Over the last few years, fine art has shifted from primarily an expression of creativity to a new global asset class. And as a growing number of non-traditional collectors now look to fine art — both classic and contemporary — as a way to diversify investment portfolios, valuations have skyrocketed.
At the top end, a Picasso or Monet can fetch as much as $250 million from a willing buyer. Even new artists can now demand seven-figures. A whole collection can be worth billions.
“The total value of a Francis Bacon show last year was around $2 billion,” said Richard Northcott, Director of Fine Art & Specie, Ironshore. “The value of art has shot further and further skyward.”
But more money also introduces more risk.
At a time when traveling exhibitions and the lending of artwork between museums and collectors have grown more common, higher dollar values generate greater liability exposure through every step of a transaction — including the transportation, storage and display of fine art.
“Almost all museums have exhibition programs and museums are continually lending works of art from their collections to each other,” Northcott said.
With values at elevated levels, it’s potentially ripe ground for litigation. Lawyers and legal counsels for institutions have noticed.
“The input of non-art professionals like attorneys in constructing loan agreements has resulted in increasingly complex contracts,” Northcott said.
To protect themselves from taking on more liability than they’re covered for, museums need the insights and skill of an insurer with expertise in fine art, and similarly qualified brokers.
“Ten years ago, there were one or two standard loan agreements used by almost every institution. Now it’s not unusual for every museum and most private collectors who lend art to have their own specially-designed contract,” Northcott said. “As the values keep going up, people ask for more and more complex stipulations.”
Standard loan agreements of the past typically included a clause requiring a boiler-plate fine art insurance policy. Coverage for acts of terrorism, war, wear and tear and gradual deterioration, for example, were typically excluded from standard museum policies. Now some lenders want those perils covered under their loan agreement.
Upping the ante even further, some lenders now ask borrowers to accept “absolute liability” in their contracts.
“There is no technical insurance definition of ‘absolute liability.’ Lenders want borrowers to take blanket responsibility for a work of art and accept liability for whatever happens while it’s in their care,” Northcott said.
“Whatever happens” can encompass a wide and unpredictable scope of scenarios; potentially everything from physical damage from any cause to a change in market value during the loan period. Today, those risks can even include cyber breach as contemporary artists experiment with digital mediums.
“Because ‘absolute liability’ has no legal definition, it would all be down to what an aggressive lawyer would argue in court on the lender’s behalf,” Northcott said. “A museum putting on a show for a high-profile artist could have hundreds of millions of dollars of value at risk. The biggest fine art exhibitions now can be worth well over a billion dollars. Very few museums have the financial capacity to take on that liability.”
As a result, some museums are forced to turn down lending agreements and refrain from borrowing works of art because the liability is too great a burden.
“To avoid rejecting an agreement, and missing out on an opportunity to feature a fine work of art, the museum registrar needs a thorough review of both the proposed agreement and their insurance policies,” Northcott said.
Northcott and his team carefully analyze each loan agreement to determine how much liability the borrower is being asked to take on. No two contracts are alike, and each one needs to be picked through with a fine-toothed comb.
“We’ll compare the agreement against the borrower’s insurance coverages to see where they fall short,” Northcott said. “Then we’ll examine whether we can extend the policy to include some or all of the additional liabilities.”
Ironshore’s flat management structure and a culture of cooperation makes it easy for different underwriting units to work together to build the bespoke solutions necessitated by complex lending agreements.
“I spend an increasing amount of my time talking to my colleagues in the War and Terrorism departments, the Political risk department, and other parts of the company to access their capacity,” Northcott said. “I’ll communicate the risk to them, and usually we can work together to craft terms and conditions that address the client’s exposure.”
Ironshore also has the ability to write on admitted or locally licensed paper in territories across the world that work best for the client, based on the locations of borrower and lender — a critical factor when so much art lending takes place across borders. Barriers like differences in language, law or contract vernacular, as well as the various insurance statuses available today, may pose challenges to international loan agreements. Ironshore’s global resources ensure a good fit can almost always be found.
“We have paper in Singapore, Hong Kong, Australia, and we can tap into our Lloyd’s syndicate. In most circumstances, we can find a way to tailor a solution to a museum’s unique circumstances,” Northcott said.
