THE TRUTH ABOUT INSURANCE
Why are marine premiums rising and what can you do about it?
In light of recent price hikes for leisure boat insurance policies,
Alex Smith interviews five leading insurance providers to find out why it’s happening
What percentage of the premiums goes out again in claims?
It varies from one category to another but in recent years, and most notably between 2008 and 2018, far more has been paid out in claims than has been taken in premiums. It was a period during which insurance companies clamoured for business, driving premium prices down and implicitly encouraging the customer to buy on the basis of price. That generated a problematic business model, as Richard Power from Fastnet Marine Insurance explains: “It got to a stage when it was clear that those rates were unsustainable. In fact, during the three years to the end of 2017 in the Lloyds yacht insurance sector (which is a pretty good benchmark for the sector as a whole), claims exceeded premiums by between 180 and 300%.”
Is that why boat insurance premiums have risen faster than inflation?
Yes. In the last two years, marine leisure insurance premiums have risen sharply. While the extent varies with size and category of boat, most insurers agree that the general scale of the increases is somewhere between 25% and 60%. Larger boats have seen the highest increases but there have been increases across the sector that leisure boaters have baulked at.
Jeremy Entwistle from GJW Direct notes that customers will also have been hit by the Government doubling Insurance Premium Tax over the last couple of years. That said, insurers are still battling for market share and there are plenty of ongoing customer initiatives. To add to this, over the last couple of years online quoting has improved and customers can quickly get quotes themselves rather than waiting a couple of days. We’re a long way from price comparison websites dominating the boat insurance market like they do in motor insurance but this transition puts power in the hands of customers to shop around, check their cover and get a policy that is priced for what they really need. Always remember that insurers don’t necessarily share the same view of risk!
Why have the price increases happened?
The increased premiums of the last couple of years are a direct result of an industry attempting to rebalance the books after a period of unsustainable pricing. Simon Tonks from Pantaenius explains: “The industry has struggled for profitability over the years, with competition driving the price down, at the same time as attritional claims and larger losses were affecting the market. Despite these things, premiums really didn’t increase for a long time so the market is just now catching up with that.”
What caused under-pricing in the past?
Prior to the financial crisis of 2007-2008, insurance companies would generally gather data to identify the ‘burning cost’ – the actual cost of claims on an annual basis – in relation to a given yachting sector. That would then be factored into the calculations in order to determine a premium rating model that could accommodate the burning cost while providing sustainable returns for investors.
After the crisis, with a flat stock market, “a lot of people stepped into yacht insurance, providing policies of varying degrees of coverage, quality and security,” says Richard Power.
justified; they’re essential. Quite a lot of insurers have moved out of the market because they’ve made no money and most of the insurance companies and underwriters are owned elsewhere. The owners of these big corporations are in it to make money, not to subsidise. If they’re subsidising any part of their emporium, they will simply shut it down.”
Have we been paying too little for too long?
It certainly looks that way. Given the increasing scale, value and complexity of yachts, the proliferation of big loss weather events and yacht fires, and the higher rate of claims, it seems we have been paying too little. Jeremy Entwistle said: “At one point, we sat there and watched what was almost a race to the bottom. We watched people slashing prices and we had to sit there and take the pain. Now a sense of balance has been restored.”
Are we paying for the industry’s mistakes?
In terms of current premium increases, it’s fair to say that we’re now paying the price required to bring about a new and more sustainable equilibrium for marine insurers – and that’s a consequence of a short-term, price-driven approach to securing new business in which marine insurance companies were all, to a degree, complicit.
What is the likely impact of coronavirus?
For owners in most countries, the simple reality that they haven’t been able to use their boats for a while is bad news. But in the absence of specific cover built into a contract to cover marina fees or lack of use during enforced down time, it’s a hit the boater will be compelled to take.
What is more critical, however, are the potential implications for yacht owners in the Caribbean, as Barrie Sullivan points out: “In the Caribbean, most clients have been told where they can and can’t be during the hurricane season. And because travel is now restricted and a lot of the countries where there is safety and shelter are not accepting any more people, there will be a lot of boaters in the Caribbean who are stuck with their yachts in areas where they won’t get hurricane cover.
And this is an incredibly sad dilemma because there’s no real solution to it. My view is that, having learnt their lessons through expensive mistakes in the past, no insurers are going to break their rules to accommodate it.”
up the bill after an accident and a maintenance contract that’s picking up the bill for something that should have been replaced or repaired before it failed.”
Are some insurance providers better at paying out than others? In the wake of big losses, a great many companies have dropped out of the market, which means that in general, the companies that remain take a transparent and sustainable long-term approach to their business dealings. Steve Risk explains: “It’s a long-held myth that insurers are there to take premiums without paying claims. If a client has a claim that is recoverable under their insurance policy, then once the Insurance policy has become a contractual agreement between the Insurer and the policyholder, insurers will always look to pay that claim. The only difference between insurers is the way they go about servicing the claim – in terms of the level of service, communication, accessibility and responsiveness.
But the end result is the same.”
Plainly then, it is vital to be candid, honest and explicit at the policy writing stage – a principle roundly supported by Richard Power: “There are certain protections, where, if the insurer doesn’t ask a specific question, the customer doesn’t have to disclose it. But to be safe as a buyer, it’s useful to play a proactive role. My advice would always be to bare your soul.”
Is there anything I can do to reduce my premium?
As with other forms of insurance, the key methods of reducing your premium involve reducing the Agreed Value
(the sum insured), increasing the excess and shopping around for a better deal. The building of insurer-client relationships is also becoming more highly valued than it was in the past, but as Richard Power points out, “the market has transformed, within the space of six months, from a buyer’s market to a seller’s market”. As a result, price flexibility is now constrained by the resumption of sustainable rating systems – and the giveaway bargains of the past are simply no longer available.
Should I buy on price or cover?
While it remains possible that new players will be tempted by the rewards of a recovering marine insurance industry, thereby kickstarting a fresh crusade for lower prices, the consensus, as things stand, seems all but universal. The nature, breadth and relevance of the cover is the chief priority in securing proper protection for your yacht. The price is then largely defined by that.
Thanks to: Jeremy Entwistle, GJW Direct; Simon Tonks, Pantaenius; Barrie Sullivan, Y Yacht Insurance; Richard Power, Fastnet Marine Insurance;
Steve Risk, Coleman Marine