REC MARINE OR WRECK MARINE? (Excerpted)

A transformation has been underway for the past several years in the recreational marine aka “rec marine” insurance industry. It generally encompasses two unique product classes, boats and yachts in one and marine facilities (including marinas, boat dealers and yacht clubs) in the other. Historically, both classes of rec marine have experienced what amounts to a roller coaster ride of underwriting results.

Boats and yachts

As with so many lines of business, rates for boats and yachts had been persistently falling for the better part of the past 25 years. As an ocean marine line of business (in most states), this class offers a very low barrier to entry. Freedom of form and rate can be an underwriter’s best friend and worst enemy at the same time.

The attritional loss ratios (losses excluding CAT events) were mostly borderline profitable, if at all. The poor results were driven by many factors, inadequate rate being the most obvious. Then we add soaring cost of construction and new technology-driven enhancements that ballooned repair costs. For example: The cost of a common run-aground claim skyrocketed with the introduction of forward-facing Pod drives that, by design, shear off when the boat has a hard grounding, the cost of which was never contemplated into the underwriters’ rating scheme.

Advancement in technology made boating easier to get into, inviting record loss frequency. The Florida market specifically was plagued by organized crime rings, with record thefts of boats and outboard motors, as well as increased costs associated with lightning strikes.

Social inflation drove liability verdicts higher and then came the onslaught of storms. Superstorm Sandy was the first shot across the bow with an estimated 65,000 boats lost or damaged. Rates firmed up modestly for approximately 18 months following that storm and mostly were limited to New England risks.

Starting in 2016, we saw Matthew, Harvey, Irma, Maria, Florence, Michael and the defining back-breaker of the status quo, Dorian in 2019. Hurricane Dorian was a Category 5 beast of a storm. It was a direct hit to many insurers and reinsurers. I can name 12 different boat programs that have either completely imploded—ceasing to exist—or withdrawn from the southeast market as well as a large national carrier withdrawal from Florida.

The result of all this was a massive withdrawal of capacity for boats and yachts in the southeast and throughout the gulf coast. Rates are up anywhere from 50% to 100%-plus for most risks, with much tighter terms, conditions, and deductibles.

We’re seeing the entrance of non-rated carriers with foreign capacity being opportunistic given the current rate environment and, despite the risk of your E&O carrier not covering risks placed in an unrated market, brokers are seeking this capacity out of pure desperation.

It’s safe to say this market has “corrected” in a material way. The question is, for how long? Marine underwriters tend to have short memories but the reinsurers who ultimately provide the capacity for CAT risks do not. That is the primary reason we have yet to see new capacity enter this market.

Marine facilities

While marine facilities haven’t seen the same market contraction that boats and yachts have, there’s one line of business that’s become quite hard: docks. Piers, wharves and docks in the southeast have taken a strong beating—a hard lesson learned by insurers, who tend to model the probability of loss to property based on the severity of a CAT event. What’s the amount of loss I should expect for a Category 1 hurricane? Cat 2? Cat 3?, etc. The problem with these models is that the severity of the storm is predicated on wind speed, which most often isn’t the leading indicator of damage to docks; it’s storm surge, which doesn’t always correlate to wind speed.

The consistent barrage of storm activity over the past decade has certainly led to a dramatic tightening of terms and conditions as well as rate realignment that better reflects the reality of our exposures as marine underwriters. While this is great, the elephant in the room currently is the skyrocketing lumber and electrical costs that are leaving most insureds dramatically underinsured and, sadly, going mostly unaccounted for by most marine underwriters.

This is what makes me wonder if our industry should rebrand as the underwriters of wreck marine.