Did capacity shrinkage following the terrorist attacks on 11 September 2001 damage London's prominence as a market for big-ticket fine art risks? Jane Bernstein reports
The actual fine art losses following the 11 September attacks were relatively minor and yet there was some reduction in London market capacity afterwards. Many industry experts believe, however, that the slide in capacity for big-ticket risks began before September 2001. A variety of issues may have caused underwriters to approach large risks with caution - but the question is, has this shift endangered London's prominence as a fine art market or are capacity levels now recovering?
Howard Kingston, manager of fine art specie at Zurich London, comments: "Post-11 September saw a significant increase in reinsurance costs and, therefore, certain insurance companies and Lloyd's syndicates made the decision to reduce their line size and capacity. This decision, in part, was based on the fact that it became uneconomical to maintain the large line sizes required to meet the needs of the big-ticket fine art risks, as well as the prospects of greater returns from other lines of business."
He adds, however, that this withdrawal of capacity was not merely a feature of the London fine art market and that other classes of business were also impacted.
Some brokers feel the ability to easily place big ticket fine art risks in London was impacted directly by the 2001 terrorist attacks. Alexander Rich, account executive with Heath Lambert's Blackwall Green division, believes 11 September did have an impact on fine art capacity, pointing to a flight to core business classes immediately following the attack on the World Trade Center.
In addition, he explains that while fine art losses themselves were relatively low, there was a knock-on effect on confidence among underwriters. "People became hesitant," he comments. "There was a general feeling that we live in uncertain times." He says this effect is particularly marked in the area of blockbuster exhibitions, where there are large sums insured. This nervousness is compounded by a culture among fine art underwriters to take on 100% of large risks, wherever possible. "If a plane landed on a museum, then one underwriter could be looking at massive losses," comments Mr Rich.
It is certainly the case that a broker can place 100% of a $20m (£11.3m) risk in one place, agrees Daniel Wood, fine art underwriter at Ace, though he emphasises it would have to be with a specialist fine art underwriter.
"If a fine art underwriter likes a risk, they will try to take on as much of it as they can," he explains. Mr Wood agrees that the ramifications of the 2001 terrorist attacks had an impact on the market but believes it served to accelerate a process that had already begun. He traces capacity reduction back to 1998. "Reinsurance capacity was becoming scarce, the market was hardening and line sizes were reducing," he says, adding that the market had reached a point where rates had fallen to unprofitable levels. "Reinsurers were bearing the brunt so they tightened their belts."
Charles Dupplin, who runs the art and private client division for Hiscox Group, also believes 11 September was not the only cause of a capacity shortfall for big-ticket risks. He believes a far greater cause has been "investment losses due to the dotcom crashes and general stock market weakness", and that capacity began to shrink in 2000. "The attacks on 11 September certainly exacerbated the industry's capital shortages, but it was not the sole cause," he says.
David Scully, underwriting director with Axa Art, points to globalisation as another cause for concern among underwriters. He explains: "Globalisation has also resulted in a big increase in theft that has scared off some fringe markets. For example, thieves can move art across countries or use it as currencies in international drug deals. It is a risky area if proper underwriting assessment and risk management are not carried out."
Most commentators agree that those for whom fine art is a core business were largely unaffected by nervousness following 11 September 2001. As Mr Scully says: "Fringe fine art markets were affected but those whose core business is art were not." He adds that Axa Art had the same capacity on 12 September as 10 September.
Mr Wood agrees that Lloyd's syndicates that were committed to this line of business would always find a way of covering a risk.
Others play down reports of capacity problems for big-ticket fine art risks. Philip Turner, who heads the specie division at Marsh, says there was a "slight dip" in capacity following the US terrorist attacks but that capacity is now back up to pre-11 September levels, adding: "The only area where there is a specific capacity problem is terrorism. Apart from terrorism cover, it's business as usual."
Tom Carr, executive director of Aon Marine, comments: "It has not been more difficult to place 99% of fine art risks post 11 September. Capacity for virtually all classes of insurance was impacted by the attacks and the fine art market was no different. However, there is still in the region of $1.5bn that exceeds the needs of every fine art risk other than the very occasional blockbuster exhibition. Even in this instance, London will provide the majority of the capacity."
