Are Commercial Property Insurance Companies Dinosaurs?

The vast majority of commercial property, i.e., assets, are no longer physical. The majority of commercial assets are intangible. In fact, the overwhelming majority of assets owned by insurance agencies are intangible. They consist of those things called “expirations.” Other intangible assets that constitute a large proportion of a commercial enterprise’s value include software, trade secrets, patents, trademarks, proprietary processes, copyrights, and often most valuably — customer data. Yet virtually no insurance product exists to cover the majority of a company’s commercial assets.

The COVID-19 pandemic brought this issue to light with insurers celebrating what will likely be an extended Pyrrhic victory. They won their cases based on there being no physical damage to the insured’s tangible assets. I recently read about a cyber claim case that an insurer won because, “the ransomware attack caused no direct physical loss of or damage to the software … .” I am glad the court stuck to the policy language, but these rulings should be a major wake-up call for the insurance industry.

The most important assets a company needs to insure are now intangible assets, not physical assets. Aon completed a wonderful study, one that all carriers and all professional producers should read several times — the “2022 Intangible Assets Financial Statement Impact Comparison Report.” The study showed that intangible asset values have increased 255% since 2009. Physical asset values have only increased 97%. The future of the industry is in insuring intangible assets, and yet intangible assets only have, at best, 17% insurance coverage, versus 58% for physical assets. The report found an “average potential loss to certain intangible assets of $1.2 billion [versus] $839 million to PP&E …” The study does not even touch business income coverages, the understanding of which most producers are basically incompetent — that is not an opinion but a fact based on E&O audits and test scores.

The average value of information assets in the study, which does not include all intangible assets, was $1.21 billion per company. The average value of PP&E was $1.11 billion and the frequency of loss was higher — think cyber versus fire claims. In Aon’s study, a majority of companies reported the occurrence of a material or significantly disruptive security exploit at least once in the last 24 months.

Another study on the website www.ipcloseup.com showed that for the S&P 500, the percentage of firms’ values attributable to intangible assets has increased from 17% in 1970 to 90% in 2020. Intangible assets are increasing in value 2.5 times faster than tangible assets, are more valuable, possess a larger exposure to loss, have far higher frequency of loss, and have far less insurance coverage. The picture is plain to see: Why buy property insurance when your most important property is not covered?

In a typical property insurance policy, co-insurance kicks in if the coverage amount is less than 80% of replacement cost, yet insurance companies are refusing to insure 80% of the property. There are some deductibles on real property that are approaching 20%. What is it that insurers actually want to insure? Only agreeing to insure 10% of assets is silly.

A good way for a business to die is to keep focusing on yesterday’s needs. In 1970, tangible property needed to be insured. In 2023, intangible property is far more valuable and often far more difficult to replace. Commercial buildings typically are not that difficult to replace relative to replacing lost data, especially self-created data (i.e., all that customer data that agencies and insurance companies possess).

Insurance companies are making too much money to change course now. They are simply the proverbial frog in a slowly warming pot set to boil. No one needs an insurance company that will not insure their most valuable assets, assets that constitute 80% of a firm’s overall value. The remaining 20% is just a deductible and as that percentage gets smaller and smaller, the importance of buying insurance for real property decreases to the point of not being worth it.

For professional producers who want to provide a 90% solution rather than a 10% solution for their clients (seriously, who ever heard of anyone making a living offering 10% solutions?), finding an appropriate product is difficult to impossible because insurance companies are still living in 1970 (well, maybe 1980, since we have inflation again). The argument many insurance companies make for not providing 90% solutions is they do not know how to value intangible assets. This is a ridiculous argument because intangible assets are valued every day, including the valuations they put on the intangible assets they purchase when they buy other insurance companies.

Alternatives

For professional producers to provide a comprehensive solution, they must remember that insurance is only one of the mechanisms with which to transfer risk. Traditional insurance is actually only a subcategory within the insurance risk transfer mechanism.

The best and brightest are working within the alternative risk transfer portion of the insurance world by developing bespoke solutions for their clients. This market is not for everyone. Participants must know what they are doing, meaning they must obtain considerable education prior to entering this market because otherwise they are quite vulnerable to the sharks looking for the innocent and uneducated.

A somewhat safer alternative is working with clients on their risk management to help them reduce their need for insurance. If insurance companies want to focus on the 10%, then eliminate the need for insurance companies from the entire equation as much as possible. Many options exist with which to offer risk management on each kind of intangible asset so that your clients do not need to become their own insurance company (this is called self-insuring). You do not need to become an expert risk manager either. In fact, doing so does not make sense. Instead, think of becoming a general manager, like a general contractor, whereby you have relationships with subs who have the exact expertise your clients need. The subs might be IT experts, security experts, intellectual property attorneys, and so on. Become an expert in putting together each sub to build a comprehensive risk management plan that protects 90% of your clients’ assets. If they still need coverage for the other 10%, then find them a traditional property policy.

Commercial clients need 90% coverage. If the insurance companies will not provide it and their agents throw their hands in the air declaring, “… but I can’t sell them the coverage because none of my regular carriers will provide it!,” these clients will eventually be approached by someone more knowledgeable who can and will provide a solution.

The real question then is this, are you here to sell insurance or are you here to take care of your clients?