London Addresses Intangible Assets

London Addresses Intangible Assets

Organizations, both large and small, and from a range of different industries, are waking up to the growing realization that up to 80 percent of the value of modern business is tied up in their intangible assets, rather than in their physical plant, property and machinery.

Chief executive officers, finance directors and risk managers are becoming increasingly aware that major incidents could often go much further than the cost of the initial physical loss, and that the financial damage caused by intangible assets can bring a company to its knees.

The intangible assets that a business owns are based around a number of key areas that can be grouped under the generic term “goodwill.” These cover the intellectual capital of its workers, research and development into new and improved products, and the integrity of its reputation and brand.

The loss of goodwill through business practice or catastrophe can have disastrous consequences. Companies that are particularly vulnerable to financial damage through intangible assets are involved in areas such as biochemical research, online businesses, consultancies and brand management companies.

In the service sector, the demise of the accountant Arthur Andersen demonstrates what can happen to a company when customers lose confidence in it. For consumers, the brand name, ethics and reputation of a company can be crucial in the purchasing decision of a given product or service.

And European businesses are now becoming increasingly aware of this fact. Indeed, according to the recent “Aon European Risk Management & Insurance Survey 2002-2003,” the three greatest perceived risks facing European businesses are now deemed to be:

Business interruption;

Loss of reputation; and

Products liability, tamper and brand protection

Ironically, consideration of these threats is often not integral to the function of the risk or insurance manager. All too often, too little attention is given to intangible risks, so it is unsurprising that a survey by the London-based Association of Insurance & Risk Managers has shown that only 22 percent of companies have a formal brand and reputation strategy in place.

This change in perception and the recent hard market has placed demands on risk managers and insurers alike to rise to the challenge of being able to identify and subsequently insure intangible assets.

Despite talk that the insurance industry has not faced up to the challenge to provide enoughor even anycoverage for these particular areas, innovative products have been and are being created in the London market.

These products specifically protect businesses against the financial fallout resulting from the losses to corporate reputation and intellectual property.

Over the last two years, the London market has seen an influx of capital, mostly focusing on short-tail business and not specialty lines such as intellectual property. However, certain liability lines are experiencing an excess of capital because underwriters have pulled out of loss-making lines. As a result, underwriters are showing increasing interest in specialty classes, such as those that provide balance-sheet protection should the intangible assets of a company be lost or damaged.

With the increasing importance of corporate governance, it is expected that there will be greater accountability to shareholders for the protection of all assets belonging to the company.

There is increasing demand for insurers to produce more complex and competitively priced products. Financial accounting changes are happening that are aimed at assigning value to intellectual property, brand value and goodwill, and to their being amortised in the financial reports and accounts. This should only serve to emphasise the assets at risk and promote forward thinking as to the best way to manage such issues.

With more and more businesses relying for their competitive advantage on the intellectual capital that walks in and out of the door every day, as well as reaping the benefits of years of marketing spent in creating brand value, the way that businesses assess and tackle their future perils will change.

The demand for a sub-set of property rights that are intangible in nature and grant a monopolistic right to use, sell and distribute the fruits of ones innovation and creation is increasing. The signs are that awareness is increasing all the time and no doubt the greater focus on corporate governance and social responsibility, combined with the new U.K. accounting regime that requires valuation of intangible assets, will contribute to the impetus that is already driving this market forward.

Matthew Hogg is an intellectual property specialist with R.J. Kiln & Co. Ltd., a Lloyds managing agency.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, September 1, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.