Specialty Lines Markets

Boating insurance in the wake of Sandy

Knowing “niches within niches” in order to educate the client

By Dave Willis

It's nearly impossible to talk with boating insurance experts these days without the topic of Sandy—hurricane, tropical storm, super storm or however you want to describe her—coming up, and coming up early on in the discussion. Tom Conroy, marine managing director for Markel American Insurance Company, pretty much sums up the conversations when he says, "Nothing compares to the long-term impact to the Northeast stemming from Sandy." However, he's quick to add, "While it will take time to rebuild, boaters in the area are tough and resilient."

Michael Terrier, senior yacht underwriter and yacht department manager, Maritime Program Group, says Sandy's effects have yet to be fully realized, "but they have made—and will continue to make—a huge dent in carriers' bottom lines." He says an estimated 65,000 boats were damaged by the storm, many of them beyond repair. "We will have to see how many boats are replaced," he adds, "and how many boat owners will choose not to purchase a new boat."

The storm also caused damage that reaches beyond boats, per se. "Many marinas, boat yards and repair facilities were heavily damaged," Terrier explains. "Unfortunately, many were improperly or inadequately insured, and rebuilding will be a time-consuming process with very limited resources." Side effects will include fewer slips and less service available, coupled with increased labor rates.

Gordy Fitch, vice president of specialty programs at Hagerty Insurance, notes that classic boats insured by his firm are "highly collectible and no longer produced, so they're not easily replaceable. With Sandy still fresh in everyone's minds, it is a good opportunity to evaluate how to take advantage of modern technology and work with clients in advance of future storms, to prevent losses from occurring."

Sandy and storm damage aren't the only factors influencing the boating marketplace. "The rising cost of petroleum has had a major impact on new boat production costs," Terrier observes.

Low water levels in a number of areas, including the Great Lakes, the Mississippi River and elsewhere across the United States, are also having an effect. "When water levels reach historic lows, the entire marine industry is affected," explains Tim Lucas, recreational marine industry program manager at Harbor Risk Underwriters. "The cost of dredging most harbors will put a heavy burden on marina owners, management companies and boat owners. These costs are generally passed on to slip holders, increasing their cost of ownership."

In some cases, he adds, it will be impossible to re-launch vessels after winter storage. "This delays usage, along with the need for fuel and repairs," he explains. "In extreme situations, facilities will permanently close; this adds to the problem of public access to our waterways."

Lack of water at residential slips and public launch facilities can discourage use and, in some cases, ownership of a recreational vessel, Lucas says. "It is very difficult to get some of these customers back once they've been lost to another activity."

Despite the challenges, some bright spots exist. "Small-boat dealers—for instance, those selling aluminum pontoon and fishing boats—have enjoyed an uptick in units sold over the last year," explains Conroy. "They expect similar growth in 2013, while those in the sterndrive and mid-sized yacht segment are still feeling the pinch."

In the classic boating market, Fitch is seeing increased desirability of vintage vessels, especially the classic wooden runabouts. "Based on early sales in 2013, values are on the rise," he says. "Fifties, '60s and '70s-era fiberglass boats are also growing in popularity; they can be found relatively easily, they're less expensive to restore than similar wooden boats and they provide a low-cost entry into boat collecting."

Insuring boats

Sandy and other factors are leading to market changes in the boating arena. "There are many signs of a hardening market that will continue in 2013," says Lucas. "With Sandy, we are seeing increases in hull rates, which is a result of reinsurance costs." He also expects to see companies exiting certain regions or the marine market altogether. For those that remain, appetites will change and it could be more difficult to place certain vessels, including those in coastal markets and covered docks exposed to wind, snow and ice.

Terrier also anticipates some rate hardening. "In the wake of Sandy and an extremely soft market for the past seven or eight years, we have seen some carriers increase new business and renewal rates," he explains. "That said, there is excess capacity in the marketplace, which will slow the inevitable hardening cycle. I would expect carriers to rely more on catastrophe modeling than they have in the past, specifically in the Northeast."

Despite back-to-back years of storm activity in the Atlantic, Conroy says the marine insurance industry remains strong. "With the significant decline in new boat sales over the last few years, the universe of recreational boats is now at an all-time high of 21 years of age," he explains. "While some carriers shy away from insuring older boats, Markel can provide desirable coverage options and flexibility for owners of older and newer boats."

Agents and brokers can best serve clients in the market by building—and demonstrating—expertise. "Within the marine segment, there are niches within niches," explains Conroy. "Being successful requires knowledge of your local market—what is selling and by whom." He points out that coverage for boats can be as diverse as the boats themselves. "For example," he says, "a pontoon boat owner will have different needs than a trawler owner who is living aboard and doing the Great Loop" circumnavigation of Eastern North America.

