Date: Aug 23 2019
The yacht insurance market is dramatically changing in terms of available capacity and cost. As vessels get bigger and more sophisticated, clients worldwide are experiencing premium increases. In this episode, we sit down with Sean Blue, Global Head of Watercraft Insurance at AIG Private Client Group, a division of the member companies of the American Insurance Group, Inc. (AIG), to get caught up on how yacht-owning families can plan ahead to mitigate the overall cost of risk.
Subscribe to FOXCast on Apple Podcasts here.
Below is a transcript from the conversation:
KC: Hi and welcome to this episode of FOXCast. I'm KC Forsythe and today's guest is Sean Blue, Head of Global Watercraft for AIG Private Client Group, which underwrites insurance of over 300 superyachts in the world. AIG Private Client Group is also a FOX Thought Leaders Council member.
The mitigation of risk in yacht ownership is of interest to many in our membership and is also very important to Sean, and so today we're going to talk about the current state of the yacht insurance market. And I'm really excited to learn about it from, really, the preeminent expert in this space.
Sean, thanks so much for joining me today.
Sean Blue: Thanks, KC, I appreciate being here.
KC: Could you go into what exactly is a yacht? What qualifies a yacht versus a regular boat, and then a superyacht?
SB: Absolutely. So, a yacht is a private pleasure vessel that is 26 feet and greater. So, I think a lot of people don't think they have a yacht but indeed they do, if their boat’s 26 feet and greater and engaged in private pleasure. Superyachts—it's kind of a definition that varies across the marketplace, but we generally consider it boats that are above 100 feet and above 10 million dollars in value. There are gigayachts which, you know, maybe are more than 100 meters and $100 million in value.
KC: How many gigayachts are there in the world?
SB: I think, you know, over 100 meters, there are probably 50 or 60 or so private yachts, maybe a few more than that.
Generally, they're owned by a corporate entity that's set up just to own that boat. And that's done for a couple of important reasons. One, you want to separate the liabilities of that yacht from the beneficial owner. And there are also some tax subsidies, that you can avoid—some certain taxes in different jurisdictions by having your boat set to a separate purpose, sole purpose corporation. And there is some commercial activity—these boats that are set up into corporate LLCs are generally available for charter.
So, the primary use of the vessel is private pleasure and the vessel serves at the pleasure of the owner, but they are occasionally used for charter. And for cases that are still private pleasure yachts, the amount of charter really needs to be, you know, secondary to the personal use of the boat. So, we're talking about maybe 10, 15, 16 weeks out of the 52-week year.
KC: How long have you been in your role with AIG?
SB: I’m coming up on 14 years with AIG, working in various positions there, always on the yacht side. First as an underwriter then, you know, underwriting manager and then running the product. Prior to that, I was a broker specializing in yacht insurance and personal insurance for the high-net-worth, but always geared towards yachts and using yachts as my primary lead-source and the way that I would look to attract clients.
KC: Wow. And so, with all of that experience, what have been some of the major changes in the market?
SB: I’ve seen the market come full cycle in terms of pricing terms and conditions. When I first got into the yacht space, I wasn't dealing with megayachts. Occasionally we'd have a megayacht that we would handle, but yacht business across the board was fairly consistent in terms of price, conditions, and terms. And since myself getting into this business, I've seen the market turn full-cycle and go very, very soft in pricing terms and conditions.
And throughout my career at AIG, when I first started at AIG, we were just starting the turn of the market softening, going to levels that were really unsustainable from a business point of view. And now we're seeing a correction where the market, through a reduction of capacity, is really driving pricing increase and restriction on terms and conditions, more diligent underwriting, more policy risk selection happening throughout the marketplace. It’s more difficult to find coverage for “high cat” or catastrophe risk, such as Florida and the Caribbean vessels with multiple claims having a more difficult time finding insurance.
And the other thing that I've seen in the last 14 years is the boats are getting bigger. Megayachts are getting much larger, much more valuable, and all of the risks inherently are greater from a major catastrophe point of view and a major shock-loss point of view.
KC: Have you seen a shift in the type of risk since you started?
SB: Well I think that the yachts themselves are getting bigger. There are also more toys happening aboard the boats and we've been we have some additional concerns with additional with toys being put on the boat. New technologies like lithium ion batteries which are still fairly volatile, and these lithium ion batteries can be used for hybrid systems powering the boat, but they can also be used for toys. Toys are sea bobs, and jet surfs, and eFoils. These are all, you know jet surfs and eFoils are surfboards, either on a foil or some plain surfboard that has an electric motor powered by a very small lithium ion battery pack. And we've seen cases where these lithium ion battery packs have a thermal runway incident, catch on fire, and then cause of a major fire.
