Modern Masters of Fine Art Risk
As margins shrink and the rivalry to write fine arts policies intensifies,
specialty firms compete against industry insurance and brokerage giants. The
prize: to handle collections belonging to museums, cultural institutions,
nonprofit organizations and high-net worth individuals. As the price of art
escalates and the risks increase, major insurers vie with new kinds of
coverage and changing markets for a bigger slice of what can be a very
lucrative business.
BY STEVE YAHN
At Kansas City's renowned Nelson-Atkins Museum of Art, as at other museums
and cultural organizations around the world, putting together a
comprehensive insurance program is every bit as complicated as mounting an
important exhibition.
The key person in determining the Nelson-Atkins' fine-arts insurance is
Chief Registrar Ann Erbacher, a meticulous veteran of the museum. Staying on
top of risk considerations is a regular and important part of Erbacher's
job. She must know the precise whereabouts of some 28,000 works of art in
the museum's collection, of which only about 10 per cent are on display at
any given time.
Erbacher is on the front lines of the rapid changes roiling the realm of
insuring institutional and individual fine-arts collections, such as
steadily rising art prices and growing fears of terrorism both at home and
abroad in the wake of Sept. 11. Fine-art risk issues, especially insurance,
are being scrutinized as never before. What was long a gentlemanly,
tradition-bound business with few surprises has become much more active,
sophisticated and lucrative.
Erbacher is in regular contact with the Nelson-Atkins' broker, Henderson
Phillips, one of a dozen or so fine-arts insurance specialists. Henderson
Phillips watches developments in the art market overall, as well as working
with Nelson-Atkins on exhibition arrangements, the museum's annual review
for insurance and other purposes, and other business matters.
For example, the museum's current account executive at Henderson Phillips,
Washington, D.C.-based Deborah Peak, is tracking insurance markets in the
light of the many catastrophes that have struck the United States
(hurricanes and floods on the East Coast, a 5.9 earthquake between Los
Angeles and San Francisco, and Mount St. Helens' rumblings in Washington
state).
"We are looking for any trickle-down effect that huge catastrophe claims may
have on fine-art insurance," says Peak, a vice president of the firm, which
was acquired a few years ago by global broker Arthur J. Gallagher.
Today, premiums appear to be returning to pre-Sept. 11 levels when the
market was, by all assessments, soft. "It's a buyer's market," says Steven
Pincus, senior vice president, fine arts practice leader at Marsh. "Buyers
often think fine-arts coverage is too expensive. But there is a lot of
protection in most 'all-risk' policies on the market today, so I don't
believe paying, say, 10 cents per $100 of value for a private fine- art
collection for a truly 'all-risk' policy is unreasonable."
RATES WILL RISE
"It's a very specialized and competitive business, with definite downward
pressure on premiums in today's market," observes Scott Hodes, a
Chicago-based partner of the worldwide Bryan Cave LLP law firm. A corporate
lawyer with a great love of the arts, Hodes is also a trustee of the
fast-growing Mexican Fine Arts Center Museum in Chicago; he has handled the
legal affairs of the famed artists Christo and Jeanne-Claude since the
mid-1960s, and represents individual art collectors. Recently, he notes, the
cost of insuring the collection of one of his high net worth clients dropped
by about a third.
Competition to write fine-arts policies is so fierce, says London-based
Robert Read, fine arts underwriter at Hiscox Syndicate 33-which underwrites
fine-arts policies inside the Lloyd's market under that name and elsewhere
as Hiscox Insurance Co.-that rarely is there a deductible of any sort on
policies for museums or individual collectors.
Further, Read agrees with Peak and other fine-arts insurance experts, who
say that the torrent of hurricanes in the Caribbean and other recent natural
disasters will "absolutely" have a negative impact on fine-arts insurance.
With an estimated $50 billion in property damage from the hurricanes,
insurance companies will instinctively be searching for ways to raise rates
in every sector possible as was the case immediately after Sept. 11.
So why, with margins shrinking and competition intensifying, are a growing
number of specialty art insurance firms-from stand-alone brokers to groups
within large insurance companies-so aggressively pursuing business from
museums, cultural groups, and other nonprofit organizations, along with
collections of high net worth individuals, corporations, and universities
and colleges?
The numbers, for one. The American Association of Museums alone has 5,800
members, says Ed Able, the association's Washington, D.C.-based president
and chief executive. "And these are not just art museums. Our members
include botanical gardens, zoos, science and technology museums and a large
number of historical museums."
"This has always been a very profitable form of business," Grace D. Thomas,
international director of Fine Arts and Inland Insurance at St. Paul
Traveler's, candidly states: "The mission statement of museums and other
similar organizations has always emphasized preservation and protection.
There is a great responsibility placed on curators and also registrars to
properly maintain and exhibit the art work of their museums, even more than
financial considerations."
"There has always been plenty of stability in the area of insuring high net
worth individuals. These tend to be good long-term relationships, and we
cultivate them very carefully," says Thomas, whose career started in the
fine-arts insurance sector some 20 years ago at Chubb, and then led to
creating a fine-arts group at Atlantic Mutual.
