Small markets - smooth sailing

The hurricane season has hit hard in the Caribbean and Florida, but yacht insurers are breathing a sigh of relief that, so far, claims have only trickled in.

Joe Field, marketing manager for insurer Navigators and General, says his company had some exposure but will not be facing many payouts. "There are now more British yacht owners taking part in Caribbean rallies such as the Atlantic Rally for Cruisers, which starts each November in Las Palmas and ends at St Lucia."

But, he says, a growing number of insurers are now telling their policyholders that those visiting higher-risk regions cannot leave their yachts moored in marinas if a named windstorm is on its way. "Boats need to be moved to south of 11.30 deg latitude north and an insurer can advise the owner where it can be kept if cover is to stay in place," he explains. He adds that insurers are also assessing the main trouble spots and that islands such as Grenada, which has suffered devastation as a result of Hurricane Ivan, may be out of bounds.

British claims

Far more common are British windstorm claims and, although these tend to be relatively low in value, can be high in volume. Field says that, so far, there has been an increase in these claims this year over last.

"Normally, boats are kept out of the water from the end of October, but there can still be accidents as many sailors will continue to use their boats in the winter."

It is said that the number of sailing enthusiasts is rising. And, the sport's supporters want to emphasise that this is not just a sport for the super-rich. According to research carried out by Skandia, which sponsors Cowes Week, more people are sailing than ever before. The sport is also attracting a younger audience, many of whom are often on average salaries.

When the insurer first began sponsoring Cowes Week in 1995, 750 yachts took part; this year there were 950. The Royal Yachting Association confirms that membership has grown 15.7% in the past four years and says membership is now at an all-time high of 100 445.

But, while there are no official statistics available, it seems this is not translating into a massive rise in boat sales. According to Field, it is the top end of the market that is performing best. "High net worth is a growth area and last year we linked up with our private clients' division to launch new yacht and motor-boat products, worth up to £1m, for these clients."

John Arrandale, managing director of the yacht and pleasure craft division of Towergate Marine Underwriting, agrees that there has been an increase in the amount of more expensive yachts insured. "There aren't the figures to prove it, but the average boat owner is going to be more concerned about rising interest rates. Even with the availability of boat mortgages, there is less willingness to take out loans. Sales of larger, more expensive yachts do appear to be increasing, however."

There is also no sign that the number of insurers in the sector is growing.

Field says: "It is a small market and not one in which we have seen new players. Insurers that do not offer this are unlikely to move into it because of the cost of having to employ specialist staff."

Amlin is a major player, owning Haven Knox-Johnston and also acting as underwriter to Devitt, a broker that is a sizeable player for smaller craft. GJW Direct, which is backed by Munich Re, is another established provider and there are also a number of smaller syndicates in the market.

Arrandale says there is also little sign that new brokers are being attracted to the yacht business. "People using a broker will want them to be an expert and most of the sailing clubs will have their insurance arranged via a scheme. There are few openings and you do not see a lot of movement." He points out that the insurance arranged for members of the British Canoe Union is largely handled by Cambridgeshire-based NW Brown, which is its approved broker.

Although there are signs of softening in many sectors of the insurance market, yachts are set to remain stable or incur some slight increases, of around 5%, in 2005. This is as a result of recent changes to the current rules on limitation for boat owners - insurers are also expecting these to have an impact on claims costs.

Limitation of liability

The current rules on limitation of liability for maritime claims are governed by the London Convention 1976, implemented in the UK by the Merchant Shipping Act 1995. A protocol to the convention significantly increasing the limits has now been ratified by ten countries, including the UK and will become effective in May 2005.

Under the existing legislation, pleasure-craft owners could usually limit their liability for damage to property and personal injury to a total of 250,000 Special Drawing Rights of the International Monetary Fund (SDR) - equivalent to approximately £210,000. This figure will increase to 1.5m SDR under the new rules, six times the current limit, equivalent to around £1.26m.

However, Field says all insurers in the sector have seen a dramatic increase in personal injury claims over the past three years. And, as a result of the increased number and size of claims, it has recommended for some time that £3m is a more realistic liability cover limit. "The current limitation figure does appear low by today's standards and an increase has been expected for some time. However, combined with the dramatic rise in compensation awards in recent years and increasing compensation culture, yacht insurers can expect liability claims costs to rise significantly as a result," he says.