KC: So, when you're talking toys, you're not talking pool noodles. You're talking about things that add liability to these yachts.
SB: Exactly. Drones are another example. Drones also can tend to have some lithium ion batteries. But this is another kind of emerging reality in the yacht space—more yachts are carrying drones and there's liabilities associated with how those drones are operated, used, piloted around airports and restricted airspace. And also, who's licensed and trained to operate those drones? So, that's something that we're seeing fairly recently. More and more boats have these drones and are concerned about the liability associated with those drones. The physical damage is not that significant. They're under a thousand bucks or 2500 bucks, but the liability for operation of those drones around other people is a concern.
KC: What’s the purpose of most of those drones?
SB: Well recall that I mentioned these yachts are chartered quite a bit. And so, you know, just as you go to the amusement park and you want to picture the whole family at the end of a roller coaster, you know, drones are often used for taking photographs of guests and charter guests having fun on the boat documenting their vacation, but also used for marketing pieces for the yacht itself of the locations that it goes to and the fun that you can have aboard the boat.
KC: What are some trends you're seeing when it comes to claims?
SB: We're seeing a lot more lightning claims than we used to see in the past and a lot more towed tender claims. There's a lot of larger yachts that will like to have a tender, or another vessel that does not fit aboard the mother ship for the purposes of fishing or using a smaller boat for a day of recreation. And these boats are often towed behind the mother ship. In the past, you know, that that's not a new activity but what is new is that the size and value of these towed tenders is becoming greater. And therefore, the losses that are associated with towing a tender—because it's inherently a risky thing to do, those losses are becoming more severe. Because we are seeing towed tenders now with four outboard motors that are maybe 42-feet, that are worth a million dollars or so. And the frequency of which a towed tender is lost is pretty high.
And that's something that a client can do to manage the risk and make their make their yacht a better risk for the underwriter is, if you're going to be towing a tender there are a lot of things you can do to make it as safe as possible. But one of those things is not have such an expensive tender you're towing. Have a risk that maybe is a little bit more manageable in terms of value. But there are other technologies that you can that you can have on the towed tender. There are tracking systems that have bilge alarms that have tracking for GSM and GSS, which are the two types of global positioning satellites. One is synchronous with the earth, the other one moves around. So, what that means is you can you can track that tender anywhere on the globe. And the alarms that go off if you break the towing lead, if the bilge pumps go off, if you have a battery monitor that shows that your battery is reaching the end of its life or its power, that can give the captain a signal, "hey it's time to pull that boat in and check it out and stop towing it and make sure we're in a safe situation."
That's a claim that we're seeing more and more and we're imposing hard collectibles and more stringent underwriting requirements, such as these tracking systems that I mentioned.
Towed tenders where the center console boats with multiple outboard motors—triples and quads—are also a high theft risk in South Florida and the Caribbean. These boats are stolen with alarming regularity and used for drug trafficking, human trafficking, parts on the black market. And they're pretty easy to steal, they're quite fast. They are easy to disassemble. And they're hard, again as I said, to track. So, we're seeing a lot of these towed tender, or these center console claims with multiple outboards. And your clients may see very high deductibles, they may see high premiums associated with these risks. They might see requirements for a very, very diligent detailed, thorough plan on the safeguarding of the vessel, from a captain to a caretaker. But then also, these tracking systems that I mentioned which are becoming a requirement in able to insure these boats.
Because the deductibles that are applied for these types of risks are very high. We at times, and others in the marketplace, will impose a 25-percent or 50-percent theft deductible. So, for a boat that's you know 750 million dollars, a 50-percent deductible is real money. That's real skin-in-the-game for the client. So, it certainly behooves them to make sure that they take all the steps they reasonably can to make the risk as presentable as possible, including these tracking systems that we spoke to.
KC: Right. What are some other common types of losses that you've seen?
SB: Our most frequent loss is crew injury and groundings. So, we have a lot of a lot of large jobs with a lot of crew and these jobs are always, you know, launching tenders and recovering tenders, and playing water sports, and pulling in spinnakers. And, you know, it's a pretty active job, and like any active workplace there are there are common injuries that happen.
KC: What would be more severe types of losses that you deal with?
SB: Fire really is our number-one severe loss. The largest claims we've paid out have been for fire, and fire aboard a ship is the worst thing that could possibly happen. And those firefighters, or those crew members are the firefighters and first responders in that situation. So again, we have an injury concern. But we also have the reality that that these crew members are the first responders to a fire and need to have that knowledge and expertise to help put out that fire.