Conroy says it's important to fully interview the owner and understand how he or she will be using the boat, so this can be relayed to the carrier. Fitch concurs. "Agents should fully understand exactly what their clients own and how to provide the best possible coverage for them," he explains. "Asking questions about the boat's history and its intended use can help determine if it is collectible and requires a specialized policy to properly protect it."

Fitch says he frequently encounters people with the misconception that a homeowners policy will suffice in the event of a claim. "That is not typically the case, especially when it comes to vintage boats," he notes. "A specialty insurance provider understands the unique coverage needs and value associated with classic boats."

Success in the boating insurance arena requires diligence. "Gone are the days when a broker can sit in the office and wait for the phone to ring," explains Terrier. "Competition for an insured's premium dollar is greater than ever."

Terrier says knowledgeable brokers can advise prospects and insureds that coverage is as important as the bottom-line price. "They will know the details and nuances of each company's policy form," he explains. "Remember, yacht insurance is generally not an ISO product; every carrier has its own policy form; and there are vast coverage differences from carrier to carrier."

Some policy forms will depreciate machinery, gel coat or paint finishes and may exclude mechanical breakdown of machinery altogether or liability to any paid crew, he notes. "This could result in an uncovered loss and leave an insured with a hefty bill to pay out of pocket that another carrier would have covered under the terms and conditions of its policy form," he adds. "This type of claim can lead to an E&O suit."

Damon Hostetter, senior vice president at ACE Recreational Marine Insurance, believes that understanding and advising customers on the numerous yacht and boat products in the market and educating buyers so they have a basic understanding of what is and isn't covered—before a loss occurs—are key differentiating factors for specialist agents and brokers.

"As boats and their related equipment have become more complex and more expensive, boat insurance policies have kept up," he explains. "They now extend coverage to items such as sports equipment, fishing tackle, navigation and communication equipment, along with coverage for computers and personal electronics.

"Coverage also is available to boat owners for liabilities arising from marine environmental damage and pollution and uninsured boaters," Hostetter adds, "and marinas, yacht clubs and similar facilities can also be added as additional insureds—something they often request along with proof of insurance." He points out that cost-saving alternatives exist, such as "actual cash value" coverage for older vessels or those with lower values, which boat owners may want to consider, as well.

According to Lucas, education and communication are critically important. "Agents and brokers need to stay up to date on carrier interests and procedures," he explains. "They should call their underwriters and find out what they and their clients can expect in the near future. Ask about rate increases and appetite changes."

Hostetter suggests that specialty agents and brokers educate customers on the expertise and personalized service they provide. "Boat owners and potential customers need to understand that licensed insurance agents and brokers are experts in their field, and that they can provide knowledgeable counsel," he explains. He says such counsel covers everything from types of coverage needed and various cost-saving alternatives available to which companies offer the most comprehensive policies, superior claims service and overall best long-standing market reputation.

He believes market reputation, stability and strength are differentiators that should be addressed. "Both agents and boat owners should seek out insurance companies with longevity in the boat insurance industry, as these are the companies that will likely offer the most reliable claims-paying capabilities," Hostetter explains. "Insurance companies that have withstood the weather catastrophes of the past decade and remained strong throughout the economic downtown over the past few years are the ones likely to be there for their agents and customers in the future."

Hostetter also encourages agents to look to carriers that support agencies in other ways. "Working with an insurance company that provides an abundance of sales materials for producers and product brochures for customers is a significant benefit," he explains. "It helps the producer promote, educate and sell, and can save the agency time and money."

Lucas stresses the value of regular communication and interaction. "It's important to work way ahead of your renewal schedule," he advises. "Regularly inform your clients about what the industry has experienced, what they can expect and, most important, how they can use the latest events to better prepare for a potential loss.

"One of the most frequent comments we hear an insured make about his or her agent is, 'I never see or hear from him until it's time to renew,'" Lucas adds. "This isn't a good business practice in any market, but it most certainly does not work when the market starts to harden. It is more important now than ever to stay in touch with your clients and show them you care.

"E-mail can actually make this very easy and affordable," he notes. "It can be something as simple as sending along an interesting article that relates to preparing for and dealing with the aftermath of a storm." Lucas also encourages agents to let insureds know they're willing to speak to their yacht club or dock owners association. "That's an extra value you can provide, which can help generate more business," he says.

Going the extra mile—nautical or statute—will yield positive results. "Agents and brokers who understand their market and provide exceptional service will retain their clients," notes Conroy. "More than that, they'll surely get many word of mouth referrals."