FOOT IN THE DOOR
A fine-arts insurance account is also a prized catch is because it may
provide a "back door" for insurers to pitch other forms of insurance
required by museums and other institutions that have high property values,
strict security regulations, sophisticated fire-protection systems, and the
like, all of which need to be insured to one degree or another.
And, despite the widespread media coverage of the brazen theft late last
summer of "The Scream" and "Madonna", the two masterpieces by Norwegian
painter Edvard Munch that were stolen from none other than the Munch Museum
itself in Oslo, historically art theft has not had any significant bearing
on art insurance prices-even if, as in the Munch case, the paintings
themselves were not insured for theft.
"Collectors and the media sometimes wonder about the impact of prominent
instances of art theft on insurance rates in our market," says Hiscox's
Read. "Certainly we are watching out for any big 'copy cat' thefts in light
of the Munch heist, but, in fact, our biggest source of claims come from one
form or another of damage, wear and tear, discoloration, or damage in
transit."
STABILITY SELLS
The most favorable characteristic of the fine-arts insurance market is that
costs remain stable and rarely move in wild swings, Read and other
colleagues agree.
"Historically, underwriting fine-arts insurance has remained broadly
profitable," says Read, whose group underwrites policies for more than
10,000 high net worth individual collectors globally, along with 250 or so
museums, and another 250 commercial clients such as auction houses, dealers,
shippers and suppliers. "Moving in a cycle of plus or minus 20 percent the
rate variances are rarely volatile, whereas many other forms of coverage,
such as property insurance, are subject to much unpredictable and wider
swings."
One aspect of the fine-arts world today that does disturb Read is that
individual and institutional collectors around the world have grown
increasingly reluctant to loan their art holdings for exhibitions, even at
the finest and seemingly most secure museums.
"Since Sept. 11, we have been forced to do fewer exhibitions of our own, and
have reduced the number of loans we make for exhibitions elsewhere," says a
key officer at a major U.S. museum.
TRAVELING SHOWS
Christiane Fischer, New York-based CEO of AXA Art Insurance Corp., which
insures about 400 museums and individual collectors primarily through
"all-risk" policies, also worries about the hardening and shrinkage of
insurance policies for traveling exhibitions. "There's been a lot less
exhibition activity, and therefore museums are having trouble getting
reasonably priced insurance for traveling exhibits, especially ones outside
of the United States," adds Fischer, whose firm includes 60 art experts
around the world.
S. Jennifer Lee, director of art collection management at the AIG Client
Group for high net worth individuals, underscores the overriding importance
of offering comprehensive services, and be careful to reassure individuals
who loan their art work for exhibitions, but are increasingly uneasy about
letting them out of their controlled environment.
Lee, who joined AIG in 2000 after more than 10 years with Citibank's Private
Bank Art Advisory Service in New York, says that, despite the intrinsic
drama of art theft or the theatrics of a roundhouse battle over inheritance
issues, "most losses occur in transit. So we make sure we are working with
transporters who have a demonstrated ability to safely handle fine art and
understand their cultural heritage."
Again, preservation is the watchword, adds Lee. Always with a
risk-management focus, Lee's group at AIG does everything from carefully
selecting the right framer for a painting, or overseeing the proper base for
a work of sculpture, to regular documentation and appraisals of a
collection, as well as assisting clients when they are buying or selling.
ESCALATING VALUES
Another major factor in the fine-arts insurance market today is the
anticipated escalation of prices at auctions this fall in London and New
York, principally at Sotheby's and Christie's. Or, more accurately,
record-setting and attention-getting prices at the fall auctions will create
the expectation that the art market is poised for an upward spike following
two unnerving years of general inactivity and flat prices post-Sept. 11. The
Impressionist, Modern, and Contemporary categories, in particular, now
appear likely to be market leaders.
In short, results of this fall's major auctions are likely to be a classic
double-edged sword for museums.
The first swing of the sword will be the almost automatic obligation to
revalue the worth of art collections, if not soon after the auctions, then
certainly at museums' annual insurance evaluation.
The second swing is likely to come if - as has been predicted in the press
and anticipated by dealers and the auction houses - a new generation of
younger, wealthy, determined buyers emerges in force at the fall auctions.
This new wave of enthusiastic, knowledgeable collectors will need assistance
from the growing number of firms, with insurance companies in the forefront,
that already are tailoring services to suit them.
How important is the impact of a steady rise in prices of art in calculating
premium prices? "Significant," says the Kimbell Art Museum's vice president
and CFO Brenda Cline. "like many other museums, an important part of our
annual insurance evaluation is to analyze the impact of rising art prices.
It definitely is an important cost consideration."
From the insurance industry side, Nicholas Reynolds, vice president of
underwriting for XL Fine Arts and Specie, is convinced that the inexorable
rise in art prices over the past 20 years has been the dominant factor in
calculating fine-art insurance premiums.
"Art prices have soared more than 20-fold since 1985," says Reynolds, who is
based in Chicago. "The major museums, therefore, are feeling price pressure
in two ways. Of course, they want to acquire new works for their own
collections, but the substantial rise of prices curtails what they can
spend. At the same time, the regular rise of art prices in the marketplace
have caused the values of museum art collections to increase far beyond the
money that is available for insurance purposes."
