Intangible doesn't mean insignificant - June 2004
One of the biggest challenges for companies today is predicting the source and extent of risks to the business in future. It's particularly challenging to anticipate and especially to quantify intangible risks like business interruption or damage to the company's reputation.

These are often indefinable risks that do not fit the traditional models employed by many insurers. Since, in such instances, insurers do not have the luxury of frequent claims experience to build their underwriting assumptions on - it takes years to build up adequate statistical data or history in order to be in a position to calculate an exact risk premium - traditional cover is often unable to respond to a client's need for this type of cover.

Another reason that it is hard to obtain cover for intangible risks like reputational risk is that it's difficult to measure the risk: while it is possible to estimate the monetary value of a company's reputation, quantifying the losses inevitably poses a problem.

Yet there are few businesses that are not vulnerable to this type of threat. Infighting amongst directors and extortion attempts emanating from aggrieved customers, business contacts or staff are just two sources that could trigger a situation that threatens to damage a company's reputation.

In the current hard market it is unlikely that cover for this type of risk will be forthcoming from the traditional market. However, boards of directors, increasingly facing the need to "cover all bases", could find that the solution to a sudden drop in share price or other impact on shareholder value lies within the framework of an alternative risk transfer (ART) structure or solution. These types of structures and solutions lend themselves to providing funding for loss avoidance and risk control measures. For instance, a supermarket could ward off an extortionist wanting to place tainted goods on its shelves through having access to funds which enables it to step up security in terms of stock inspections.

Models that have been developed to quantify exposures, identify risk profiles and even handle claims in the business interruption arena can, with little adaptation, be used effectively to put some sort of exactness to other kinds of intangible risks.