In this latest Opinion piece, Erinrose Sullivan, Head of Museums and Cultural Heritage at SO REAL looks at how digital twins can mitigate HNW losses.
Demonstrating ownership or relevant beneficiaries is a crucial part of both the underwriting and claims processes, especially for non-life policies. In general, it is a relatively simple case of providing proof of purchase on the risk, such as on vehicle or home insurance content policies, in order to successfully manage the claims process through reparation or new-for-old against the risk. However, High Net Worth (HNW) items, such as fine art and antiques is more complicated. Such risks are often highly limited products, with potentially only a few made, or are hundreds of years old. In these cases, proving ownership – or provenance – becomes a major challenge. There is no receipt for an antique statue.
Typically, provenance is demonstrated through a lengthy process whereby historians and restoration experts evaluate the item to judge that it is legitimate, and the insured party is the rightful owner, and a report is generated to that effect. If that item is then lost or stolen, and recovered, that report – typically written and provided with basic images – is the basis for adjudicating the rightful owner. Demonstrating provenance in this way isn’t secure, and potentially opens insurers up to part of the £1.2 billion in claims fraud. And, when provenance becomes a fraud itself, insurers face even more issues trying to understand who really owns a piece of art. In the USA for example, two antiques dealers were arrested for using false provenance documents to illegally sell antiques between 2015 and 2020. Sadly, provenance fraud isn’t new, and it continues to plague the industry.
There is however, an opportunity for the HNW art insurance industry to take learnings from other sectors, particularly to apply to claims handling. If a condition of the policy requires the insured to not just acquire a basic level of provenance but to incorporate technology from the beginning, it could save millions in fraudulent claims.
Create a digital twin
Rather than simply taking multiple photos of an item, insurers could mandate that a non-invasive scan is taken of the item using similar technology to that used in airport X-ray machines to build a “digital twin.” Take an antique vase for example. Using scanning technology, it’s possible to accurately capture the full and intricate detail of the piece, including any pre-existing formation, abnormalities, cracks or chips – all of which can make it a unique item. In the most advanced cases, it’s also possible to see inside pieces without subjecting them to any potential damage in the process, meaning any particularly delicate items don’t need to be handled in the same way, which could lead to greater risk of damage. Should that piece be lost and then recovered, the loss adjuster can use that digital twin to accurately review the piece and decide who the rightful owner is as part of any provenance dispute.
Having a digital twin enables further benefits in addition to proving provenance. By their nature, many HNW pieces require care and attention, and must be handled carefully. In one such case in 2008, a sculpture by Jeff Koons fell over, breaking into multiple pieces. Following an assessment, AXA, which held the policy on the piece, deemed it a total loss and paid the claim in full. However, if a digital twin had existed the story could have been different. Having a highly detailed scan to work from, rather than photos, it may have been possible to restore the piece at a lower price than the full sum insured and reduce the pay-out AXA had to make. For Koons, it would also mean a completely unique piece, which potentially could have had even greater resale value for him.
A new way to track owners
As well as having the digital twin representation of a piece to prove the real-life version is the legitimate item, insurers need to consider requiring a new way of proving current owners, especially within private sales. Blockchain could be the answer to that problem. Based in a decentralised, digital environment, within digital currencies, blockchain has enabled users to clearly see who owns how much of each currency. That clear knowledge can also be replicated in HNW insurance. Having a permanent record of an owner, and more specifically when an owner changes, means insurers would have a dedicated audit trail from which they can efficiently assess who the insured actually is. As such, it becomes harder to commit fraud and to accurately track claims made for different pieces as they change owners over time.
Blockchain and digital twins
Having a permanent ledger via blockchain, alongside a digital representation of the physical item as a digital twin is a powerful combination for HNW insurance. It makes it possible to identify not just the owner of a piece of art, but also to verify that ownership is legitimate if the piece is lost or stolen. As a result, the claims process can be much simpler, faster and ultimately cheaper for insurers. It also creates benefits for the insurers, whom, by making the investment in new technology, could lower their premiums as a result.
Provenance is critical to HNW insurance, and the industry needs to adapt to face existing and emerging threats to help manage fraud more effectively. Digital twins are the way forward that enables a more robust claims handling process that can help to reduce provenance fraud, mitigate losses and ultimately help insurers to manage their portfolios more effectively.