It takes in-depth knowledge of the art world to understand the unique risks and the circumstances of each individual loan agreement. Ironshore’s underwriters put in the time on the road to meet with their museum clients and their brokers and get to know their unique needs.
“The more clients I meet with, the more I really understand what’s going on in their institutions and what issues they’re concerned about. That allows me to tailor solutions to their specific needs and goals,” Northcott said.
Where underwriters provide the safety net up front, the claims team props institutions back up when some damage does befall a piece of fine art. Ironshore’s in-house claims teams work together with each business unit, so they have a complete understanding of how policies are written and can align their response appropriately.
“Our claims team will come to us and ask what our intent was when we wrote a particular policy. We are available to assist in claims exceeding $25,000 and on all complex or difficult cases. That close relationship and open communication provides a high-quality claims response to what are often quite complex and emotionally charged fine art losses,” Northcott said.
As the art world grows more valuable, more complex, and ultimately riskier, insurers with industry expertise and a high-touch approach to underwriting help museums minimize their exposure, and enable more fine works of art to be shared around the globe.
For all disclaimers and to learn more, visit http://www.ironshore.com/international/fine-art-and-specie/c53.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Ironshore. The editorial staff of Risk & Insurance had no role in its preparation.
Lingering hopes that large-scale cyber attack might be a once-in-a-lifetime event were dashed last year. The four-day WannaCry ransomware strike in May across 150 countries targeted more than 300,000 computers running Microsoft Windows. A month later, NotPetya hit multinationals ranging from Danish shipping firm Maersk to pharmaceutical giant Merck.
Maersk’s chairman, Jim Hagemann Snabe, revealed at this year’s Davos summit that NotPetya shut down most of the group’s network. While it was replacing 45,000 PCs and 4,000 servers, freight transactions had to be completed manually. The combined cost of business interruption and rebuilding the system was up to $300 million.
Merck’s CFO Robert Davis told investors that its NotPetya bill included $135 million in lost sales plus $175 million in additional costs. Fellow victims FedEx and French construction group Saint Gobain reported similar financial hits from lost business and clean-up costs.
The fast-expanding world of cryptocurrencies is also increasingly targeted. Echoes of the 2014 hack that triggered the collapse of Bitcoin exchange Mt. Gox emerged this January when Japanese cryptocurrency exchange Coincheck pledged to repay customers $500 million stolen by hackers in a cyber heist.
The size and scope of last summer’s attacks accelerated discussions on both sides of the Atlantic, between risk managers and brokers seeking more comprehensive cyber business interruption insurance products.
It also recently persuaded Pool Re, the UK’s terrorism reinsurance pool set up 25 years ago after bomb attacks in London’s financial quarter, to announce that from April its cover will extend to include material damage and direct BI resulting from acts of terrorism using a cyber trigger.
“The threat from a cyber attack is evident, and businesses have become increasingly concerned about the extensive repercussions these types of attacks could have on them,” said Pool Re’s chief, Julian Enoizi. “This was a clear gap in our coverage which left businesses potentially exposed.”
Development of cyber BI insurance to date reveals something of a transatlantic divide, said Hans Allnutt, head of cyber and data risk at international law firm DAC Beachcroft. The first U.S. mainstream cyber insurance products were a response to California’s data security and breach notification legislation in 2003.
Of more recent vintage, Europe’s first cyber policies’ wordings initially reflected U.S. wordings, with the focus on data breaches. “So underwriters had to innovate and push hard on other areas of cyber cover, particularly BI and cyber crimes such as ransomware demands and distributed denial of service attacks,” said Allnut.
“Europe now has regulation coming up this May in the form of the General Data Protection Regulation across the EU, so the focus has essentially come full circle.”
Cyber insurance policies also provide a degree of cover for BI resulting from one of three main triggers, said Jimaan Sané, technology underwriter for specialist insurer Beazley. “First is the malicious-type trigger, where the system goes down or an outage results directly from a hack.
“Second is any incident involving negligence — the so-called ‘fat finger’ — where human or operational error causes a loss or there has been failure to upgrade or maintain the system. Third is any broader unplanned outage that hits either the company or anyone on which it relies, such as a service provider.”
The importance of cyber BI covering negligent acts in addition to phishing and social engineering attacks was underlined by last May’s IT meltdown suffered by airline BA.
