Clients often ask our Novamar Insurance staff “why are my premiums increasing? I’ve never filed a yacht insurance claim”. Think of a premium pool as just that, a pool full of money into which all insured boatowners pour premiums to pay claims. When the pool level gets low, premium dollars need to be added or claims don’t get paid, and people’s financial lives can be ruined.
With most lines of insurance, there are thousands or millions of valid numbers to crunch. For example, there have been over 44,000,000 Toyota Corollas built. That’s a heck of alot of cars with insurance data to analyze! For yacht insurance, the premium pie is very small with far fewer risks to analyze. Yacht types and how they are used varies greatly causing the actuaries/number crunchers much grief when it comes to pricing risk. In spite of the few numbers of yachts, there are many risk attributes that affect how yacht insurance premiums are generated. Vessel age, construction material, maximum speed, engine type, navigation area, boating experience and, hull and liability coverage limits are the most common data points or risk factors used by actuaries/number crunchers to predict and price risk. The use of data analysis tools is on the rise as technology improves, which, at least theoretically, allows for more accurately assessing and pricing “risk”. Other factors affecting insurance premiums are social inflation, supply chain disruption, and the prevailing legal climate. Drawing on past experience is also very important to predict future loss trends.
A yacht can have 1-5 engines; gas, diesel, or electric powered; inboard, inboard/outboard, outboard; saildrives, and pod drives. A boat with an inboard engine has a standard shaft log and a packing gland or a dripless shaft log. Both require maintenance or they can leak, putting the boat at risk of sinking. Inboard/Outboards, saildrives and pod drives are smooth and efficient, but rely on seals to keep water out of the gears and must be maintained often. These types of drives can be very expensive to repair or replace. A sailboat can be used solely to cruise, or club race occasionally, or race with professional paid crew aboard, adding paid crew liability exposures. Some have carbon masts, most are aluminum, and a few classics have wood masts. With fewer mast builders around, a dismasting often means long waits for a replacement and on some occasions the aluminum rig is replaced with a more expensive carbon fiber mast. There are large production boatbuilders, small production boatbuilders, custom boatbuilders, and backyard boatbuilders. Boats are delivered from the factory with various systems which can get installed at the dealership, changed, upgraded, removed, and added to over time. Changes or upgrades may be done professionally or by boatowners with varying levels of skill. Poorly installed or maintained systems can cause a boat to sink or burn. Hurricanes seem to be increasing in strength and severity with fewer well trained technicians available to repair today’s more complicated yachts. Lightning strikes taking out navionics as well as more sophisticated electronic engine controls have caused lightning claim costs to go through the roof in recent years. Even a relatively new boat of ten years old, will often require custom fabrication as original parts and components are no longer available. Sourcing parts and components is rarely achieved by calling the boat dealership or marine hardware store with a part number. Marine surveyors are the underwriter’s eyes when it comes to assessing the condition of a yacht prior to purchase as well as when a complicated claim occurs. The bottom line is that it’s very difficult to price risk using data analysis alone. Underwriting yachts and adjusting yacht insurance claims requires specialized expertise. Unlike automobiles, there are far more variables and no two boats are truly alike. You can understand why an industry that has largely gone away from pricing by experienced yacht insurance underwriters to number crunching by actuaries is having a difficult time wrapping their brains around the cause of their poor financial results. Insurance is about properly pricing risk and then allocating investor and shareholder capital. The conclusion by the majority of yacht insurers and their reinsurance partners is predictable results are difficult to come by resulting in over 15 yacht insurance programs shuttering and allocating their capital to other lines of insurance with more predictable results. The remaining yacht insurance programs have capacity limitations and are being asked to absorb this excess demand for coverage at a time when their reinsurance and claims costs are skyrocketing. At the end of the day, insurance is a math exercise. If yacht insurance was an easy and profitable line of insurance to write, insurance companies would be jumping over tables to do so instead of the current environment of tighter underwriting criteria, more limited risk selection, higher premiums, or closing their programs.
The premium pool needs to remain full to float all our boats. As boatowners, we are all swimming in this premium pool together. The best way to add reasonably priced yacht insurance capacity to the market is for all of us to do our part by maintaining our boats and not taking unnecessary risks. As premium pricing and losses stabilize, supply chains get back to normal, and social inflation moderates, we are anticipating more capacity will enter the market again, but that may be a year or two out. In the meantime hopefully you are reading this from the cockpit of your boat on a sunny afternoon with your favorite beverage in hand.