Modern masters of fine art risk

Risk & Insurance, Nov, 2004 by Steve Yahn

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.

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 Erbscher'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 oil 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."