Webinar: Risk Management and Insurance of Art & Luxury Collections

And welcome to this ArtRatio Webinar on risk management and insurance of art and luxury collections. I am your speaker: My name is Manoj Phatak. I am a Chartered Engineer and the Founder and CEO of Art Ratio.

Let me ask you two questions: Why do insurance companies not currently insure against the gradual damage of artworks? And the answer is simple:- They cannot know when the condition started to deteriorate.

A second question: Why should insurance companies be concerned at all when artworks get damaged? And again, the answer is very simple:- Damage reduces the value of the artwork and premiums are a function of value. And of course we know that insurance premiums are the primary source of income for insurers.

So let’s look in a bit more detail at the subject of risk management. It’s the kind of topic which is typically taught in project management type training scenarios and normally when we look at the word ‘risk’, we’re talking about colloquially we’re talking about a negative connotation. But in project management terms, risk is defined as being an uncertainty.

An uncertain event or condition that may have a positive (or a negative) impact on a project and we typically take a three step process where we identify the risk, we analyze the risk and then we find a suitable response to that risk. So when you’re identifying risks, you must always make sure that the event that you’re talking about is in the future. It may or may not occur, but it must be in the future. If it will occur (like the Sun getting up every morning) or it has occurred, then we would not consider that to be a risk. And when you’re analyzing risks, you can have a good outcome we call this an opportunity; and if we have a bad outcome to that risk then we call it a threat. Again this information comes from the Project Management Institute.

So let’s look at a typical probability-versus-impact matrix for threats; and you can see along the bottom you have Low, Medium and High and along the left-hand side again Low, Medium and High. And so if you’re looking at low probability, low impact threats; then typically one scenario you might take would be simply to accept it, not to necessarily spend much time or money and to do the minimum possible. If on the other hand, you’re talking about high probability and high impact threats, for example launching a new product in a brand new market where the chances of getting sued may be very high if you don’t comply, then of course one possible solution would be to avoid that threat by not launching in that market.

So we have the band right in the middle where you have either low to medium or medium to high impact and probability and in that case we have two possible solutions: one is to mitigate the threat by reducing the probability of occurrence and the other one is to transfer the threat and that’s typically the example that we give for insurance. Okay we’ll talk a bit more about that in just a second. Let’s look at the flipside where we look at opportunities so where your risk has a potentially positive outcome.

Again you have low probability, low impact opportunities, you might just choose to accept those; High probability high impact opportunities where you might choose to exploit those, that’s in the maximum possible to make sure that it does actually occur; and in the middle band you can see again two possibilities one is to enhance the opportunity (which is to try to increase the chances of it occurring) and the other one is to share, and a typical example of that would be setting up a joint venture with a separate company. Okay let’s look at a worked example of a risk register; something that you would typically do if you’re a project manager or business analyst.

And in this particular scenario let’s assume that your client, a renowned London gallery, is considering implementing digital condition reporting to optimize restoration, ascertain shipping requirements and to communicate with the art insurers. So what risks could impede or even help the objectives of this project?

So the first example that we give is where gallery staff may push back on the adoption of digital technologies; that of course would be a threat to the project. If you spent a lot of money on this technology and then nobody is willing to use it then that would be a waste. In this case the probability might be medium and the impact of course would be high and we may choose then to respond by mitigating that particular threat, for example by assigning an extra budget for hands-on training.

Okay, a second example would be where insurers perhaps might reduce premiums based on having more accurate data, thanks to the digital nature of your condition report, that of course would be an opportunity that might have a low probability and a low impact, and in that sense you might might choose to simply accept the response, perhaps by including extra quality checks on data to ensure accuracy, but you’re kind of doing the minimum possible and that’s what we mean by having an accept response.

The third example is where shipping costs may increase due to more stringent requirements and that of course comes from having much more accurate data which is what digital credit reporting typically gives you. In this case if the shipping costs increase then that would be considered to be a threat to the project because your costs are going up.

In this case the probability might be medium and the impact might be high and in this case we may choose to transfer this particular threat by outsourcing the preservation to try and improve the condition.

Okay so art insurers typically cover things like theft and fire and flood and transit but also other topics such as appreciation, newly acquired items, and defective title.

If you look at a couple of quotes: this is one as from Dr. Claire McAndrew as we saw in the first slide. Art insurance policies exclude coverage for gradual deterioration as the impact from these cannot be correlated to a distinct moment in time, and the rates can vary from 7 cents to 20 cents per hundred Dollars.

The second quote comes from Chubb insurance, and Doris Strauss used to work there, and she says we estimate that the premium value of all insured art globally is somewhere between 500 Million Dollars and 1 Billion Dollars. If those estimates are right there’s a lot of uninsured art out there. So if you put all the numbers together you will see that the total value (the global value) of all insured art should be somewhere between 250 Billion Dollars and 1.4 Trillion.

Ok, let’s look at the actual data and this is coming from the Art Basel / UBS Art Market Report 2019, which refers to the financial year 2018 of course. You can see here the left-hand side the insurance and security segment accounts for about 8 percent of the overall 20 Billion that was spent on ancillary services in the art world, and this would imply an art insurance market worth anything between two hundred million Dollars globally to 1.6 Billion annually.

Ok, so we’ve seen already that damage reduces the value of the artwork and insurance premiums are a function of value, so it makes sense to protect the condition of the artwork because that will protect insurance premiums. And this of course is in the vested interest of insurers. On that basis ArtRatio has started a new initiative for a concept called Black Box Art Insurance.

It’s not the first time it’s been done, in fact it started off in the automotive sector where automotive insurers nowadays will offer a black box for your vehicle; either a piece of GPS hardware or it can be a smartphone app, and they will incentivize good driving with reduced annual premiums. So what we’re saying at ArtRatio is: Why not adopt the same idea in the art world, where good collectors (and we can see how good they are by looking at the data regarding conservation parameters) are rewarded with lower premiums and perhaps even quantifiable reputations, thanks to the hard data that we’re getting or we’re collecting in the vicinity (in the direct vicinity) of the art object itself. And you can find more information at the URL which is listed on the bottom of this slide and appears on the ArtRatio Blog.

So thank you very much for joining us on this mini-webinar. A quick shout out to our institutional partners which include the Museum’s Association, LAPADA, the Institute of Conservation and SEAHA. I look forward to joining you on another webinar in the short-term future. Thank you very much.