traditional insurance division into private and commercial purposes, requiring new forms of specialised coverage.  Increasingly, manufacturers and industrial conglomerates make greater profit from services such as maintenance, rather than from selling the physical goods they produce. All these evolutions of business models imply a shift of operational risks.

The demand for insurance solutions needs to evolve, away from a focus on asset covers and balance sheet protection, toward protection for earnings and cash flow risks. Some previously uninsurable non-core business risks can now be insured – to some degree – due to the creation of triggers, indemnity structures, plus data and modelling advances. Examples of perils that can be covered in more innovative ways include non-physical damage business interruption, cyber, product recall insurance, reputational risk insurance and protection for weather and energy price risks. All are areas of focus for Swiss Re in our Corprate Solutions and Reinsurance business units.

Most innovative insurance solutions are custom-made to a protection buyer's specific need. Eventually, successful concepts develop into more mainstream products. Some of these more innovative solutions are achieved through the use of parametric triggers, double triggers, and structured solutions. In contract terms, many are derivative solutions rather than insurance. Regulatory constraints are sometimes headwinds to the implementation of new concepts. All new or expanded areas of risk transfer require modelling or underwriting and are enabled by the expanded availability of data and the evolution of analytical capabilities. These new solutions expand the boundaries of insurability, and in doing so, enlarge the scope of insurance in risk management.

Article by Thomas Holzheu, Swiss Re Institute Research & Chief Economist for the Americas

[1] Source: Annual Study of Intangible Asset Market Value, Ocean Tomo, 4 March 2015.

[2] "Superstars’: The dynamics of firms, sectors, and cities leading the global economy" by McKinsey Global Institute, October 2018