He asserts: "We do not believe there has been any reduction of interest in fine art from the key insurers in this class at all." He adds that certain insurers have, in fact, focused on growth in this sector due to its historical profitability.
Furthermore, any reduction in capacity by insurers before or after the 2001 attacks now appears to be correcting itself. Mr Wood says a calmer, more rational approach has returned and rates are returning to a more acceptable level, although he emphasises increases have been incremental rather than dramatic. "Rates are pretty stable now and there continues to be an appetite for this type of business."
Breadth of cover
Mr Dupplin is also confident capacity is on the up, but adds: "The breadth of cover is no longer quite what it used to be. Following 11 September, people are far more aware of their aggregates. The various systems used to measure aggregate have increased substantially in their sophistication and this has largely been driven by managements who have become more cautious."
One cause for increased confidence is that the investment losses experienced in the post dotcom era have now largely stabilised. In addition, there has been a resurgence among reinsurers. Concerns about reinsurance were a major driver behind the reduction in Hiscox's capacity prior to 11 September 2001, according to Mr Dupplin. He says, however, that confidence is now coming back: "Most reinsurers have returned to healthy profits but there are fewer reinsurers to choose from."
Underwriters and brokers strongly deny any suggestion that London could be losing its prominence as the market of choice for large fine art risks (see box); however, there is a somewhat cautious confidence surrounding the sector's profitability, which tends to be tempered by some sector-inherent concerns. As Mr Scully comments: "It has generally been profitable but it is also very volatile - losses don't tend to be small."
Mr Dupplin asserts that fine art is, in general, a profitable sector.
"The bad bits are loss-making but the good bits are profitable," he explains, adding: "It's never going to be up there with the kind of profits possible in, for example, the reinsurance market but it is certainly a nice earner."
Mr Carr agrees that fine art is generally profitable for insurers. He says: "The value of art is growing and given the high values involved, particularly at the top end of the market, significant losses can occur. Indeed there have been a number of fairly high-profile losses in the UK, Europe and the US over the past 18-24 months."
As far as exact capacity levels before and after WTC are concerned, insurers are unwilling to reveal their figures. The message is that any shrinkage has now corrected itself. As Mr Carr says: "No specialist fine art underwriter completely withdrew from the sector post-WTC, and many have been increasing their capacity back to or even beyond their pre-11 September levels."
- Is London at risk of losing its prominence as a big ticket fine art underwriting market?
"In our opinion, the London fine art market is still predominant in terms of providing capacity and expertise (both broking and underwriting) for big-ticket fine art risks such as exhibitions, museums, permanent collections and private collections. In our experience, London is involved in some capacity in the large majority of big-ticket fine art placements.
"For example, we are not aware of any major exhibition - other than where government indemnity is provided - in the past 10 years that has not been partially or wholly insured in London.
"Bear in mind that even if London is not the primary insurer, it still has a major role in terms of providing reinsurance and, therefore, capacity, to many of the domestic insurers globally that are writing fine art." Tom Carr, executive director, Aon Marine
"Absolutely not. On the contrary, the greater ease of global communication - for example, through e-mail, plus cheaper travel and telephone calls - makes it almost as easy for a broker to contact an underwriter in London as locally. I am currently in Australia talking to brokers and assessing risks." David Scully, underwriting director, Axa Art
"I would say generally no. London is still prominent and, at the right price, has collective capacity for up to around $1.2bn (£677.8m). Problems of capacity occur on the rare occasions that exhibitions have values over this figure." Paul Brown, partner for cargo, art and speciality risks, broker First City (commenting from a museum collection and exhibition perspective)
"No, we do not believe this to be the case. London still has the ability and capacity to underwrite large exhibitions. The US and Europe are alternative markets. However, the international markets need to work together to address the insurance needs of the major exhibition organisers and art institutions, particularly where catastrophe aggregations are an issue." Howard Kingston, manager Fine Art Specie, Zurich London.
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