Protect your liquid assets

expert wine taster

The wine cellars of high net worth individuals can be worth thousands of pounds - so why aren't brokers treating them in the same way as works of art or jewellery? asks Veronica Cowan.

Fine wines are a liquid asset, but bubbling under the surface is the question of why collections are often overlooked by high net worth clients — and their brokers. According to AIG's private client group, as few as 5% of HNW clients insure their collections compared with 75% for art. "Some insurers assessing claims do not know about the wine collection," says the insurer's New York-based underwriter Katja Zigerlig, a view endorsed by Simon Mobey, head of personal lines at Chubb, who adds: "Eight out of 10 high net worth homes we appraise are underinsured."

Rupert Damms, client manager at Zurich Private Clients, says that if the wine collection is not specified there would be a policy limit — for example, a full cellar could be capped at £5000, depending on how the broker presented it. In the event of a claim, the current market value would be paid, in contrast to where each bottle is listed in a schedule, when the specified sum insured would be paid for each.

Barry O'Neill, managing director of Allianz-owned broker Home & Legacy, says the key difference between standard household insurance providers and HNW clients is that the latter benefit from an all-risks wording. "In some circumstances, it is possible to achieve a more competitive premium by specifically insuring the wine collection, rather than including it within the overall contents sum insured."

Educating the palate

But uncorking the issues around why some brokers could be bottling out when it comes to getting clients to specify their collections is tricky. Ann Owen, head of AIG’s UK private client group, has a nose for what the problem is: “Brokers don’t ask them, and the client does not know, so we are trying to educate them to bring this to the client’s attention.”

Mr Damms says there is no strict reference to wine in HNW policies, but when conducting home appraisals he specifically asks if the client has anything unusual or specifically valuable, such as wine or guns. “Few brokers ask, but if they are doing the best for the client they should,” he says. He also observes that because many people view wine as a consumable to drink, they would not think of insuring it unless prompted.

Asking a client if he (most wine collectors being male) has a significant wine collection is not exactly an unpalatable question, so why the sensitivity? Some people are not keen to insure to a value, explains Richard Moxon, a senior manager in the private clients practice at Marsh, although he has not come up against resistance when he does enquire. He adds that wine collections have been a relatively new thing emerging over the last decade, “so historically it has not been at the front of brokers’ thinking”.

Clients will volunteer what they want insured, remarks Charles Hamilton Stubber, director of Aon Private Risk Management, although he does advise clients to keep the valuations on any wine collections up to date, with wine becoming a valuable commodity, as well as on risk management issues.

Matthew Mullee, private client director at specialist broker La Playa, has not seen wine collections becoming a big trend, although his firm does see more enquiries where individuals have wine to insure, and says he would always ask about collections when speaking to a new prospect.

What amounts to a significant collection of wine is not an easy question to answer, and most clients won’t mention it, reports John Maxted, joint managing director of Howe Maxted Group, who adds that clients buying wine for consumption would not look to insure it on its own unless they had a big collection. He points out that the wine would still be insured even if the insurer was not told, but it would be under basic perils, without additional cover.

So what are the key questions brokers need to ask clients when it comes to ensuring collections are comprehensively covered?

Sara Greenland, associate director of personal insurances at Sterling Insurance, says these should include the value of the collection; the approximate number of bottles; the single article limits; where, and in what conditions, it is stored — as there is a “damage due to climatic conditions” exclusion; and security of the cellar. This is because typical loss scenarios include temperature control malfunction, caused by a failure in cooling equipment; theft or ‘mysterious disappearance’; along with power failures; water damage and bottle breakage.

“In the event of water damage, there is a potential loss of value, due to damage or loss of the labels on the bottles, although the wine itself may not have been affected.”

Lack of label won’t affect the taste but will substantially impact the value. Mr Mobey explains that he has had a couple of claims where 55% of labels came off, and Chubb paid on a loss in value basis. Ms Owen recalls one big client who had wine in cellars and, following a flood, used a dehumidifier which cooked the wine. “It was specified and we paid the claim.”

Mr O’Neill adds that an up-to-date inventory of the collection is important, as well as a professional valuation — and re-valuation — at least every five years or when significant additions are made to the collection. A common-sense approach proposed by Mr Damms is to ask the client whether they view their wine cellar as a consumable or would want compensation if it was lost or damaged.

Does this mean that wine is something in which HNW individuals are increasingly investing? “Recently, we have recognised that clients are spending more on things they are passionate about — be it fine art, prestige cars or wine — than they were last year,” says Mr O’Neill. “This may be as a result of clients seeking alternative investment strategies or perhaps feeling more confident.”

