The rise of intangible risks

One of the main challenges facing risk managers around the world today is the rise of intangible risks.

Until recently, the main stock value of a company was its physical assets - its property, plant and machinery. But the rise of the internet and technology means that the value of many companies is now comprised of non-physical resources, such as its brand and data, or what is increasingly known as ‘intangible assets’.

Risk managers attending the annual Airmic conference in Birmingham today will be discussing how advances in technology have changed the risk landscape, with a shift in focus from physical to intangible assets.

JLT Specialty head of communications, technology and media practice Peter Hacker says non-physical assets “can be little more than a website, intellectual property data, [or] a brand”.

So what does that mean for risk managers? If 80% or 90% of your firm’s value is based on these things, a traditional risk management and insurance strategy may no longer be relevant.

“For example, take a smartphone; this is based on various applications, when you use applications you use software, when you use software you have data and content, and you have third parties hosting all that,” Hacker says.

“The key challenge for risk managers and brokers is to think outside the box in a horizontal way, outside of their silos.”

Similarly, if a telecommunications company is hacked, most insurers think in terms of a cyber incident.

“But it is much more than that because there is a potential effect on a firm’s P&L as variable costs increase. The company might lose customers, be confronted with contractual liability issues, have lost data or be in trouble with the regulator,” Hacker says.

“The challenge is to understand the shift into this complex area and develop solutions, not just products. The risk should be quantified and then an all-risks approach should be adopted.

“Products alone will not provide the value a company needs.”

Risk managers change their approach

Hacker says that risk managers have recognised this shift in focus over the past 12 months.

“They are now following a different approach,” he says. “First they look at the risk landscape, the macro-economic risk and regulatory risk. Next, look at your tangible risk and then your intangible risk – and you need to understand this in terms of your first-party and third-party exposure, which is built around intellectual property and business interruption.

“Once you understand these, you need to quantify the risk across your organisation and look at what you are buying already. Ask, do I have cover in my property, casualty, D&O policies?

“Review your policies and understand what you already have. You need to stress test your policies and find the gaps. For example, is your supply chain covered for a data failure? Next, you need to decide: are you better to invest in insurance, or alternative risk management such as supply chain management and disaster management?

“Only then can you create a properly tailored solution.”