Marine Market Sees Favorable Future Despite Hard Market

August 5, 2002

While many markets in the insurance industry continue to see adverse effects due to the hard market and recourse from 9/11, the marine market is one of the few that has a good view of the light at the end of the tunnel. The marine market is fortunate in these troubled times to be one of the few markets to actually turn a profit in some areas. However, many other areas of the market are still seeing their fair share of problems.

“The hard market in the pleasure boat business is not having the same effect as in the commercial business as liability, property, and workers’ compensation,” said Joe Cecchini, chairman and CEO of Western Marine Insurance Services. “In the boat business, we’re seeing some increase in the neighborhood of 10-15 percent across the board. So it’s much more stable. That’s good news from a service standpoint. It’s had a pretty stable history.”

Cecchini noted, however, that the difference comes in to play when you compare family trail-boat and yachts to high-performance speedboats. “That market [high-performance boats] is having some difficulties,” he said. “There are some companies that are pulling out of that. The pricing in that class of business is accelerating, simply because it’s harder to find companies that will write these boats legitimately.”

Garrett Lumley, director of Marketing at Western Marine, added to Cecchini’s sentiments, saying, “Yes, our prices have gone up. But at the same time, we still have a market, whereas a lot of companies have left the marine market, and so you generally tend to find fewer players, but it’s still pretty competitive.”

Robert Large, product development manager, Pacific Specialty Insurance, puts a different perspective on the state of the market. “What we have seen in general in the last year is a downward trend in both of our marine programs, personal watercraft and boat. I think that largely has followed the kind of economic slim that we have seen where generally people are not spending their hard-earned dollars on boats and personal watercraft. So the slippage we’ve seen in our programs have really followed the economic slowdown.

“I have seen a couple of new competitors on the insurance side trying to enter the market, and typically when that happens there will be a little bit of aggressive pricing,” Large added. “But, I haven’t seen too many changes given that the market has hardened. I think most people are trying to hold their ground if you will.”

“Pricing’s our biggest issue,” Lumley said. “It varies by product and it varies by customer. On the commercial side you have a wide range of pricing. You may have one customer who has zero claims over the last five years, [and] you think an increase of only 25-30 percent. You may have another customer who has mainly an identical business who had only one claim and they went up 150 percent. It’s hard to gauge what the prices are going to be right now.”

Another industry source who agreed to speak with Insurance Journal on an anonymous basis said the hard market is being “steered primarily by the reinsurers,” whose problems are trickling down into the companies. “What we’re seeing is a combination of stiffening pricing and market availability. I think in the long run we’re going to see the market availability as the key factor.”

However, he added, “We happen to be receiving more business because we have more stable markets. Those companies that have good reinsurance packages probably have good opportunities right now to develop a good portfolio at adequate prices.”

“From a yacht and boat standpoint, the pricing has been too low for too long,” he continued. “I think we’ve been blessed with some pretty lucky weather scenarios, even nationwide, that have kept the loss ratio in check. I feel that now is a very good time to get some rate stability back, so that when we get back to normal weather patterns, we’ll have the premium base to be able to handle the losses that are sure to come.”

Boat Thefts
Top States 2000 2001
Florida 2,093 1,886
California 1,032 1,066
Texas 883 886
Michigan 420 466
Washington 403 371
North Carolina 297 327
Georgia 327 312
Colorado 275 295
Tennessee n/a 288
Arizona 296 284
New York 267 n/a
Total Thefts 10,615 10,488
Recoveries 4,355 5,150
Source: National Insurance Crime Bureau

Cecchini explained the relationship between market availability and pricing. “Most of the companies have a speed limitation on their boat/yacht insurance program, so a year ago there might have been six or seven or eight specialty markets that were writing that class of business, now, today, there’s probably three. So, when you have that kind of a situation, there’s supply & demand factors. It’ll have an impact on pricing.

“It depends on the configuration of the boat. It’s driven by speed,” Cecchini said, noting that premiums will largely be affected by an engine’s horsepower.

One aspect of insuring personal boats and watercraft that can affect pricing is theft and fraud. Boat theft costs boat owners and insurance companies over $40 million annually, according to a press release from the National Insurance Crime Bureau (NICB). They estimate that approximately 1,000 boats are stolen each month.

“Your ultimate pricing is driven by your ultimate loss ratio,” Cecchini said. “As a general rule, you like to see incurred loss ratios in the 50-55 percent range. Particularly in the higher-valued performance boats, they’re attractive to rings; they’re attractive to theft, because the engines are the biggest components of that. They’re very expensive, they can run $30,000-$40,000. We find the boat, but the boat has been stripped. That stuff is recycled through whatever distribution channel these guys use.”

Cecchini added that his company has created a safety association to promote awareness on how to protect valuable items, allowing the company to educate its agents and clients on how to prevent theft and fraud.

Large agreed that high-valued boats are especially at risk. “Personal watercraft has always been a problem,” he added, “because they’re small, unattached units, and so they can easily be stolen off of a trailer off of the beach if people aren’t careful and watching them. So, historically the rates have reflected the fact that there’s going to be a certain element of fraud or theft that can occur with a watercraft.”

Lumley explained that fraud and theft is most likely a major factor in specific areas. “You may find underwriters tightening down on writing business in that area. You may find a little bit of price changing in that area—they may up-price or add an endorsement to change the price from that area. Basically, it doesn’t affect the industry as a whole, it generally tends to affect a certain area.”

One area Lumley noted that is particularly prone to a high number of boat thefts is Las Vegas. “There was a ring operating out of there for some time, and generally, when we had a risk come in from Las Vegas, we were more adamant about finding out where the boat was secured; how it was secured. Certain ways of securing the boat were not acceptable for that area,” he added.

While the marine market is keeping their head above water in today’s insurance industry, predictions for the future are positive as well.

“We’ve seen a downturn in premiums in the last year that really mirrors the hardening market, and I think that’s to be expected,” Large said. “As the economy and then the market recover, I expect it will see the personal watercraft program continue to do very well. It’s still a very strong program for us. I think in the long run, you’re going to see it rebound as strong as it ever has been.”

According to the anonymous source, “I believe that we’re going to see fewer whimsical marine markets. What I mean by that is for a long time during the soft market a lot of companies thought that the marine business was kind of a cash cow—a good opportunity to get some quick premium. And they maybe weren’t very good at it. I believe we’re going to be reduced to some serious discerning marine markets.”

He added, “We’re seeing a ripple of pricing change, and I think most of us that are serious in what we do are expecting a significant change in the coming months. But it hasn’t happened yet. Rather we’re seeing some more incidental markets pulling out. It’s clearly a changing marketplace right now.”

Lumley said that one thing Western Marine is doing to alleviate the pressure of the hard market is to educate their customers on “what’s going on in the industry, how insurance really works, and also how to best protect them, whether it’s with us or with another carrier. We’re really trying… to get them knowledgeable about the products their buying. The more educated the consumer, the better off you are.”

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Insurance Journal West August 5, 2002
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