The relative lack of freeport facilities around the world and the significant increase in the value of fine art have contributed to heightened concerns worldwide in the specialist fine art industry of risk exposure. The scale of the potential accumulation risk for works of art in freeport storage worldwide has been a concern for insurers for some time, and there is no end in sight.
Freeports are multi-functional, customized facilities that are specifically designed and built for the secure storage of fine art, antiques, collections and other valuables, which are located near international airports and receive tax-free status if and until the item(s) are transported to the selected destination. Whilst freeports offer tax advantages and top quality storage facilities, the warehouses pose insurance issues. Specialists in fine art insurance estimate potential losses in the billions of dollars in the event a warehouse is struck by a catastrophic event. Industry recognition of significant risk exposure in just a single warehouse has resulted in limited capacity and pricing obstacles.
Fine art collectors tend to purchase artworks and valuable objects for both enjoyment and investment purposes. Many major artworks not on display in museums or private residences are stored in tax free facilities. Freeport storage allows the owner greater flexibility and some potential advantages in respect to taxes and duties. Confidentiality and preservation of condition of the works of art are other advantages of these facilities.
The booming art world currently shows no sign of slowing. In 2014, sales reached 37 Billion(GBP), a 7 percent increase from the prior year, according to the European Fine Art Foundation. Concentration of high value artworks in a single facility cannot be underestimated and is growing. If a facility suffered damage from an unexpected and/or catastrophic event, the losses could be staggering, and would have a severe effect on the fine art insurance industry.
More freeports are being built in markets around the world as demand for this type of storage space has increased exponentially over the past few years. While freeports were primarily located in Switzerland, they can now be found elsewhere in Europe, in the USA and Singapore. In 2014, a 22,000 square meter warehouse was completed in Luxembourg.
Specialist fine art insurance companies are now requiring specific declarations from clients that include detailed description, valuation and provenance details, sum insured and in addition the exact building, floor and room the art is stored in. This allows insurers to monitor their exposure and produce more accurate Probable Maximum Loss calculations. Each insurer will set its own limits on maximum aggregate sums insured that they can accept, some by location, some by building, some by floor.
This then creates a finite amount of insurance capacity available for any location/building/floor. Given the aggregated values in that location, this can create a shortfall in supply to demand. In today’s high end market, artwork can easily be increasing in value at a higher rate of inflation, further compounding the scenario where insurers are challenged with capacity demands. As insurance companies get closer to their own maximum limits, the price for the capacity increases, and sometimes capacity runs out completely. The result is differential pricing based on the location of the facility coupled with a differential in the number of insurers interested in underwriting the policy coverage.
These factors make purchasing insurance coverage for fine art valuables and collections stored in freeports a process that should be fully researched to secure adequate protection in advance. Specialist fine art brokers can advise clients on up to date market capacities that do change on a daily and weekly basis. Some clients also ‘reserve’ insurers capacity to make sure that they have coverage as values and inventory ebbs and flows over time.
Ultimately, the value of art and the demand of clients to store art in these facilities have outgrown the insurance industry’s ability to provide aggregated capacity. As long as this trend continues, it will remain a challenge.