Intangible assets are an increasing proportion of companies’ balance sheets, already accounting for as much as 85% of the total business value across industries according to estimates. With the acceleration of digital business models, amplified by Covid-19, this value could now increase much further, becoming a major blind-spot for firms not factoring intangible assets into their risk models.
Lloyd’s, the world’s leading specialist insurance and reinsurance market, has published a report in collaboration with KPMG urging businesses to pay attention to the new risk landscape that has evolved under Covid-19.
Protecting intangible assets: Preparing for a new reality looks at the increasing value of intangible assets, and the role of risk managers and the insurance industry in protecting them.
It said the pandemic has disrupted global supply chains and moved the world towards de-globalisation. It has changed working arrangements, businesses’ ability to trade, and consumer behaviours. It has also created a new social contract between businesses and society and has accelerated underlying market trends such as the shift to remote workforces and digital transactions.
The new report looks at how Covid-19 has increased companies’ exposure to new risks, many of which implicate the intangible assets held by businesses.
With unprecedented scrutiny on firms’ behaviour, reputational issues were just one of many posing a threat to firms’ resilience during the pandemic, it warned. New ways of working were also presenting their own unique challenges, amplifying the complexity of managing intellectual property and conduct risk amongst a remote workforce. For businesses to stay resilient, operationally and financially, awareness of what intangible assets are and how they can be protected is critical and must form a considerable part of their risk management strategy.
The report looked at eight intangible assets: Intellectual property, proprietary software and databases, written processes and procedures, organisational culture, rules, norms, relationships with customers, reputational and brand, relationships with distributors, partners and human capital.
The report said the fundamental shift towards a new world dominated by intangible assets started decades ago, long before any detailed discussions about looming pandemic risks.
Step-by-step, the importance of intangible assets grew – from around 17% of S&P asset value in 1975, to 32% in 1985, to 68% another decade later in 1985, and ultimately exceeding 80% in the last 10-15 years.
“This has been closely linked to the changes in the economic landscape, with technology-driven service companies becoming increasingly prominent, while industries famous for their holdings of property, machinery, and other tangible assets, have slowly given way.
“Restrictions enforced for public health purposes have accelerated progression towards a new reality. An increasing number of executives have started questioning the return to normal even after Covid-19 disappears. “
It said that meant there was now a world where most of the workforce and business data (including potential trade secrets) was scattered across thousands of living rooms, kitchens, and bedrooms, while expensive office buildings are kept empty.
“Not only does it become more difficult to manage intellectual property in such an environment, but additionally the traditional ways of managing teams and culture have to be rethought. Similarly, as the new post-Covid-19 world drives anxiety levels to new highs, businesses are also more prone to making reputational mistakes that can leave lasting impact in the way their customers, employees, distribution partners, and other stakeholders perceive the character of their business.
“This is particularly important as various activist events keep pushing the corporate environment from traditional shareholder capitalism to stakeholder capitalism. The recent ‘Black Lives Matter’ protests have demonstrated the power of social activism and the need for businesses to embrace the changing social norms.
“We could well see activist movements growing in the next few years to address some of the well-known global challenges, ranging from climate change to income inequality. Risk owners in businesses across all industries will have to be alive to these changes to make sure they have the right tools to keep enhancing their corporate value. They will have to rethink the optimal ways of using risk management practices to build internal resilience and become proficient at safeguarding their existing and new intangible assets.”
The Lloyd’s market is developing products to help organisations mitigate their exposure to risk, and the report outlines a range of examples of products already available in the market in response to the risks posed to reputation, human capital and intellectual property. It also highlights the vital role the insurance community has to play in helping organisations manage these challenges so that they were better prepared to protect their assets.
It said the insurance community would need to help organisations face the challenges, collaborating with subject matter experts, data and analytics providers, and insurance capital.
“Once organisational risk management practices become more strategically entrenched in intangible asset management, insurance can play a role as a risk transfer mechanism. As such, insurance can help drive additional commercial benefits that could offset some of the costs of traditional risk management.
“Whilst a range of insurance products already exist that can help organisations manage their risks related to reputation, human capital, and IP, it is important that insurers, risk owners, and risk managers work together to further develop these products. Additional co-operation is required between risk owners, risk managers, and insurers, to better understand the nature of intangible assets (e.g. reputation, human capital, and IP), the new threats they are facing, and what new solutions could be developed to make businesses more resilient.”
Trevor Maynard, head of Innovation at Lloyd’s said the industry needed to realise the world had changed and to adapt to how it looked now.
“Covid-19 has changed the risk landscape, exposing companies to new risks and encouraging companies to think about how they now operate. Whilst a range of insurance products already exist to help organisations manage their risks related to reputation, human capital, and intellectual property, it is important that at Lloyd’s we work together with the market to innovate and create new products to help customers mitigate risks and protect themselves from future threats.”
Paul Merey, a partner at KPMG said many businesses were not prepared for the new reality.
“The key drivers of corporate value are completely different now to in the past, and this shift has only been amplified by Covid-19. Whilst physical assets are still a focus, recognition of what intangible assets are and how much they represent a firm’s value may come as a hard awakening for some organisations. In order to remain resilient and competitive, organisations across all industries must be proactive in finding new ways to enhance their business practices to protect these assets, and this will require a new way of thinking and acting.”
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