ART AS INVESTMENT
Most recently, according to the Artprice.com charting service, the price of
art sold at auction increased 9 percent in the first eight months of this
year over the sales recorded in the same year-earlier period. One
disquieting element in the arts-prices equation is the resurfacing of talk
of art as an investment. Perhaps it was inevitable, with art prices on the
march even before the great expectations for the fall auctions, and with
stock markets in the United States gyrating without a sense of direction.
More than ever, the toughest questions museum officers and trustees now
confront when dealing with fine-arts insurance matters are: What type of
policy should be purchased, what should that insurance policy cover, and how
can the most effective policy be established?
With few exceptions, most museums and other non-profit groups opt for
"all-risk" policies to protect their fine-arts collection. At Hiscox
Syndicate 33, says Read, "all risk" literally means coverage of "all
physical damage." Terrorism coverage, however, is an exclusion. On
commercial risks, the category in which museums fall, the insurer has added
a "nuclear/chemical/biological contamination" exclusion.
Until Sept. 11, terrorism insurance was routinely included in most
"all-risk" policies. But after the World Trade Center attacks, many insurers
began requiring that terrorism insurance be treated as an exclusion-and
usually an expensive one. So in November 2002, the U.S. government stepped
in and enacted the Terrorism Risk Insurance Act (TRIA), which requires
insurers to offer some form of terrorism insurance to their clients, who are
free to accept or reject it.
TERROR AND COSTS
"In early 2003 or so, many U.S. carriers insuring museum collections relaxed
and decided to just offer TRIA and simply went back to offering pre-9/11
coverage," observes Robert F. Salmon, managing director, Willis Fine Art,
Jewelry and specie. (See separate story on terrorism insurance above.)
How much should a museum pay for a fine-arts insurance policy? At one end of
the issue, some museums are so financially strapped, especially vis--vis
their mission to serve their members and visitors to the maximum extent
possible, that they don't spend any money on insurance. At the other end,
some museums, often ones created and funded by exceptionally wealthy
individuals or families, have the financial means to fund their entire
collection, in some cases very sizable ones.
In between? There is no set methodology, says Dorit Straus, worldwide
manager for Specie and Art at Chubb. "There's no pure number. Some museums
find themselves strained to budget for any insurance at all. Then there are
museums with around $2 billion in value, that will buy $400 million worth of
protection."
"One thing I would like to stress," adds Straus, who started her career as a
risk manager at Harvard University, "is that fine-arts insurance is one of
the best values available in the insurance market. Prices are,
comparatively, very inexpensive." Most experts see rates for museums with
good financial track record, and wealthy individual collectors, in the range
of 1 percent to 5 percent of the appraised value of their entire collection,
without any deductibles.
One very powerful and encouraging new force on the art and art-insurance
scene is the Internet. "More and more, when a work of art has been stolen,
information about the theft is quickly posted on the Internet," says
attorney Hodes.
The most important Internet clearinghouse for information about fine art and
antiques theft, and recoveries, is the The Art Loss Register
(www.artloss.com). The Register and its site, known in the art world as the
Scotland Yard of art theft, was created through a partnership of leading
auction houses and art trade associations, insurance companies, and the
International Foundation for Art Research.
The Web site contains an exhaustive list of stolen works of art, but,
encouragingly, it also bills something called "Featured Recovery."
For example, there is the remarkable tale of a Picasso painting entitled
"Buste de Femme," which vanished after the fall of Marcos in the
Philippines. The painting was registered in Art Loss Register's database in
1986. It was searched by the Register and an auction house in 1998 prior to
sale and was matched with the Picasso from the Philippines. The painting was
sold at auction in 1999 for $992,500 including premium, and the proceeds
went to the Philippines government.
NO SIMPLE MARKETPLACE
In sum, says XL's Reynolds, who specializes in public and private sector
institutions, particularly museums, colleges, and universities: "The
fine-arts insurance market is becoming increasingly sophisticated. Everybody
down the line is asking more and better questions."
AXA Art Insurance's CEO Fischer vigorously agrees. "We are asking a ton of
questions," Fischer says.
But, in the long run, that's good for both museums and individual collectors
and their insurers. "Since 9/11," adds Fischer, "there has been a growing
awareness of the value of art collections and, as a result, insurance
policies already are beginning to more accurately reflect a collection's
true worth."
Willis' Salmon concurs, "We're already seeing a greater focus on an
aggregation of values. What are the values of risks involved? How do you
plan for foreseeable changes in risk? In the market today, all underwriters
are asking more intense questions about risk all around."
STEVE YAHN, a veteran journalist, has been the editor of Advertising Age,
Editor & Publisher and Crain's Chicago Business. He was also the editor and
publisher of the Collector/Investor. He can be reached at
[log in to unmask]
http://www.riskandinsurance.com/041101choice.asp
_____________________
Ton Cremers
http://www.museum-security.org
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http://www.cpprot.net
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