April 19, 2013

Guiding Your Art-Loving Clients, Whether It’s a Passion or an Investment

For the large majority of Chubb customers who insure their art collections with us, art is a passion, and those who love art buy what they like. Still, more people are looking to art and other collectibles as a relatively stable place to invest their money. 

While Chubb does not offer investment advice, we will advise customers about how they can protect their collections, whether it is art, jewelry, fine furniture, classic cars or whatever they have a passion for. That, of course, goes beyond the insurance policy, but I will touch on some key loss-prevention tips later in this blog.

The emotional aspect of buying art still ranks as the most important motivation for collecting, according to a 2011 Deloitte/ArtTactic Report, with 97% of the collectors surveyed mentioning this as one of their primary motivations. However, 49% of art collectors are also strongly driven by investment returns, and a further 39% see art as a key component in their portfolio diversification strategy, according to the report.

Insurance broker Sandra Berlin has witnessed this firsthand. A senior VP at Willis in Chicago, Berlin has been working in the personal and commercial art insurance world for more than 20 years and has helped place insurance for individuals who own hundreds of millions of dollars’ worth of art.

“A certain percentage of art collectors do it for investment,” she admits. “But for most, they purchase art as a passion. They enjoy both the aesthetic and intellectual aspects of their art collections. Often collectors build a great deal of knowledge about the art that they collect.”

Still, she adds, those who have the means to afford a sizeable fine art collection are not foolhardy with their money. “No one wants to collect art at a high level and lose money on their investment.” 

The Ups and Downs of the Art Market

The art market, like the stock market, has experienced cycles of boom and bust. There was a boom in the mid-1980s, when Impressionist and post-Impressionist works soared in value, then a meltdown between 1990 and 1992, when prices fell more than 44%. The market did not return to sustained growth until 1998. The global art market, including auctions and private sales, grew 95% between 2002 and 2006, from $25.3 million to $54.9 million. The art market peaked in 2007, but the collapse of the financial markets in 2008 precipitated a sharp decline. From October 2008 through September 2009, art sales declined by more than $30 billion. 

As the financial markets gradually solidified in 2010, art buyers started coming back. In February 2010, Giacometti’s Walking Man sold at Sotheby’s for $104.3 million, a record price for art sold at auction. Three months later, Picasso’s Nude, Green Leaves, and Bust, sold at Christie’s for $106.5 million. Last spring the record for the most expensive work sold at auction was broken when Edvard Munch’s The Scream sold at Sotheby’s for $119.9 million.

In addition to auction houses, the private art market has been growing in recent years largely because of the rising number of art fairs and auction houses increasing their private sales. The growing popularity of art websites like Paddle8 and Artsy, which make middle-market art widely accessible, may drive growth in this sector.

Art as a Value Investment

Berlin said one of the keys to insuring and protecting an art collection is understanding the value of the art and how those values can change over time. Berlin was an English major in college with a minor in art history and worked as an appraiser before starting her career in insurance. 

Several factors help determine the value of a piece of art, including rarity, condition, medium and supply, among others.

If an artist has a small body of work and his pieces don’t come to auction frequently, this can drive up prices. The condition of a piece can significantly affect value, which is why collectors need to get appraisals done in person rather than through a photograph.

Oil paintings are generally the most expensive medium, and limited edition prints can have greater value. A limited supply also drives up value. There are not as many top quality Impressionist and Old Master works on the market, because most are now in museum collections. Finally, a strong provenance—the history of the ownership of a piece—can increase prices.

Protecting the Collection

Those starting an art collection, especially if they view it as an investment, need to be vigilant about protecting and insuring their art. 

Although breakage is the most obvious form of damage, fingerprints etched into highly polished metal surfaces, smudged pigments, torn canvases, and pulled or torn textile fibers can all reduce the value of art. Theft is another concern for art collectors. The FBI estimates that $6 billion worth of art is stolen each year, and 90% of stolen works are never recovered.

I won’t go into details about protecting art—we have people at Chubb who have far greater expertise than me on the subject and, besides, we list a number of useful tips online. If you’re wondering if your art is well protected, call your insurance agent today and request an assessment from your insurer.

Berlin said many of her art insurance customers have curators who will help manage their collections, and others experts who catalogue the works. Even those with smaller collections often rely on the advice of the dealers they’ve worked with, she said. 

One advantage to investing in the art market, unlike the stock market, is that you can insure your investment. Selecting an insurer that specializes in insuring art is critical. To make sure you have enough insurance to protect your collection, you should have the art appraised regularly. 

Whether you view your art as a passion or an investment, it is important to make sure it is protected.

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