Clients often ask our Novamar Insurance staff “why are my premiums increasing? I’ve never filed a yacht insurance claim”. To start with, think of a premium pool as just that, a pool full of money that all insured boatowners contribute to available to pay claims. If the pool level gets low, premium dollars need to be added or claims don’t get paid and, depending on the size of the default, people’s financial lives can be ruined. Many risk attributes affect how premiums are generated. Vessel age, construction material, max speed, engine type, navigation area, boating experience and, of course, the hull and liability coverage limits are the most common data points or risk factors used by actuaries / number crunchers. The use of data analysis tools is on the rise as technology improves which, 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.
In most lines of insurance, data points are way more consistent and easy to come by, with thousands or millions of valid numbers to crunch. With yacht insurance there is a far smaller number of risks to analyze. Some examples to ponder, a yacht can have 1-5 engines, gas or diesel, and now 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 and the boat is at risk of sinking. Saildrives and pod drives are smooth and efficient, but both rely on seals to keep water out of the gears and must be maintained regularly. Both types of drives are 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. Some have carbon masts, most are aluminum, and a few classics have wood masts. With fewer spar builders around, a dismasting often means long waits for a replacement and on some occasions the aluminum rig is replaced with a carbon mast – at greater expense. There are large production boatbuilders, small production boatbuilders, custom boatbuilders, and backyard boatbuilders. Boats are delivered new with various systems which get changed, upgraded, removed, and added to over time. These changes are done professionally or by boatowners with varying levels of skill. Hurricanes seem to be increasing in strength and severity. 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 ten year old boat will often require custom fabrication as original parts and components are no longer available. Sourcing parts and components is rarely achieved by calling the dealership 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. Plus underwriting yachts and adjusting yacht insurance claims requires expertise. There are too many variables and no two boats are truly alike. So you can see why an industry that has largely changed from relying on pricing from experienced underwriters to number crunching by actuaries is having a difficult time wrapping their brains around their poor financial results. Insurance is about assessing risk and allocating investor and shareholder capital. The conclusion is the majority of yacht insurers and their reinsurance partners have shuttered their programs and allocated their capital to other lines of insurance with more predictable results. The remaining yacht insurance programs have 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 tightening underwriting or closing their programs. The premium pool needs to remain full to float all our boats. As boatowners, we are all in this together so the best way to accomplish this is for all of us to do our part by maintaining our boats and not taking unnecessary risks. As pricing and losses stabilize, we are anticipating more capacity will enter the market again, but that may be a year or two out.