Mind Your Three P's: Property, Patents and Protection

Mind Your Three P's: Property, Patents and Protection | Risk & Insurance | In January, more than 25 risk executives of some of the largest technology companies met at the annual Technology Industry Risk Forum and it was clear to me as I spoke with peers that two risks were forefront: The financial viability of our insurance carriers and the increasing challenges of intellectual property and, particularly, patent protection.

By GEORGE HAITSCH, the vice president for corporate risk for SAP AG

Some risk managers are developing their own risk metrics to evaluate the financial health and the stability of their insurance carriers and risk financing partners. These metrics, which will reflect each company's individual concerns, priorities and risks, are evolving in part because of the financial crisis.

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Risk metrics typically go beyond ratings, although the ratings continue to have value. But many feel that it is increasingly important for risk managers to have an independent and internal benchmark to apply to our financial partners.

Risk professionals have a fiduciary obligation to verify that our financial partners are stable. Whatever factors one looks at--cash flow, reserves, investment asset allocation--the financial criteria must reflect what's important to your company and provide a timely perspective on that firm's health. Looking back at 2008, it's clear that the ratings agencies did not provide a strong warning of the developing problems at AIG, nor at other major financial institutions. Some believe that an independent assessment of the quality of the risk management process at our carriers is an increasingly important factor.

Intellectual property remains a significant risk to me and to many technology companies. It's a risk that most technology companies work hard to manage. It isn't an area where insurance offers easy answers.

Frankly there isn't much of a market for patent insurance. Because of the size of the potential risk, these intellectual property issues can quickly become unanticipated catastrophe exposures made even more difficult by the long-tailed nature of the risks. Generally speaking, those with significant patent exposures, especially in the US, are looking at achieving some form of a comprehensive alternative risk financing approach to these issues.

Many technology analysts expect increasing consolidation within the tech space. That elevates the importance of risk analysis and identification in the mergers and acquisition process. In today's economy, you certainly can't afford to acquire possible toxic liabilities--like a big intellectual property issue--in a merger or acquisition without clearly understanding the costs and the possible benefits. That requires a level of due diligence that strongly factors in the risk issues in the analysis. In a sense, it can also call for continued progress to improve enterprise risk analysis as a part of the risk management process.

April 15, 2009

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