This was triggered by a technician who switched off and then reconnected the power supply to BA’s data center, physically damaging servers and distribution panels.
Compensating delayed passengers cost the company around $80 million, although the bill fell short of the $461 million operational error loss suffered by Knight Capital in 2012, which pushed it close to bankruptcy and decimated its share price.
Awareness of potentially huge BI losses resulting from cyber attack was heightened by well-publicized hacks suffered by retailers such as Target and Home Depot in late 2013 and 2014, said Matt Kletzli, SVP and head of management liability at Victor O. Schinnerer & Company.
However, the incidents didn’t initially alarm smaller, less high-profile businesses, which assumed they wouldn’t be similarly targeted.
“But perpetrators employing bots and ransomware set out to expose any firms with weaknesses in their system,” he added.
“Suddenly, smaller firms found that even when they weren’t themselves targeted, many of those around them had fallen victim to attacks. Awareness started to lift, as the focus moved from large, headline-grabbing attacks to more everyday incidents.”
Publications such as the Director’s Handbook of Cyber-Risk Oversight, issued by the National Association of Corporate Directors and the Internet Security Alliance fixed the issue firmly on boardroom agendas.
“What’s possibly of greater concern is the sheer number of different businesses that can be affected by a single cyber attack and the cost of getting them up and running again quickly.” — Jimaan Sané, technology underwriter, Beazley
Reformed ex-hackers were recruited to offer board members their insights into the most vulnerable points across the company’s systems — in much the same way as forger-turned-security-expert Frank Abagnale Jr., subject of the Spielberg biopic “Catch Me If You Can.”
There also has been an increasing focus on systemic risk related to cyber attacks. Allnutt cites “Business Blackout,” a July 2015 study by Lloyd’s of London and the Cambridge University’s Centre for Risk Studies.
This detailed analysis of what could result from a major cyber attack on America’s power grid predicted a cost to the U.S. economy of hundreds of billions and claims to the insurance industry totalling upwards of $21.4 billion.
Lloyd’s described the scenario as both “technologically possible” and “improbable.” Three years on, however, it appears less fanciful.
In January, the head of the UK’s National Cyber Security Centre, Ciaran Martin, said the UK had been fortunate in so far averting a ‘category one’ attack. A C1 would shut down the financial services sector on which the country relies heavily and other vital infrastructure. It was a case of “when, not if” such an assault would be launched, he warned.
Despite daunting potential financial losses, pioneers of cyber BI insurance such as Beazley, Zurich, AIG and Chubb now see new competitors in the market. Capacity is growing steadily, said Allnutt.
“Not only is cyber insurance a new product, it also offers a new source of premium revenue so there is considerable appetite for taking it on,” he added. “However, whilst most insurers are comfortable with the liability aspects of cyber risk; not all insurers are covering loss of income.”
Kletzli added that available products include several well-written, broad cyber coverages that take into account all types of potential cyber attack and don’t attempt to limit cover by applying a narrow definition of BI loss.
“It’s a rapidly-evolving coverage — and needs to be — in order to keep up with changing circumstances,” he said.
The good news, according to a Fitch report, is that the cyber loss ratio has been reduced to 45 percent as more companies buy cover and the market continues to expand, bringing down the size of the average loss.
“The bad news is that at cyber events, talk is regularly turning to ‘what will be the Hurricane Katrina-type event’ for the cyber market?” said Kletzli.
“What’s worse is that with hurricane losses, underwriters know which regions are most at risk, whereas cyber is a global risk and insurers potentially face huge aggregation.”
Nor is the advent of robotics and artificial intelligence (AI) necessarily cause for optimism. As Allnutt noted, while AI can potentially be used to decode malware, by the same token sophisticated criminals can employ it to develop new malware and escalate the ‘computer versus computer’ battle.
“The trend towards greater automation of business means that we can expect more incidents involving loss of income,” said Sané. “What’s possibly of greater concern is the sheer number of different businesses that can be affected by a single cyber attack and the cost of getting them up and running again quickly.
“We’re likely to see a growing number of attacks where the aim is to cause disruption, rather than demand a ransom.
“The paradox of cyber BI is that the more sophisticated your organization and the more it embraces automation, the bigger the potential impact when an outage does occur. Those old-fashioned businesses still reliant on traditional processes generally aren’t affected as much and incur smaller losses.” &