Looking after the finer things

The sweeping influence of the internet has meant that the purchase of insurance has been revolutionised, particularly at the standard end of the personal lines sector. Motor, household and travel insurance needs are catered for easily via a few clicks, either directly via a chosen insurer or by using one of the many price comparison sites.

In the face of such an onslaught it is refreshing, for the traditionalists anyway, that fine art insurance is one class of cover that is unlikely to yield to machine-only underwriting. With the tremendous breadth and complexity of the fine art market there is, as yet, no substitute for individual contact and negotiation between fine art owners and their brokers and insurers. It is a market that is desperately underinsured in many instances, offering an excellent opportunity for the insurance community to provide a much higher level of advice and analysis than is available currently for other, more commoditised risks.

So what exactly is meant by fine art? In insurance fine art can include anything from paintings to classic cars, furniture, carpets, stamps and scent bottles. As a class of insurance business it is divided into three areas, private clients, public risks - such as museums and exhibitions - and commercial operations such as art dealers. Each poses quite different underwriting challenges. Insurance is sold largely on a commission basis for private and commercial clients, but often on a fee basis for public collections. In terms of its worth to the insurance industry, Lloyd's alone writes something like £100m in gross premiums every year for fine art business. As an example, a typical premium for a £1m collection could be around £1,500.

Exciting times

The real excitement comes when you start to consider the stratospheric growth in values within the fine art market, particularly for modern and contemporary art. The latest Hiscox Art Market Research index revealed spectacular rises in the value of contemporary art (up by 55%) and modern art (by 44%), while other art categories such as English sporting paintings and nineteenth century European paintings also showed a healthy rise. With one of Damien Hirst's trademark medicine cabinets going at auction recently for a record breaking £9.65m and a Banksy painting, Space Girl and Bird, fetching £288,000, the market for fine art has never been more vibrant. Media coverage of the big art sales is widespread and the public fascination with how much money people are prepared to pay for the most modern and abstract of works continues undimmed.

One of the first issues to address from an insurance standpoint is that, as fine art values have increased, many collectors are not keeping up to date with the value of their collections and therefore run the risk of finding themselves underinsured in the event of loss. Explaining to insureds that they need to start paying more for their insurance to cover the rising value of their collection is not always the easiest conversation to have, however, the importance of regular valuations cannot be emphasised enough. Art value indexes like HAMR can also help in providing a benchmark to illustrate the changing value of a collection.

Loss expertise

As well as making sure a collection is valued appropriately, a critical concern is that your insurer has the relevant expertise in the event of loss. Claims can be immensely complex, and fine art insurance differs from many other classes in that the owner is generally far more interested in having the original item back than being compensated.

This gives the insurance industry a chance to go beyond just being a signatory on a cheque. For example, does an insurer know how to get something restored properly? If it does not, the costs of restoration and the depreciation of the original item can be much greater. Would the insurer know what to do if faced with a collection of seventeenth century books that had been damaged by water? The priority, of course, is to stop them expanding and get them into a cold store as soon as possible. If it is done well then the books can come back relatively undamaged, however, done badly and the collection is a write-off. It is a safe bet that in most cases the owner would prefer to get their book collection back.

Fine art can present complex claims but it is also a dense and involved underwriting challenge, particularly in the modern and contemporary art arena where some of the mediums used can be subject to quick deterioration. Hirst's original shark in formaldehyde degraded to such an extent that it has been refreshed recently with a new catch. This is not a new challenge for the latest generation of conceptual artists, including Robert Rauschenberg (b. 1925), famous for his paintings and sculptures made using non-traditional materials including a stuffed goat and, getting there years before Tracey Emin, even his own quilt.

Gradual ageing and wear and tear are excluded in all art insurance policies, but with the examples cited it can be very difficult to discern wear and tear from accidental damage. There is also a growing problem of risk accumulation issues for insurers if you consider that a single Klimt picture was sold for more than £96.5m. Only a few such artefacts in a single fire zone are needed to create huge values at risk.

The insurance market rates the private fine art market as stable, with any recent softening arrested by the UK floods that, while not impacting fine art collections particularly, affected the household insurance market generally. There have been some significant art losses carried by the London market, most famously Picasso's Le Reve, which was damaged by its owner, Steve Wynn, and was the subject of a £28m insurance claim recently.

The public fine art market is probably loss making from an insurance perspective, with rates being very soft. The low frequency of losses means that smaller insurers probably do not realise the true burning costs of this class. Hiscox is sitting out opportunities to cover many exhibitions because rates are not where they should be to cover the risks, unless of course someone has worked out a risk-free way of moving exhibits around safely and is keeping the secret to themself! There is evidence of fresh capacity coming into this market, which is depressing rates, but this new capacity risks being clobbered once the losses start coming in.

Meanwhile, rates are stable to softening in the commercial art market. This could change if there is a big correction in art market prices. As mentioned, the HAMR index has shown a terrific rise in the value of contemporary art. Much like the house price crash and the negative equity trough of the early 1990s, the burning question to ask must be what happens if dealers are suddenly left with overpriced items? The caricature of the loveable but corrupt art dealer made famous in Lovejoy is not an entirely fictional creation and insurance fraud in the commercial sector continues to be a big issue. Experience has shown that a depressed market can tempt some dealers to commit a fraud if the alternative is making a big loss on one of their pieces.

New money, new markets

An interest in collecting art, whether confined to single pieces or a bigger collection, is no longer the preserve of the tweed and stately home set. A young, professional emerging high net worth class that is making its wealth on the money markets or in the professions presents new opportunities, while art collecting is also becoming more accessible to the mid-net worth sector. In addition, foreign money, particularly from wealthy Russians, is also having an inflationary impact on the modern and contemporary art markets.

What this all adds up to is a very good, long-term opportunity for the insurance community to take advantage of, but it is critical that the service delivered continues to be exemplary. Insurance buyers, particularly in the private client sector, often develop a very intimate relationship with their brokers that can result in high client retention rates and good long-term profitability, provided the service offered continues to add real value. Pushing up the sums assured is also critical to reflect the growing value of collections, while selling fine art insurance purely on price is surely an opportunity missed. We have established already that the selling of fine art insurance is unlikely to fall victim to the internet, so the challenge now is to show what we can all do to deliver the sort of tailor-made service that this class of business demands.