BOAT AND WATERCRAFT INSURANCE: NAVIGATING A MARKET REBOUND [Rough Notes]

Pricing remains competitive, spurring underwriting changes in some segments

Factors that play a role in the general economy also affect the watercraft industry. So it comes as no surprise that the boating business is off its highs of several years ago. "The recreational marine industry has definitely been impacted by the struggling economy," says John Beachley, yacht product line manager of International Marine Underwriters, a member of the OneBeacon Insurance Group. "All in all, new boat sales are still down, as they often are considered a luxury item."

Similar to what happened in the housing market, he adds, financing for new boat purchases has tightened up. "This is true also for dealer floor plan financing," adds Beachley, whose firm serves personal pleasure craft owners, as well as limited six-passenger charter boats and fishing guides. "Boat prices have also fallen, and many people are finding themselves upside down with their loans."

Recreational boating businesses have felt the pinch. According to Doug Semler, vice president, marine and aviation division at Old United Casualty Company, six-packs-small charter boat operations, so named because they serve up to six paying customers per boat-have been hurting because of general economic conditions. "Lack of discretionary income has caused numbers for these charters to be down over the past couple of years," he explains. Semler's Merriam, Kansas-based firm covers private pleasure craft-from jet skis to $3 million yachts-as well as bass fishing guide operators.

Other factors affect boat owners, whether they're in it for the money or the sheer pleasure. "Along with the cost of buying and paying for the boat, fuel prices and the other costs of owning, operating and maintaining a boat keep going up," Beachley notes. "Boating is a leisure activity, but as owners balance budgetary priorities, some people are just not using their boats as much, which is a real shame."

That may be starting to shift, as the economy works its way back to health. The boating business is starting to show signs of improvement-at least when compared to the past few years. "We see the market rebounding," says Sara Burke, marine product manager at Cincinnati-based American Modern Insurance Group.

Semler concurs. "There are indications that things are turning around," he says. "Some boat shows are reporting increased attendance and some buying." Jim Park, director of sales and marketing for Seahorse Underwriters, says, "One of the larger dealerships we work with was at the New York Boat Show and, while they didn't sell as many boats this year as they did last year, the ones they did sell cost more. This trend of people getting back into larger cruisers is encouraging." Birmingham, Alabama-based Seahorse Underwriters offers recreational marine insurance for private pleasure boats up to $30 million in value, along with a program for fishing guides that use small boats.

Burke has seen bright spots in other segments of the market. "In our market, we're seeing somewhat of a consumer shift toward the fishing segment," she explains. "Also, pontoons are becoming larger and have more power, so they can pull skiers. So there's more activity there, too."

Certain parts of the fishing business are doing well. "The bass fishermen, those who are dedicated and actually have sponsorships, are turning a new rig every year or two," says Semler. "The jury is still out on the six-packs, though. The season is really just starting for many of them, but there seems to be a little more consumer confidence, so perhaps their business will pick up as families elect to vacation closer to home and take in this kind of leisure activity."

Another bright spot may be in financing. According to Semler, lender purse strings may be loosening a bit. "I've talked to a few finance people, and they are saying they're busier than they have been in many years," he explains. "Of course, that is a good sign." Adds Park, "From what I hear from my dealers, it's getting easier to finance. It's not as easy as it was five or 10 years ago, but it's still better."

Insuring boats and watercraft

Like much of the rest of the insurance business, competition is strong in the boating and watercraft marketplace. "Pricing remains very competitive," says Beachley. Park concurs. "We are seeing tweaks to policies," he explains. "More carriers are offering disappearing deductibles and they're enhancing coverages, such as personal property and towing coverage, to attract more customers."

There's been some shuffling of carriers in the boat and watercraft insurance space. "We have seen a few companies exit the market," says Beachley, "and a couple of new players have entered." Semler, who describes current competition as aggressive, sees some markets growing while others are shrinking. "There are fewer markets for yachts-boats 26 feet and greater-than there were, say, three years ago," he says. "At the same time, there are more small boat writers. A lot of the direct writers are getting into it big time."