One of the things that we're doing in response of that, is putting large yacht crews, as a team, through shipboard firefighting training through our partnership we have with Resolve Maritime Academy in Fort Lauderdale. We've run multiple megayacht crews through this shipboard firefighting. But the fires can be caused by lithium ion batteries, as we talked about, but they can also be caused by lightning strikes, which is also a fairly common type of loss that we see—especially on sailboats in the Caribbean and South Florida. And also, on sport-fish boats with large fish towers on them.
But the fires, you know, one of the largest losses we had that was that was a fire was an electrical fire that started in the owner’s bridge-deck state room closet. Both had recently come out of refit and we believe that there was a screw put through a through a wire, attaching a paneling inside the closet. And that caused short-circuit situation. And the fire was undetected for a little bit of time and smoke emanated through all the void-spaces on the yacht. And it took the crew quite a bit of time to find the origin of the fire. Just a smoldering smoke event until the heat finally got strong enough to start buckling the roof above the state room. And at that point, the boat was filled with smoke.
And so, in this particular case, we have a fire loss that could have been prevented or could've been minimized if the crew had had a thermal graphic camera that is available. You can even get them now that attach your iPhone and you can look through the wall and see hotspots. And there's also more expensive thermographic cameras. But the one on the phone would have done the trick. And the crew had had that, this is something they could have looked through various spots on the wall to look for hot spots or the origin of the fire, and they would have turned what was a multi, multimillion-dollar loss into, you know, not that significant.
So, that’s another thing we’re educating our clients and crews about, is having these thermographic cameras aboard, having the right firefighting equipment (such as surface-piercing nozzles to get into the void space).
A lot of the yards are built to certain classifications, which is like a building code. And these classification societies, you know, they govern the sea-worthiness and the safety, and the build of these yachts, and they do a great job. One of the things they don't do, though, is they don't require sprinklers in these void spaces. And so, having these surface-piercing nozzles to get fire extinguishant in that void space, in this case and others we've seen, I think what have also proven to be very helpful in limiting that loss. And in this case, everybody was lucky that the crew did find the fire, and it didn't spread, it was mainly a smoke event. But this is a multiple, 100-foot vessel that holds almost 20 crew that was on fire at sea.
KC: Thinking about our membership, it's often the family office executives that handle any risk mitigation. So, for executives, what impact can they have to assist their clients in the acquisition of a yacht and placement of that insurance?
SB: I think number one is choose a good broker that has experience writing yacht insurance. It doesn't necessarily have to be a yacht-specialty broker, but a broker that regularly places these types of large risks. And whether it's AIG or otherwise, also deal with a carrier that regularly places these large risks. I think that's critically important, to have a carrier that or an insurance partner that understands the needs of the client, has the capacity to put forth to solve their problems and provide the solutions. Has had all of the experiences or has already encountered any problem areas that might be encountered, such as yard periods and onerous language in that, or boats that are changing status of ownership, or coming in and out of class, or involved in charter, or have some of these toys, or going to exotic locations—maybe going through the Gulf of Aden, having to deal with piracy situations or breach of war. So, engaging with a partner that has the experience and the portfolio to support what the client wants to do with the boat.
Secondly, I think being very transparent about what you want to do with the boat. Where you want to go, what you keep aboard, what your plans are long-term and short-term for charter, for sale, for cruising. For toys that are going to come on the boat, how you're going to crew the boat. I think having a very transparent relationship with your underwriter and the broker about what your plans are, helps us all kind of foresee what we're going to get ourselves into, but also how we can provide solutions with some forethought.
I think the third thing, is engage a yacht manager to help you manage all the aspects of the yacht. And this is really on the large-end the yacht scale—boats that are $10 million and up in value. But yacht managers can be engaged for a variety of different roles—some can just hire your crew for you. Some can provision the yacht, help pay the bills, help with all those logistics, make sure that it maintains class-licenses—all of the legal requirements that a yacht has. So, really interview these yacht managers and find one that fits your needs but encourage you to let them help you manage it. There's a lot of things going on with the yacht that may not be familiar with. And yacht managers are really critical in helping the client and their business office in negotiating all of those things with a yacht has to go through.
KC: For sure. Well, that's kind all the time we have. Thank you so much for joining me. If somebody wanted to learn more about you or get in contact with you, how might they go about that?
SB: So, email me anytime they like. That e-mail is email@example.com. And I look forward to anybody's questions they might have.
KC: I'll include the link to AIG on the FOX website as well. And thank you so much, Sean. This is a totally new world for me, and you clearly know the ins-and-outs of it. It was really fascinating to talk to you.
SB: Thanks, KC. Appreciate it.