Capturing the abstract: How captives can be used to manage intangible risks

The most valuable assets a company owns often are no longer physical. Indeed, several studies indicate that the intangible assets of the world’s 500 largest companies make up roughly 85% of their value. Intangible assets can include a company’s brand, intellectual property and datasets. Risks to those assets can be hard to quantify, manage and transfer.

Marine Charbonnier, global programmes and captives regional director Europe at AXA XL, explains how a captive can give risk managers a flexible, adaptable and capital-efficient way to manage these risks.

Q. What are the risks associated with intangible assets?

For some companies, so much of their value is now tied up in intangible assets that if something happens to them, the very survival of the company is threatened. Say, for example, a company is hacked and its data compromised. If that data is personal data about customers, then on top of potential regulatory fines or a ransom demanded by hackers, the company could face huge damage to its brand and its customer loyalty. This loss of trust could lead to a significant drop in sales and consequently the company’s share price.

If, to cite another example, a competitor is somehow able to replicate a piece of intellectual property, the company could see its competitive advantage lost.

Supply chain disruptions – which may be out of your immediate control – also can harm your reputation, or enable a competitor to seize the opportunity to fill a gap in the market.

But quantifying these risks is not easy; and the value of these intangible assets can fluctuate greatly.

Q. Why are these risks so difficult to manage and transfer?

Managing the risks associated with intangible assets can be complex. By their very nature, they often are difficult to put a value on; the potential impacts of the risks to intangible assets are also hard to grasp – until the worst happens. The value placed on intangible risks can often be subjective and calculated using assumptions about future income, for example.

A lack of historical loss data and the inherently unpredictable nature of these risks often makes it tricky for insurers to feel comfortable underwriting them. While insurance coverages that can address some of the risks associated with intangible assets are being developed, such as cover for non-physical-damage business interruption, they are not always easy to obtain in the traditional market.

Q. How can captives help risk managers get a better handle on managing these risks?

Captives can address many of the challenges that face the traditional market when looking at these risks. For example, a captive can bundle volatile risks, for which there is little data, with other exposures that have more stable loss histories and little or no correlation.

This also can make these risks more attractive to reinsurers, particularly when they are part of a multiline/multiyear contract supported by structured reinsurance.

This approach also gives the captive owner a mechanism for capturing better data about these risks, which feeds into an enterprise risk management model and can help the fronting partner to refine terms and conditions, attachment points and limits.

Another vital benefit of using a captive to cover intangible asset risks is that it gives the ability to respond to events fast. With issues such as a threat to reputation, a swift response is of the essence. When this coverage is written within a captive, with the support of crisis consultants, captive owners are able to react immediately to limit both the size and duration of the damage.

Q. Are there other advantages to using a captive for intangible asset risk?

Risk-based capital regulations, such as Solvency II, offer diversification benefits to companies that self-insure a spread of risks within their captives. Also, changing governance requirements around the world also mean it makes sense to incorporate different risks into the captive.

This means it is becoming less attractive to insure just a few, predictable lines of business within a captive. Underwriting the risks associated with intangible risks within a captive can not only give the captive owner a better understanding of their risks and more useful data, it also can make the captive more capital-efficient.

Contributed by Marine Charbonnier, global programmes and captives regional director Europe at AXA XL.