Semler recently encountered one such carrier at a local boat show. "I stopped by their booth and asked some questions, and the people there really didn't have a lot of answers," he explains. "I looked at the premiums they were charging, and I suspect they're subsidizing the premiums they are illustrating with their homeowners, auto and umbrella policies, because at the rate levels they showed, they can't possibly have losses on the watercraft side and be profitable."

Burke is observing underwriting changes as competition intensifies in some segments of the market. "Insurance scoring is becoming more prevalent in pricing," she explains. "Also, standard carriers are enhancing their boat endorsements to offer more coverage."

Some think the boating and watercraft market may be living on borrowed time when it comes to weather-related losses. "We're fortunate that we have not had hurricanes like we did back in '05 and '06," says Park. "We have really dodged a bullet." Park says most carriers-especially those with a long history in the market- are well positioned to withstand such storms. "Deductibles are higher for named or numbered storms," he explains, "and some carriers have reduced exposure in hurricane-prone areas and for older vessels, which are harder to repair. Some carriers, particularly newer entrants, may not be as well prepared."

Outlook for agents and brokers

According to Park, the boating and watercraft insurance arena is returning to what some call a "new normal." "It's been a tough few years," he explains, "and we may have another year or two before we are out of it. The economic down- turn has affected people throughout the business." Specialist agencies have been sold, he adds, as have books of business. "For many, having a boat is a luxury, and when people lose their jobs or are underemployed, one of the first things to go is a luxury item."

That said, he believes signs point to increased opportunities-and revenue- for retail agents and brokers. "Big-name insurance carriers want to bundle everything together, autohome- car-motorcycle-boat, everything," he explains. "They've been advertising this heavily." Local independent agents can ride this wave and cross-sell watercraft policies to existing customers.

"Of course, agents need to make sure they provide the customer with the best policy for each risk," Park says. "Discounts are great, but it's more important to protect the risk as it should be. Depending on the type of boat, for instance, it may be better to have a boat- or yacht-specific policy." Independent agents need to make sure the coverage is right.

Beachley agrees. "Agents should continue to work with their customers and the insurance companies to make sure the coverage they have in place best suits the customer's needs, not only from a price perspective but also from a coverage perspective," he explains. "What was needed when the policy was initially obtained may no longer be necessary or adequate."

Coverage issues may come into play more as new entrants bombard the airwaves with advertising that focuses largely on price. "Agents and consumers need to be aware that some policies may not be all they're cracked up to be," says Semler. "A lower price may lead to a surprise when a total loss occurs and they receive a check for just a portion of the loss because the policy covered actual cash value, not an agreed amount."

There are other good reasons to understand product differences. Semler says saving a client a few bucks may cost more, especially in today's litigious society. "For instance, if you move a customer from a specialty watercraft market with an agreed value policy to another carrier's actual cash value policy, you open yourself to potential lawsuits and E&O claims," he explains. "Know what you're selling and who and what you're selling against."

Agents and brokers can make sure they offer the best options by keeping up on carrier offerings. "Insurance companies' appetites change," explains Beachley, "so it's important for agents to stay well informed about what the different companies are interested in and what they have the capacity to handle."

Burke adds, "Retail agents and brokers should know what's available and, where appropriate, take advantage of some of the unique discounts many carriers are offering these days. One example is a diminishing deductible. That can be a great tool for retaining business long term."

Some agents may want to consider adding a specialty and targeting, perhaps, the guide or sixpack business. "Working with guide associations may offer good opportunities for agents," notes Park. "Boaters and fishermen are passionate, and I've seen agents who share that passion do well in this business. What better way to love your work than to incorporate something you enjoy into your business?"

As the boating season gets under way around the country, agents and brokers need to examine how watercraft coverage might fit into their overall strategy. And they need to stay attuned to market changes. "Get the temperature of the watercraft market in 2012," Semler advises. "I think it will be changing and perhaps hardening in some areas. Still, some segments of the market will continue to be quite soft."

Adds Park, "I don't think we will see the vibrant boating business we saw up until a few years ago, but things will turn around, and there will be more opportunities going forward."

"Agents and consumers need to be aware that some policies may not be all they're cracked up to be. A lower price may lead to a surprise when a total loss occurs and they receive a check for just a portion of the loss because the policy covered actual cash value, not an agreed amount."

- Doug Semler Vice President, Marine and Aviation Division Old United Casualty Company