He adds that this will inevitably impact on premiums, particularly for those who have a higher exposure to third-party risks, such as owners of racing yachts, speedboats, charter boats, larger yachts and motor cruisers.

It is thought that premiums for these types of boats could increase by between £100 and £200 a year, which, for existing policyholders, will be applied at time of renewal.

Light aircraft

The insurance market for the light-aircraft sector is set to grow because the European Commission has proposed that all aircraft operating in Europe should be required by law to carry insurance covering liability for damage to third parties, including damage resulting from war and terrorism.

This will not lead to a huge rise in policies since, while private aircraft pilots need not have third-party liability insurance, most do buy this as most airfield and airport operators insist on it.

According to Michaela Collinge, a spokeswoman for broker Bartlett: "Pilots have previously enjoyed the luxury of deciding whether to insure or not.

However, following the new EU directive, which is anticipated will become enforceable in May 2005, pilots are now having to obtain liability cover as a minimum, therefore, the market is anticipating an increase in the number of policies it will underwrite next year."

National brokers Marsh and Aon will place business for aircraft-owning clients, but the real specialists tend to be a handful of regional brokers such as Traffords, Bartlett and RFIB.

Collinge adds that Bartlett, which has its head office in Leeds, has arranged cover for private pilots and airfields since 1998. It is the preferred broker of the Popular Flying Association (the representative body in the UK for amateur aircraft construction, recreational and sport flying for light aircraft) and the British Microlight Aircraft Association.

Most pilots who fly as a hobby already complain about the cost of cover - flying is expensive - bearing the cost of paying for hangar space, permits, medicals, membership of flying clubs in addition to the cost of owning a plane and buying spares.

One pilot, not wishing to be named, says: "Some people will say enough is enough and will give up, thereby damaging our sport. We are not sure how many will give up but are sure that some people will call it a day because of the extra burden."

Apparently, the Civil Aviation Authority will also be given the power to impound an aircraft if it does not have insurance.

Collinge continues: "Flying is a much-loved sport and organisations such as the PFA is proactive in encouraging the young to take up flying, however, inevitably it remains the domain of the older population who have the time and the financial means to pursue recreational flying. It is not therefore necessarily a growing market but I would suggest it is a stable one."

There are more than 6000 registered private aircraft, excluding gliders, in the UK, with a further 5000 not certificated by the CAA.

She adds that flying continues to be expensive and so not all pilots insure the aircraft itself. "The majority of the policies we arrange are for liability only, as this is the most inexpensive type of insurance for aircraft and the type of protection with which pilots are most concerned."

Meanwhile, like the yachts sector, there are few carriers and, unlike commercial airline insurers, this produces a relatively small premium income, estimated to be between £10m and £12m a year in premiums - producing a modest profit.

The more flimsy microlights can be problematic to insure, since one or two accidents can wipe out a year's profits. This sector is largely serviced by broker RFIB, which bought the book of business from THB.

Stable rates

While steep increases were imposed after 11 September 2001, rates are now stable. And, although terrorism cover was generally excluded following the terrorist attacks, it has now been reinstated on some policies, although few have chosen to pay the additional 25% or so in premiums.

Business is largely broker-produced for smaller aircraft; there has been an increase in the amount being placed online through aeroinsure.com, operated by underwriting agency Global Aerospace, a dominant player in the market, backed by Berkshire Hathaway, Great Lakes Reinsurance, Tokio Marine Europe and Mitsui Sumitomo.

Phil Gregory, general aviation underwriter at Global Aerospace, comments: "On our account for light aircraft business in the UK, some 75% to 80% is coming through the website, which is doing very well. Brokers find it a great boon, providing them with substantial cost and efficiency benefits, and I believe that this is the direction in which this class of business will move increasingly in the long term."

Claims payouts are, on the whole, relatively low and are caused as result of incidents within hangars resulting in hull damage. The most common hull claim on light aircraft is a propeller strike, which can result in engine shock.

"The most common type of claim is damage to aircraft following a bad or emergency landing. Emergency landings usually come about as a result of engine failures, sometimes the cause of which is never established.

Unfortunately, it is becoming increasingly common for aircraft to be involved in an accident that includes fatalities and most accidents involving aircraft are due to pilot error," says Collinge.