Super storms, fraud and business consolidation add up to confused conditions in the world of insurance.
The yacht insurance business is a risk/reward proposition. If the risk and reward for insurance companies are kept in balance, everyone is happy. If they get out of balance, everyone pays. When insurance underwriters incur losses beyond a tolerable level, they pull back from the market. Supply and demand dictate any reduction in companies writing yacht insurance, and both can subsequently increase boaters’ premiums. This is the situation we find ourselves in at the beginning of this boating season.
Most yacht insurance companies try to have no more than 10 percent of their business in high risk categories. Those could include vessels in storm prone areas, high-speed pleasure craft, inexperienced or absentee owners and vessels traveling to foreign countries. Statistics show that a high percentage of insurance companies’ losses come from a small percentage of their customers. Recently, some insurance companies’ high-risk segments have increased to levels above the 10 percent threshold. This could be a result of decisions their salespeople were allowed to make, an increase in boaters traveling longer distances, an increase in the severity of storms or a combination of these factors. To compensate, insurers have scaled back coverage, or in some cases have pulled out of the market completely. I can speak to this personally: In the past five years, three insurance companies have informed me they were exiting the market and would not be renewing policies.
In the total market of insured goods, yachts make up a minuscule slice of business. With a good economy and a large number of high-value yachts in the market, it only takes a few losses for an underwriter to get on the wrong side of that risk/reward equation. When this occurs, they have to adjust their business model. Most companies have other assets to insure, where they may have fewer losses or make more money. Companies enter and exit market sectors all the time; it’s just that recently, more have been exiting the yacht market than entering.
According to Pantaenius Insurance Company Vice President Scott Stucek, “A combination of factors has created the perfect storm for the industry,” with losses coming across a wide range of their businesses. He added, “In the recreational boating market, the severity of weather is one of the leading factors causing this change.” Michael Pellerin with BoatUS Insurance agreed: “Not only have we seen an increase in weather-related claims, but the claim values are increasing as well.” He added: “The integrated nature of boat electronics today has caused the damage to be much greater. Years ago a lightning strike might have taken out the VHF radio, and maybe some navigation equipment. With today’s fully integrated electronics systems, lightning strikes are damaging a larger number of components within the boat.”
One of the ways insurance companies are mitigating their losses is by adding specific weather-related endorsements to policies. In my last renewal a lightning endorsement was added, increasing our deductible for damage from a lightning strike while the boat was in Florida during portions of June and November, when lightning strikes are highest.
Another troubling trend is yacht owners submitting engine failures and mechanical problems to their insurance. In many cases this is a misappropriation of insurance. Stucek has seen this in Pantaenius’s claims and reminds customers: “Insurance shouldn’t cover poor maintenance,” and that “all boaters pay the cost, because eventually these claims will affect policy rates.”
When boaters are forced back into the market to shop for a new policy, it’s easy to get confused by the wide variance in the wording and coverage of yacht insurance policies. Just the simple distinction between a boat and a yacht can be confusing, as companies don’t always use the same criteria. Most insurers categorize vessels by size, ranging anywhere from 26 to 30 feet in length as the cut-off. Policies covering boats under this size tend to be more standardized, and in some cases even regulated. Yacht policies for vessels over these lengths are unregulated. Yacht insurance underwriters do not have to submit rates or policy wording to regulators nor comply with insurance regulatory laws.
Shopping for yacht insurance is very much a buyer-beware endeavor. Most insurance companies are reputable and care about protecting their clients’ interests, but they have to make money doing it. As my agent said at my last renewal, “This is this year’s policy; don’t be surprised if it changes next year.” Find a broker or agent you can trust to help you navigate the stormy waters of the yacht insurance market.