A company's fixed assets such as laptops, plant and equipment are usually secured, guarded and insured. While this remains important, intangible assets such as brands, confidential information, or patents are usually much more valuable, but also more difficult to protect.
The importance of intangible assets
In the past years, the value of companies’ intangible assets has grown steadily. The importance of intangible assets increased from around (opens a new window) 17% of S&P asset value in 1975, to 32% in 1985, to 68% another decade later in 1985, to ultimately exceed 80% in the last 10-15 years.
This trend is driven by the ascension of technology companies while sectors where property and machinery play the main role became less important.
Nowadays, intangible assets are the primary drivers of companies’ performance. Examples of intangible assets include:
Intellectual property
Proprietary software and databases
Written processes and procedures
Organisational culture, rules, norms
Rational capital reputation and brand
Relationship with customers
Relationship with distributors, partners
Human capital
As the COVID-19 pandemic outbreak has accelerated the digitisation process and moved more business online, if anything, intangible assets are set to become even more important. Where possible, organisations have switched to remote working, museums are conducting virtual tours, and health practitioners have introduced tele-medicine. Consequently, organisations need to protect employees and information at private homes and address new types of reputational threats.
Directors and officers have a fiduciary obligation to manage all assets and risks, including intangible assets. Consequently, they need to:
Develop a strategy to protect, manage and exploit key intangible assets,
Identify key intangible asset risks,
Develop a strategy to manage and mitigate the risks and transfer liability where possible.
Protecting intangible assets
To protect a company’s brand and reputation, management should regularly scan the environment to detect significant social movements outside the business early. To protect human capital, companies need to systematically and periodically articulate procedures and organise regular knowledge sharing and related data capture. This will avoid that if team members depart, the expertise is lost. To protect intellectual property, organisations are deploying a range of cyber protection measures as well as stricter employment contracts.
In a joint August 2020 document (opens a new window), Lloyd’s and KPMG have developed the following action list to protect intangible assets:
Assess the total intangible value of your organisation – what is the value of intangible assets on your balance sheet? Do you have other ‘hidden’ intangibles that are valuable but not visible on your balance sheet (e.g. human capital and reputation)?
Form inter-departmental working groups to assess the relative value of different types of intangible assets in your organisation; determine which are critical to your success.
Perform ‘war-gaming’ exercises and horizon scanning to test your resilience to risks impacting intangible assets; determine your weaknesses and act on them. Try to prevent risks from happening.
Assess your ability to adequately monitor intangible asset value changes over time and assign each asset a clear risk owner. Consider using corporate partners, such as communications agencies, to further understand risks and value.
Determine if there are risks you cannot deal with within the organisation and evaluate what financial or other solutions may be available.
Damage to intangible assets
Reputation and brand is among the most valuable of asset types and damage often occurs following activist events. Financial costs due to damage to a company’s brand or reputation can result from litigation related to harassment allegations or from cutting ties with a famous actor. Sexual harassment allegations about the CEO can cause the company a sharp loss in market value. The cost from the impact on intangible assets can involve loss of revenue, litigation, marketing cost, and lost market value.
Reputational damage can be caused by a range of internal and external practices, including employment practices (e.g. diversity, health & safety), social issues (e.g. LGBTQ and women’s rights), corporate conduct (e.g. business ethics, data privacy), civic responsibility (e.g. community outreach), charity (e.g. disaster and humanitarian relief), and environmental stewardship (e.g. carbon footprint). Each industry tends to be impacted by different types of activism.
The role of insurance
The insurance market is constantly developing new products and adjusting them to help companies mitigate risks to their intangible assets.
There are solutions mitigating potential harm after a reputational event and indemnity for lost profit due to an adverse media event, for example. In the human capital area there are products insuring against a key person leaving the company or accident & health cover for example for athletes in sports teams. To protect intellectual property (IP) there are special solutions for IP pursuit or defence and liability.
Cyber insurance can help mitigate risks further. The protection was primarily built to cover the costs and liabilities due to a breach of a company’s network security and/or unauthorised access to personal data, but it has evolved to cover a broader set of risks.
The product can include privacy liability cover, breach forensics, notification costs, regulatory fines and penalties. Further, third party coverage can protect providers of technology services such as data storage companies or website designers through technology errors & omissions (E&O) insurance.
Media liability insurance, also called E&O, can protect a company from negligence in media content and advertising, including websites, blogs and social media.
Almost all policies will include numerous first party coverages as well as help minimising reputational damage following a breach event or assist with network disruption.
The policy can therefore cover the cost of data restoration, network extortion, network interruption, and system failure. Numerous insurers offer unique solutions that can be tailored to a company’s specific risk profile and exposure base.
For further information, please contact:
Jessica Wright, Specialties Growth Leader Lockton Singapore
Tel: +65 8866 6276 | Email: Jessica.Wright@asia.lockton.com (opens a new window)
