A credit-crunching Christmas

A ring is one of a long list of extravagant gifts – including a stable, yacht and decorations from Tiffany’s – in this well-known Christmas jingle. This year, in the midst of a debt crisis, a diamond ring is surely the ultimate recession-defying gift.

One woman who famously enjoyed her precious gems was actress Elizabeth Taylor, who died in March at the age of 79. Taylor’s fifth husband Richard Burton – who she married twice – gave her an 8.24-carat ruby and diamond ring one Christmas. His first jewellery purchase for her was a 33.19-carat Asscher-cut Krupp Diamond, in 1968.

These rings, along with the famous Taj Mahal diamond and her dazzling ruby-and-diamond Cartier jewellery set – a gift from third husband Mike Todd – were among the eighty pieces of jewellery that recently sold at auction for a record-breaking £80million. A portion of the proceeds will go to the late icon’s cancer charity.

From mine to finger

For the lucky recipient, a girl’s best friend has already been on a long journey from the original mines in places like Africa, South America and Australia where it was first uncovered, to specialist manufacturers around the world – and from there on to wholesale and retail jewellers. Each step of the journey is an insurable peril.

“The whole industry will have the possibility of purchasing some form of insurance to protect their assets,” explains James MacNaughton, Specie and Fine Art Underwriter at Ascot Underwriting. “Once uncovered, the commodity – even though it’s in the rawest of forms and whether it is stone or metal – is a substance which is insurable and therefore the process of insurance can start.

“All the infrastructure that supports the diamond industry takes out policies to support the safeguarding of the stones on their way to becoming that final product.”

Generally speaking, the rarer the gem, the more it is worth. The proportion of gem-quality diamonds among those typically mined is relatively few: only about one in one million diamonds are quality one carat stones, about one in five million are two carat and just one in 15 million are three carat. Some of the world’s rarest diamonds are coloured.

“Pink diamonds appear to command the highest prices and premiums as encountering any pink diamond prior to the 1980s was rare,” says Scott Sellick, Underwriter, Specialty, XL Group. “Most diamonds should come with a Gemological Institute of America Certificate which identifies shape and cutting style, measurements, carat weight, colour and clarity.”

When a gem-quality diamond is uncovered there is then a transit risk in moving the gem by armoured car, helicopter or as valuable air cargo from the mine to the manufacturer.

There were a number of extremely expensive and rare finds in the last year – especially in certain mines in Africa,” reveals MacNaughton. “These stones become multi-million dollar stones.

“As a syndicate we’ve been involved in insuring the stones if they are taken from the mines to the Bourse in South Africa and then out into the worldwide diamond markets.”

More recently, diamonds have been transported to countries in the Far East including China, Thailand and India where the industry can take advantage of more cost-effective labour to refine the raw products that have been found.

From there, the finished diamonds are typically transported to wholesale and retail jewellers found in prime locations within the world’s major cities – famous shopping streets like Fifth Avenue in New York and Bond Street in London. Major diamond centres include Hatton Garden in London, Ramat Gan in Israel and Antwerp in Belgium.

By the time a diamond ring is finally purchased from the jeweller it may have already been insured a number of times, sometimes as many as four, reveals MacNaughton. “From the point of view of private clients, as soon as they’ve purchased they usually take out insurance.”

Diamonds are forever

With its long history and ability to put together policies for larger-value items, Lloyd’s remains a key insurance market for the diamond industry. “Lloyd’s has always been traditionally involved in insuring high-valued works of art or stones because it’s got the capacity to do so – and the experience of underwriters to underwrite these policies,” says MacNaughton.

The market has insured some of the world’s most famous gems during its 320-year history. Both XL and Ascot were involved in the development of Damien Hirst’s diamond-encrusted skull and XL insured the Millennium Star, the world’s sixth largest diamond.

Christmas and New Year, with numerous high-profile events, inevitably brings additional exposures as some of the more luxurious jewellery collections are put on show. “We have arranged the insurance for countless jewel-laden stars at awards and festivals worldwide,” says Sellick.

“The rich and famous not only show off their jewels at Christmas but have the jewels entrusted to them by various retail jewellers for red carpet and other public events throughout the year,” he continues. “This can range from the $100,000s to millions for celebrities wearing one or various items: earrings, a necklace, a bracelet, a ring or watch.”

Owners of precious gems are advised to value their collections every few years to ensure they are not underinsured. In recent years, diamond prices have risen sharply, fuelled in part by growing appetite from emerging economies such as China and India.

Rough-diamond prices increased by 50% in the first half of 2011 following two years of more than 30% growth, according to data from PolishedPrices.com.