Visibility On The Invisible: Intangible Asset Insurance
This is part one of a three-part series of “Visibility On The Invisible: Intangible Asset Insurance”.
Over 80% of the value of most companies now reside in intangible assets. It comes as no surprise to learn that an intangible asset is the opposite of a tangible asset. As it’s not physical, an intangible asset tends to be “unseen”. This creates problems for companies as they look to identify, protect and manage them. It’s much easier to deal with physical things – but that doesn’t mean it’s more important.
Intangible assets is an umbrella term that includes both intellectual property (e.g. patents, trademarks, designs, copyright) and intellectual capital (e.g. know-how, trade secrets, research and development, strategy and market Intelligence). Each type of intangible asset needs to be identified before it can be protected and then subsequentially valued. Figure 1 below provides a broad overview of the different types of intangible assets.
Figure 1. The different types of intangible assets.
As each type of intangible asset is protected differently, the risks associated with them differs. This risk includes infringement, loss of rights and loss of confidential information. By identifying intangible assets, the risks of these assets can be determined; for example how the assets could be lost or diminished in value. A further major advantage of identifying intangible assets is that they can then be valued. Placing a value on each type of intangible, in conjunction with determining their risk value, enables a company to have a much better idea of the overall risk in loss of intangible assets. As with many things in business, the greater your visibility, the greater your maximum leverage.
Intangible asset insurance is one of leading way to reduce the risks associated with intangible assets. It primarily covers the cost of expenses arising from IA related legal disputes, such as costs associated with patent infringement or breach of contractual obligations in relation to confidential information.
The use of intangible asset insurance forms part of intangible asset risk management as it helps to shift the risk off your balance sheet. Any business looking to protect their value should consider identifying and protecting their intangible assets, and mitigating their overall risk by using intangible asset insurance.
Did you know most Executives do not own an IA register? Ask IAMC about how we align IA with your business plan.
Intangible assets account for a significant amount of the value of today’s companies. As intangible assets play a major role in generating value for companies, especially given the push towards knowledge-based economies, it’s important these assets are properly accounted for. By way of example, in 1975 intangible assets accounted for 17% of the value of S&P 500 companies, but in 1995 this raised to 46%. In 2018, intangible assets accounted for a massive 85%,[1] as illustrated in Figure 2 below. This increase in intangible asset value resulted in a change in the types of largest companies in the world (see Figure 3).
The rise of intangible asset value is directly linked to the ease of scalability. Scalability refers to an organisation’s ability to continue operations and grow with increased demand in the market. A company is scalable when sales volumes begin to expand significantly, and the company can maintain or increase profit margins. Factors like globalisation and the prevalence of the Internet and digitisation have enabled intangible assets to grow in a way that simply wasn’t possible in the past.
[1] Financial Statement Impact of Intellectual Property & Cyber Assets: 2020 Aon-Ponemon Global report
Value is now heavily vested in the things we cannot touch and see. Indeed, many companies today, especially technology companies, do not produce any tangible product, yet their net value places them in some of the most valued companies in the world. The difficulty in accounting for intangible assets is they are often unseen and not well understood. In contrast, tangible assets, such as land and equipment, tend to be easily accounted for.
Figure 3: The changing business types for the top 10 companies in the USA over the past 100 years.
Most intangible assets are not reported on balance sheets because accounting standards do not recognise them until a transaction has occurred to support their value. An issue with this is that companies can exist without ever knowing what their true value is or where their value is generated. Not knowing the true value of a company makes it difficult to understand and account for what assets exist, and, perhaps more importantly, take steps to mitigate the risk of losing these assets.
Value is created in many ways with intangible assets but, much like tangible assets, intangible assets are not all created equally. This means that each intangible asset within an organisation must be accounted for and protected separately. Further, intangible assets are not always used in the same way within an industry. For example, two competitors may leverage their intangible assets differently making their risk profile to loss of intangible assets different.
Even without knowing it, many organisations generate valuable intangible assets. Worse still, organisations knowingly develop intangible assets but choose to ignore or undervalue their value. Figure 4 below outlines some of the more common misconceptions surrounding IA.
Figure 4: Misconceptions about intangible assets.
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