Ms Greenland comments that wine is not a short-term investment option but usually one of five to 10 years minimum. “It is also subject to price volatility and is a specialist market, although there are now wine investment companies that make the decisions for the investors,” she explains.

One of those is The Wine Investment Fund, which invests predominantly in Bordeaux Cru Classe wine. Stock is stored in a UK government-bonded warehouse and insured at replacement value, so any HNW owners would not take physical custody of it. The fund does not acquire wine at the en-primeur (pre-bottled) stage — when the price is typically volatile — and fashionable or trophy wines, as well as those near the end of their drinkable life, are avoided.

Storage of wine is integral to maintaining its value, according to experts, so how are fine wines stored? Ian Clarke, managing director of the Purple Wine Company, an independent merchant, says investors and collectors either store their wines at home in private cellars, pay for storage in a bonded warehouse or by en primeur where wine is stored at the Chateau until time for its release.

He comments: “Storing the wine under bond has many advantages for the investor, giving recorded and secure storage in the correct conditions and the wine can also be bought and sold without paying duty or VAT.” He adds that most bonded warehouses and specialist wine merchants, who store on behalf of clients, will include insurance cover in their rental charges. “It is, however, prudent to regularly check that this insurance is adequate and covers the fluctuating value of the wine.” Wines bought en primeur and stored by the chateau will also have insurance but he says it is worth checking exactly what perils it is insured against.

As well as advice on correct storage, those investing in wine as a way of making money need to seek further expert advice because wine investment remains a largely unregulated activity — with no investor protection. Values can be fluid, and have certainly been hit by the recession, although some traders are optimistic. Andrew della Casa, director of The Wine Investment Fund, says there was “a bit of a dip in 2008” but red Bordeaux has rallied and is now doing better than other similar assets. “The wine market as an asset class has come a long way. The ‘old world’ demand has never declined in North America and Europe, but recently the middle classes in Asia and Russia have become new consumers in this market,” he adds.

Simon Davies, head of marketing at wine broker Fine & Rare Wines, claims there is “overwhelming evidence” that people are using wine as an alternative investment vehicle — though its value has not gone up much in the recession. “It has bounced back more than other commodities,” he says, with demand in the Far East helped by Hong Kong’s removal of import duties on wine last year.

Thomas Jenkins, Bordeaux buyer and broking manager at Justerini & Brooks wine merchants, reports that the end of last year was “pretty catastrophic” with some vintages holding their own but others going down – with 30% to 40% losses on some wines.

He suggests that too many trophy wines have gone into funds, and consumers wanting to liquidate their assets are flooding the market. But, since December 2008, Mr Jenkins says things have been on the up, with demand being driven from Asia. Hong Kong, Singapore and China are now big markets, he explains, adding: “The Chinese are very brand sensitive, and love Lafite Rothschild.”

This has caused some vintages to rise significantly during 2009, and in his view the growing global demand coupled with a fall in production by some leading chateaux should help maintain fine wine prices.

Various indices track the performance of fine wines, and the bell-weather index appears to be Liv-ex, an electronic marketplace that gives access to financial information about the wine market.

The Liv-ex 100 index tracks prices of the most sought-after wines. Research manager Jack Hibberd says four to five years ago prices rose substantially, and the alternative investment wine market took off. But in 2008 wine, like most assets classes, was not immune and prices fell by up to 20% to 25%. Since then there has been a partial recovery, which has accelerated in the last quarter.

Premium prices

France remains at the top of the wine hierarchy, in terms of exports. According to Mr Jenkins, the ones to watch include classic Bordeaux like Mouton, Latour, Lafite and Margaux, but supply is rationed — which means wine funds have to pay premium prices. This is exacerbated by the production of some vintages being down, because producers are putting quality before quantity. “Demand for fine wine exceeds supply, particularly since the demand increased from Asia and Russia,” says Ms Greenland.

What size of potential income stream are brokers missing out on if they fail to ask whether clients have wine collections needing insurance, and how expensive is such cover? “If a high net worth individual has a wine collection, it should be insured specifically. If they do so, the commission will be paid at the same rate as the remainder of the policy,” says Ms Greenland.

 Premium rates vary, depending on the size of the case, according to Mr Mullee, with very large risks paying rates as low as £0.50 per £1000 sum insured. “So £500 000 could cost £250 per annum, and someone with, say, £5000 of wine could pay £2.50 per £1000, so the premium would be £12.50.”

Mr Moxon estimates: “A good 40% of high net worth clients would have a decent wine collection and 25% in six figures. It is very cheap to specify as it is classed in the same way as art — as a low risk.”

But until those clients and their brokers perceive wine collections in the same way as art, jewellery and ceramics, insurers might want to hold off cracking open the champagne.

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