'The next cyber' sweeping onto balance sheets

'The next cyber' sweeping onto balance sheets | Insurance Business

“We’re in the middle of a once-in-a-generation, once-in-a-lifetime macro development.”

These are the words Dennis Gaughan, chief strategy officer of Aon’s recently launched Intellectual Property Solutions group, uses to describe the shift of value from tangible to intangible assets – and with that, intellectual property (IP).

“The future is now,” he says, “and companies have had a very difficult time keeping up with the pace of change.”

Last year, the average intangible asset value of S&P 500 companies was a whopping 84%, according to a report by capital advisory firm Ocean Tomo. That means that over US$19tn of the S&P 500’s value is held up in intangibles.

Just one generation ago, it was the complete opposite – tangible assets accounted for 83% of asset value.

“I think that’s pretty stunning,” says Gaughan, a former CIA case officer, lawyer, and head fund manager who now focuses on risk management around intangible assets.

What is IP risk? “In the simplest words, it’s an intangible asset risk that needs to be managed,” says Gaughan. IP includes things like patents, trademarks, and copyrights, trade secrets and know how, and it makes up a huge part of intangible assets. It’s also a big challenge to manage.

The shift away from tangibles has been accelerating since the financial crisis – not because of the crisis, but because of the technology that appeared – like the iPhone, mobility, social networking, and cloud computing, to name a few – right around the same time.

“So how do you manage the risk and how do you manage the value?” asks Gaughan. “Our perspective is you need to pay attention to the value of IP. The downside of risk protection that risk transfer provides only means something if you’re protecting an asset on the balance sheet.”

And that’s a problem for risk managers, because it’s tough to locate IP on the balance sheet. “We have this situation where there is a big value rotation, but clients are having a hard time getting their arms around it,” he says. “Part of the reason for that is because it’s hard to identify IP on the balance sheet and there are no generally accepted standards of value.”

Today, the IP landscape is legal-intensive. Gaughan says, “The focus tends to be on a bundle of legal rights, but the value aspect generally is not part of that discussion and assessment.”

Those two areas, the legal and the economic – that is, the financial value of IP – need to be integrated, if the risk is to be managed, according to Gaughan. “In order to assess both the downside of risk and the upside of value, you need a holistic, integrated point of view around the legal and the economic attributes of IP.”

Otherwise, he says, risk managers are left guessing – and guesses lead to volatility.

When it comes to risk financing for IP, there are options available, but the market resembles the early days of cyber. “It’s very early stage,” says Gaughan. “There have been IP policies and coverages since the late 90s, but not in too many markets, and with very low limits. It’s not like it hasn’t existed, but the maturity and penetration into the market is very low.”

With the rapid pace of change we’re currently experiencing, that’s set to change.

“Necessity is the mother of invention, right?” says Gaughan. “Bad stuff will happen when so much value of an enterprise is founded in IP, so we will find a way to transfer that risk out to help reduce the volatility for clients – and that will be a value proposition that should resonate.”

Will the market for IP expand?

“Absolutely,” he says. “I expect it to be the next cyber.”