The challenge of insuring the intangible
In the early 1980s, tangible assets made up around 80 per cent of the value of the S&P 500. Fast forward to today and nearly 85 per cent of the value of the S&P 500 is attributable to intangible assets. However, the risk transfer market has not caught up.
According to the Aon/Ponemon report of last year, while around 60 per cent of tangible assets, such as property, plant and equipment, are currently being insured, only 12 per cent of informational assets are. So what gives?
Why, if the vast majority of company’s values in 2018 are attributable to intangibles, are they not transferring those risks? Is it a lack of education on the client side? A lack of innovation in the brokerage community? A lack of understanding or willingness to accept these new risks on the carrier end?
Or is it that whilst the marine and property markets have had centuries to evolve, the newer intangible insurance markets are just gearing up to size as they collate the data they need to properly price and model these risks?
Likely, it is some combination of all of these factors. We have seen great strides in the cyber market, with double-digit premium growth over the last four to five years.
The market has evolved from being focused on large data holders, to providing products which contemplate the cyber perils affecting manufacturers, the transportation industry and other non-data holders.
Business interruption has quickly morphed into system failure coverage. Contingent business interruption now looks more akin to full supply-chain risk, not just for IT service providers but now contemplating all vendors.
Bodily injury and property damage stemming from non-physical threats complete the circle back into tangible loss being covered under cyber policies.
Intellectual property (hands down) makes up the largest dollar percentage of the intangible asset value of the S&P 500. This has long been a conundrum for the industry as a whole — both in terms of how to value the asset and more so how to value the loss.
Again, we have seen great momentum here with much larger limits than were historically available now obtainable from the markets both as a theft product as well as being offered for IP infringement.
Even now carriers are contemplating supporting the multitrillion dollar asset class of intellectual property when used as collateral.
This could dramatically impact both the equity financing model and asset backed lending world we know today. Clearly the will to innovate is alive and well within the industry.
It is tough to price emerging risk when the models that our industry are built on rely on historical data, data that is often out of date or irrelevant in these rapidly evolving intangible classes of business.
New ways to price and structure these insurance purchases have to be found in order to maintain the industry’s relevance in today’s world.
• Giles Harlow, senior vice-president of Aon (Bermuda) Ltd, will speak on a panel titled “Evolution of Product and Buyer” at the International Cyber-risk Management Conference at the Hamilton Princess today
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