A company's intangible assets – such as its brands, its reputation and its ideas – have always been a factor in its success and its stock valuation. Business managers and investors, large and small alike, are more conscious than ever before of the central role played by intangible assets in determining company valuations.
Management guru Peter Drucker acknowledged as early as 1969 that the US economy had been steadily moving from an “economy of goods” into a “knowledge economy” since the end of World War II. From that point onwards, companies were increasingly in the business of producing and distributing ideas and information, rather than manufactured products and commodities. However, it is only in recent years, and in particular with the information technology (IT) and internet-fuelled boom, that the world has truly woken up to the scale of this transformation.
In this new economy, characterised by ideas and innovation, intellectual property (IP) has assumed a growing importance. IP is increasingly becoming a company's most valuable asset. The proficiency with which an organisation acquires and manages its IP is key to how it performs in its markets: its IP is what differentiates it from its competitors and is vital to holding on to competitive advantage. But besides driving profitability and success in its consumer markets, IP is a major determinant of how a company's shares perform in the stock markets.
A look at Europe's most valuable companies shows that those at the top are companies rich in IP. Pharmaceutical giant Roche is the most valuable with a market-capitalised value of E335bn. Energy company BP Amoco is in second place at E270bn. Whilst the level of investment in tangible assets is not insignificant for these companies, they have substantial value in their patents, brands and know-how.
Roche and BP Amoco would be considered old economy companies, yet much of their value is derived from IP. New economy companies have an even greater reliance on their IP and often achieve greater value from it. For example, in the US, the software industry has a market capitalisation that is greater than that of the automotive industry, despite the automotive industry having earnings that are ten times higher and an asset base five times larger. Without the protection for copyright, patent and trademarks, the value of the software companies would fall dramatically.
Understandably, companies are increasingly keen to protect their investments in this crucial resource, but finding comprehensive cover for such a diverse range of assets given the equally diverse range of exposures is a major challenge. A tailored and careful risk-by-risk approach, underpinned by thorough profiling of the unique exposures faced by each individual company, offers the only guarantee of effective protection.
Defining the challenge
It is important that insurers do not confuse the subjects of brand or reputation risks with the more distinct issue of protecting the value of IP, although sometimes they appear inextricably linked.
Brand and reputation risks should be considered carefully by insurers as the potential for a catastrophic loss is greater here than in respect of other forms of intangible asset. The problem is that a brand is only what its customers perceive it to be. Brands are therefore susceptible to events that impact the reputation of the products. For example, when mineral water producer Perrier suffered a minor product contamination it acted swiftly to locate and resolve the problem within days. However, the value of its brand was diminished and has still not fully recovered. A simple and quickly solved problem arising in the company's real assets translated into an enduring and damaging threat to its valuable brand image.
It is much easier to understand the exposures faced when insuring the value of IP separately from the reputation risk. At the core of IP are trademarks, patents and copyright. These are the principal means by which companies protect their IP rights. Each affords a different kind of protection and each carries a different profile of exposures. Companies will also need to understand that a single product may carry both a series of trademarks and a variety of different patents. Protecting their investment in, and revenues from, such a product will therefore involve a variety of different exposures.
For example, a patent being infringed in one territory may the reduce the income derived from the patent in that territory, but a patent being proven invalid can have a far more serious impact on income from all territories. For single product companies this can be disastrous, though multi-product companies are less affected. Likewise, the loss of the ability to use a trademark may only affect one product in one territory, but losing the ability to use a brand name would have a tremendous impact on the business. These different elements should be borne in mind when assessing risk.
Obviously, the valuation of IP rights is a critical role in such a policy, though there is much debate about the reliability of these valuations. It is interesting to note that although companies are focusing on the value of their IP, they rarely attempt to value it or have a value placed on it. Perhaps this is because there is still a high level of scepticism over whether IP can be valued at all, or maybe because there is a lack of understanding over valuation methodologies. If either is the case, these obstacles will need to be overcome by insureds and insurers alike.
Personally, I believe it is possible to value IP, providing that everybody understands that the valuation is merely an indicator of value at the date at which the valuation is done. A bit like a share portfolio, IP values can go up as well as down. This can pose a difficulty for an insurer when assessing a claim. Additionally, it is important that the cash flows from the IP can be identified separately. When they are intermingled, for example in a corporate brand or a patent in one part of a process, it is difficult to determine its increase or decrease in value.
One of the reasons for some scepticism is the fact that there are different valuation techniques, each of which leads to a different result. Another is that valuation is only one way of measuring IP performance; other measures such as market share and units sold may also be used to balance the overall equation.
Many of these issues can be overcome by agreeing what parameters will be used to assess the value, what rights are to be included in the valuation and what the policy triggers will be. Both parties should agree from the outset that the valuation model for initial assessment will also be the valuation model used to assess any loss.
The types of event that should be considered for IP protection include:
The sheer scope of designing protection for IP assets will appear daunting, but it is a challenge that companies simply cannot afford to ignore. Defining the unique profile of risks is the first step. The second is accepting that there will be no one-size-fits-all solution that companies can buy off the shelf to cover every aspect of their IP risks. As well as the complexity inherent within each kind of risk – both IP and those non-IP risks that affect the value of IP assets – every company will face its own unique set of exposures.
Establishing what those unique exposures will be for your company means taking a risk-by-risk approach, examining every part of your business where IP assets are creating value and working through various scenarios in which those assets could come under threat. It is a painstaking process but the only way that companies can ever hope to identify, understand and quantify their exposures. By doing so, and by going on to work with their insurers to write a set of policies that will provide cover for these risks, companies will gain a double bonus. Not only will the value of their existing IP be comprehensively protected, they will achieve greater confidence to develop and exploit new and valuable IP assets, strengthening both their profits and their share price.
Ian Lewis has worked in the insurance industry as a specialist in intellectual property insurance since 1988. He spearheads the Miller Insurance Group's IP team as a leading expert in the field of intellectual property litigation and asset protection insurance.