The future of intangible asset risk transfer is here

Risk managers struggling to find capacity in traditional markets should turn to the alternatives, says Allianz Global and Corporate Specialty, regional head of ART, Asia Pacific, Richard Green.

“How to manage intangible asset is probably the biggest question facing both insurers and risk managers at the moment. The issue here is that if it’s the job of insurers and risk managers to protect corporate value, most of our values now are found on the intangible side of the balance sheet rather than the tangible.”

Green says this shift from tangibles to intangibles on the balance sheets of corporates has occurred in the last 30 years or so and is a major issue for all firms today, particularly in terms of risk mitigation strategies. “From an alternative risk transfer (ART) perspective, where ART is useful is that we’re not focused on physical assets and damage to those assets, therefore we are not focused on the traditional coverages and the tangible asset side of the asset sheet.”

Beyond the physical

“Traditional insurance products have looked to protect those tangible assets, particularly the physical assets. From there, it evolves to start looking at liability covers. Companies started to say, ‘Yes, it’s important to protect our property, plant and equipment, but actually also our potential liabilities are a very significant risk that we have to cover.’ Insurers have moved from physical asset protection to liability protection. We’re now moving on to look at intangibles,” Green added.

From an ART perspective, the focus is very often covering the loss of revenue rather than damage to physical assets, says Green. “From an intangible perspective, it is quite useful when you can say to companies, ‘Look, we have ways of protecting your loss of revenue,’ because these days, risk managers are concerned about their revenue streams in addition to their physical assets.”

The future is parametric

Parametric insurance is a rather futuristic buzz word at the moment, but it is an excellent tool for risk managers to have up their sleeve says Green. “Risk managers may find ART useful in places where they’re struggling to find traditional capacity, they can turn to the alternative market. Of course, the way in which we do deals in the ART is different from the traditional market which is very focused on indemnity-based coverages, and particularly around the damage to physical assets.”

“Whereas on the ART side, we look at parametric triggers which cover the physical characteristics of an event. The wind speed hits a certain level, and earthquake hits a certain magnitude at a certain depth, these kind of physical characteristics and once those parameters are triggered, then the ART coverage pays out. What that effectively does is it enables risk managers to cover losses of revenue that are not related to physical damage.”

Currently, ART covers predominantly natural catastrophe and weather risks, which is particularly useful in the Asia Pacific region where earthquake and typhoon are constant threats for businesses, but also weather risks. “For example, too much sun, too little sun, too much wind, too little wind, too much, too little rain, those types of weather risks can also be covered. But it’s fair to say that the alternative market investors are beginning to look at other types of risks, such as intangibles, that they might cover,” says Green.

“From an AGCS perspective, there we have a strong history in ART in Europe and the US. As you may know, we launched the Asia-Pacific unit, centred out of Singapore in October of last year. One of the jobs that I have is really my responsibility to educate risk managers in the region about what ART is and how it can work for them.”

Education is key

One major issue for risk managers is board and C-suite education on alternatives to traditional insurance risk mitigation. “There is a lack of an awareness at the C-suite level of the types of solutions that ART can offer, but I think that’s just an education process,” says Green, adding: “We saw that as well in the US and Europe, but eventually it does gain traction. I think we’ll see that in Asia-Pacific as well, as these things become more familiar in Asia-Pacific, as more placements are done in Asia-Pacific and more ART deals are reported on in Asia-Pacific, then I think the C-suite will become more familiar with this, and frankly it will become less alternative and more mainstream.”

Another advantage of using parametric insurance covers, says Green is that, unlike traditional insurance, insurers don’t care what the claims payout is used for. “When you use a parametric trigger it gives you a lot of latitude to protect intangibles, because at the end of the day, if it’s a proper parametric transaction, then once that parametric trigger’s been hit the insurers don’t particularly care what you use that money for. You could put that payout to a variety of purposes. Parametrics do play well in the intangible space because they’re done in derivative format. They’re not about putting you in exactly the same position that you were before, so they’re not about indemnity and they’re not about only reimbursing you for physical damage losses, but they’re there to reimburse you for your broader financial loss.”

Green admits that ART is not the entire answer to risk mitigation of intangible asset risks, but it should be part of a package of solutions used by risk managers. “ARTs is ultimately trying to provide the protection that the corporates actually really need at the time they need it. But intangibles is a broad space and quite difficult to quantify which makes them fairly difficult to insure. The secondary market value of intangibles is also very difficult to establish. If someone steals a piece of your intellectual property, what is it actually worth both to you and to someone else? I don’t think that ART is the answer to the entire intangible asset problem, but it’s clearly moving in that direction.”