There are three million boat owners in the UK, but cover is limited because insurers are bailing out and brokers are not getting in. Christine Seib explains

Boats are sexy. Why else would they be called pleasure craft? They can go at 120mph and still have their own cocktail bar. Their sails look as lovely on the Solent as on the Mediterranean. They are sleek and expensive. So why are insurers exiting the pleasure craft market and brokers reluctant to enter?

Fortis and CNA Maritime have withdrawn completely from pleasure craft. The demise of Independent Insurance, a reasonable-size player, is well documented.

Royal & SunAlliance recently reduced its pleasure craft business, cutting its broker agencies from ten to three. It retained Mardon Insurance Brokers, KC Powell & Partners and Towergate Marine Underwriting.

CGNU, AXA, Munich Re subsidiary GJW Direct, Zurich-owned Navigators & General and Amlin subsidiary Haven Knox-Johnston are active participants in the sector.

There are some small schemes running with German insurer Pantanius, while Groupama backs Saga's scheme.

There are between ten and 30 - opinions in the market differ - brokers who specialise in pleasure craft.

These numbers do not compare with the amount of boat owners out there. Pleasure craft ownership is growing rapidly.

Haven Knox-Johnston marketing manager Chris Knox-Johnston puts it into perspective: "The British Marine Federation says there are three million boat owners out there.

"That means one in every ten households owns a boat. Compare that to horses or caravans - there are 650,000 horses out there and 440,000 active touring caravans - and it's one of the biggest sporting pastimes in the UK."

Low rates

A market constantly increasing in size sounds great for the insurer and broker. But insurers have been stung by the common problem of rapid rises in compensation claims. Replace and repair costs are also rocketing. Meanwhile, rates, far too low for too long, have only just gone up to a level that is close to producing an underwriting profit.

Navigators & General marketing manager Joe Field says: "We've seen a 110% increase in personal injury claims in 2002.

"I think it's because people are more aware of the claims culture and are encouraged to claim by no-win, no-fee advertising.

"There's also been an increase in groundings, which I'd attribute to complacency arising from new navigation systems."

AXA marine and yacht senior technical underwriter Pat Levin agrees: "We'll no doubt continue to face a rise in personal injury claims, not because the yachting community has become more hazardous, but due for the most part to the compensation culture."

Over the past year, pleasure craft rates have risen by between 5% and 25%, with some going up as much as 40%. Similar rises are expected this year.

"It depends on the experience of each company," Field says. "A lot of insurers went into pleasure craft without underwriting experience and took on risks at too low premiums.

"Now they're having to put through big increases to return to profitability, while experienced underwriters won't need to put their rates up as much."

Even the experienced insurers still in the market are under pressure to produce profits.

"Most of those in the market are, or are owned by, big boys now, who want return on their premium income or they'll close up shop," Knox-Johnston points out.

"Slowly, but surely, last year and this year will get us back to where we should have been ten years ago, then we'll be able to underwrite on the risks presented and owners will pay premiums according to their risk."

At present, registering and insuring a boat is not compulsory. Boats must be registered for use in UK inland waterways and marinas require insurance cover for inhabited boats. There is talk that compulsory third-party boat insurance, required in Spain, Italy and Greece, may be introduced as the UK embraces further EU harmonisation. But insurers are not convinced that claims costs could be cut by increased regulation.

"The only claims improved regulation would help would be those caused by negligence, by not being able to drive properly," Knox-Johnston says.

Cynics suggest some boat builders are also sceptical of increased regulation, for entirely different reasons. Large pleasure craft, which can cost well over £1m and are purchased in cash, are a popular buy for individuals who want to launder money.

Cash sales

Drewe Insurance is a marine underwriting agency. Its marine associate director Andy Tedstone is unconvinced about such theories, but admits connections between boats and crime are not new.

"I have heard of people buying boats in cash," he says. "A lot are supposed to get stolen for use in the drug trades, but theft has dropped from its peak five or six years ago, after increased publicity about the problem."

Drewe recently sold its direct book to an unnamed insurer so it could concentrate on the broker market. It currently deals with 4,500 brokers. This fits with Field and Knox-Johnston's feeling that brokers would rather place one-off risks with insurers through a specialist than wade into the pleasure craft sector themselves.

"Why won't more brokers get involved?" Knox-Johnston asks. "Because they're terrified of the water element."

Pleasure craft are often owned by richpeople, the kind that already insure their business through a broker, then approach the broker for cover when they buy a boat, a luxury car or a small plane. An inability to insure rich boys' toys could cost the broker the commercial business as well.

"Why don't they cross-sell?" asks Knox-Johnston. "It's easier to sell to two products to one client than two to two clients, especially when you risk that the broker who knows the boat market will steal all your other business as well."

Field agrees: "Basic market knowledge would help because you don't want to lose boat business from your high net worth clients."

A very valid point. But a healthy sense of humour is also required, as Knox-Johnston demonstrates: "Years ago a chap came back to his boat on an inland waterway and saw a cow sitting on the foredeck. He stepped behind the cow and clapped his hands to get it to move. Not the wisest thing. It lifted its tail, covered him then jumped off, leaving two hoof-sized holes in the hull. We paid the claim."