Over the past few weeks, I had multiple fascinating conversations with intellectual property (IP) attorneys. We agreed that most businesses (large and small), investors and insurers don’t particularly understand IP. Unsurprisingly so, not many businesses buy IP insurance. And, those who do, are not terribly overjoyed about their experience.
Even though IP insurance products exist, they tend to cover legal costs related to litigation instead of the actual damage done to the IP itself. It’s a bit like the nascent stages of the cyber insurance market, when insurers were selling ‘cyber insurance’, but were actually just covering the costs related to sending out letters to customers who might have been involved in a breach.
What I find interesting is that IP insurance is considered to be one of the most mature types of intangible assets-related insurance products. Look at the other types of intangibles like reputation or human capital, and you will realise that insurance products either don’t exist or are very narrow in scope. There are many reasons behind that, including problems in quantifying the value of these assets, figuring out what constitutes a loss event, and determining what the actual loss value was.
If you start thinking about insurance risk modelling to determine the probability and expected severity of a loss, you soon find that there is often not enough historical data to give you confidence in putting your capital at risk. How many underwriters will want to put their head on the line when profit margins are already tight?
However, keeping the usual pricing cycle aside, the margins might keep contracting in most traditional product lines as commoditisation continues. So, if you are an insurance carrier, your long-term success will depend on a cost leadership strategy and efficient capital allocation, or advanced risk taking in new risk areas. Considering that intangible assets already account for as much as 85% of the total business value across industries and are sporadically covered by the insurance market, there is enormous space for expansion for those who are willing to take a risk.
This will require insurers to rethink the way they look at innovation.
I recall a conversation with the executive team in a major London market insurer. We talked about the nuances of choosing a first mover or a fast follower strategy, and they admitted that they are more like a slow follower. This is not unique – most market players are in the same boat. The expansion in intangible assets will require some first movers. Probably, quite a few of them. It means that the whole way of generating new ideas, prioritising these ideas, and then testing and prototyping solutions will have to be revisited.
It is hard to imagine a better place for innovation than the London market – a place that has in the past insured the taste buds of a chocolate scientist, the nose of a wine market, and the legs of a supermodel. The launch of the Product Innovation Facility at Lloyd’s of London last year has helped encourage experimentation in new risk areas. It will be interesting to see how the initiative develops, especially if various market players can find a way to collaborate on new product development.
I think this is a make or break moment for the industry. Some tech players that I have spoken to are already pointing to insurers as dinosaurs who don’t understand new risks. It’s a great opportunity for others to step up and prove them wrong. Otherwise, the whole insurance market might be at risk of gradually becoming obsolete.