October 18th, 2010

Intellectual Property Risk Management in Asia: A Growing Concern

Posted at 1:00 AM ET

The strategic importance of intellectual-asset management has undeniably increased in Asia in recent years. Since the integration of China into the world economy the Chinese government has been placing increasing value on intellectual property rights (IPR) and its protection. The country’s patent office now leads the world in patent applications.

According to the World Intellectual Property Organization (WIPO), in 2007 China and the Republic of Korea generated more patent applications per gross domestic product than did the United States.

In the last two years many Asian countries have strengthened their IPR enforcement apparatus. Taiwan, for example, established a specific intellectual property court in 2008.

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A growing number of companies use the intellectual capital protection enforcement mechanism actively to grow and maintain market share. A greater number of patent lawsuits are filed in China than anywhere else globally. Headline-making victories, such as the one against Schneider Electric of France resulting in a settlement of USD23 million, will increase the awareness that China is a place to both obtain and enforce IPR. However, overall, the damage awards in China have remained small. According to a study by NERA, an affiliate of Guy Carpenter, more than 90 percent of all IPR damages awarded in China are below USD100,000 in value.

However, broadly viewed, Asian firms increasingly seek patent protection abroad; especially in areas of technological leadership, such as information technology, semiconductors, and optoelectronic (e.g., LCD, plasma display).

All of these trends are important because they are likely to stimulate the demand for adequate (re)insurance protection.

The Modern Company, a Collection of Capabilities

The most important assets of modern business no longer exist in only physical form, but also constitute intangible property. Seventy-five percent of the value of publicly traded companies in the United States comes from intangible assets.

The four main types of intellectual property owned by business are copyrights (material such as literature, art, music, sound recordings, and broadcasts); designs (visual appearance or eye appeal of products); trademarks (signs that can distinguish the goods of one trader from those of another), and patents (technical and functional aspects of products and processes).

Each of these intellectual property rights share common characteristics:

  • Property rights:
    IPRs can be bought and sold, mortgaged, and licensed
  • Monopolistic nature:
    The IPR owner is the only person who can exploit the right
  • Territorial nature:
    The IPR is only effective in the territory of the state granting that right
  • Justification:
    The legal protection of IPR requires justification

Available Insurance Products

Insurance solutions can generally be categorized into three main groups:

  • Litigation only:
    Legal costs incurred in pursuing those who infringe IPRs are covered
  • Revenue protection:
    Provides coverage in case a successful legal challenge to the IPR results in the prevention or prohibition of the exploitation of the right
  • Liability protection:
    Comprehensive cover providing indemnity for damages owed to third parties, legal costs incurred in defending intellectual property infringement claims, and legal costs incurred in defending an injunction claim

Policy limits typically range between USD10 million and USD50 million and attach above frequency loss level. The application of an additional co-insurance of 5 percent to 10 percent is not unusual. The underwriting process often includes an audit of the applicant’s intellectual property risk management program.

Opportunities for Specialty Underwriters

In Asia, mainly in Japan, Korea, and Taiwan, companies have expressed strong interest in intellectual property insurance in the past. Given the global market position of these countries in the area of high technology this is not surprising. It is just a question of time before Chinese companies will follow this trend.

While ‘litigation only’ is an established intellectual property protection product in various Asian countries, the concept of ‘revenue or liability protection’ is relatively new and, therefore, there is little local expertise and capacity to serve growing market demand.

Asia is a rapidly developing professional indemnity and directors and officers market. Given that only a small number of mainly global specialty underwriters have been underwriting those lines of business, the underwriting discipline and consistency could be maintained over the years. In contrast to general casualty business, specialty lines rates have remained stable with a slow downward trend. With the supply of capacity growing, general casualty business in Asia has become very competitive in the recent years.

Asia’s intellectual property protection market offers much growth potential owing to the products’ current low penetration levels. (Re)insurers can benefit from identification of the market opportunities in this area.

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Guy Carpenter & Company, LLC provides this report for general information only. The information contained herein is based on sources we believe reliable, but we do not guarantee its accuracy, and it should be understood to be general insurance/reinsurance information only. Guy Carpenter & Company, LLC makes no representations or warranties, expressor implied. The information is not intended to be taken as advice with respect to any individual situation and cannot be relied upon as such.

Readers are cautioned not to place undue reliance on any historical, current, or forward-looking statements. Guy Carpenter & Company, LLC undertakes no obligation to date or revise publicly any historical, current, or forward-looking statements, whether as a result of new information, research, future events, or otherwise.

Statements concerning, tax, accounting, legal, or regulatory matters should be understood to be general observations based solely on our experience as reinsurance brokers and risk consultants, and may not be relied upon as tax, accounting, legal, or regulatory advice which we are not authorized to provide. To the extent that you discuss such statements with your clients, be sure to advise your clients that all such matters should be reviewed with their own qualified advisors in these areas.

© 2010 Guy Carpenter & Company, LLC

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