The region’s yacht market is witnessing a huge growth. Messrs John Macaulay, Matt Halpin and Alex Becker of MS Amlin discuss the insurance and risk management challenges in this sector where, despite the use of sophisticated technology, traditional maritime risks such as navigation and human error continue to cause the majority of claims.
At over 180m in length and with an estimated build cost of $400m, the superyacht Azzam is considered to be the world’s largest yacht. Owned by the Emir of Abu Dhabi and President of the UAE, it is one of seven from the Middle East that features in the world’s top 10 of superyachts, providing ample evidence of the region’s position as a global focus for the superyacht business. And, with the Middle East continuing to offer huge opportunity for those involved with yachts – from buyers, to manufacturers, through to financing, engineering and maintenance companies – the expanding complexity and sophistication of these vessels, not to mention their sheer size, demand that the insurance business keeps pace with the coverage and protection needed to cover the potential risks and losses.
The Middle East grows its market share
There were 193 superyachts – with an average length of 63m – registered to owners from the Middle East at the beginning of 2018, according to the Superyacht Builders Association. This represents 12% of the world’s total number of yachts of over 40m. The Middle East is also a superyacht powerhouse when it comes to the production side, with the UAE ranking 9th globally when it comes to the length of yacht projects. There were 14 superyachts reportedly underway in early 2018, combining to reach 611m, according to the Boat International Global Order Book 2018.
The superyachts themselves don’t tell the whole story either; the associated infrastructure is also developing at the same pace, with construction currently underway on the Dubai Harbour project which, when completed, will become the Middle East’s largest marina with the capacity to berth 1,400 boats.
Losses grow
Given the fast-paced growth for both the yachts themselves and their related infrastructure, the pressure is on the risk management side to try and stem losses in an insurance class that Lloyd’s of London recorded as “one of the worst performing last year”. Despite the sophistication of these boats, too many insurance claims are related to human error and involve boats simply running aground.
More regulation is needed
One measure that could help to prevent losses is to increase regulation. The yacht industry resembles a small cottage industry at times and is not regulated like the levels seen in areas such as aviation or motor. In many parts of the world, individuals can simply buy a luxury yacht and start sailing, even though they may not have any of the relevant qualifications.
While the UAE does have regulation in place, which has helped to avoid the attritional yacht losses that have been happening elsewhere, the story is not the same across the GCC.
Additionally, there are some concerns that safety infrastructure and training in the Middle East’s marinas are not always up to standard. For instance, what is the access like to a marina for fire fighters, and are those fire fighters trained in fighting fires on a yacht? These are unusual environments and situations, and require specific training and considerations.
Emerging risks
As well as the traditional risks, yacht owners and operators are also having to contend with emerging risks such as cyber crime and the possibility of a hack by criminals who can gain access to a boat’s computer server and perhaps access personal or financial information, or even take control of a boat’s navigational systems. News reports in 2017 recorded one yacht owner losing GBP100,000 ($131,667) to hackers who had accessed the owner’s bank account after stealing financial information from a yacht’s computer systems. The increase in the use of drones could also impact the privacy of many yacht owners as well as the use of them by yacht owners themselves, opening up potential liability issues.
Despite the growth in onboard ‘toys’ however, it is still largely the more traditional maritime risks that cause the majority of claims. The changing navigational profile in the Middle East with the construction of new ports and more traffic, will also be likely to play a part in exacerbating those risks and further driving the need for better risk management and crew training.
Premiums off the pace
In recent years, premiums have not kept pace with the risk profile of the yacht sector with too much insurance capacity chasing risks and driving premiums down. Although the loss profile in the Middle East itself is good – the weather conditions for example are very favourable and many of the yachts don’t travel long distances – this does not mean that losses elsewhere can be paid for in isolation and it’s important to look at the yacht market in its global context.
Premiums need to be sufficient to maintain enough profitability in the sector as a whole so that yacht owners can find the coverage they need, which means that insurance rates will ultimately need to recover to a more sustainable level.
When it comes to underwriting these risks, there is perhaps a lack of understanding of the technical aspects of the yacht sector. MS Amlin has performed well because of its heritage in underwriting this type of business, particularly when it comes to the larger tonnage of the superyachts. As a global leader in this class, it currently writes 27% of the overall Lloyd’s Yacht income (2017) in addition to approximately 25% of the world’s largest 200 yachts. MS Amlin also has the capacity to be able to offer limits of up to $75m to reflect the growing sophistication and expense of many yachts now operating in the Middle East.
The price of a policy can also only truly be understood in the context of a claim. Again, MS Amlin offers solid experience on the claims side with a dedicated yacht claims service team, which means not having to rely on an external claims adjusting company and ultimately turning around a claim very quickly.
Best in service and coverage
The Middle East yacht market will continue to grow and it’s an area that MS Amlin will remain focused on for the long term, particularly given that local brokers and cedants can bring risks directly to its underwriters without the need for a Lloyd’s broker.
And, as yachts develop in both size and sophistication, MS Amlin will maintain a high degree of product flexibility and commercial consistency in covering these risks, ensuring Middle East owners and operators continue to benefit from a market leading level of service and coverage, as well as the risk-management services that help owners understand and successfully manage their risk, particularly when it comes to preventing human error. M
Mr John Macaulay is product group leader; Mr Matt Halpin is senior underwriter; and Mr Alex Becker is senior marine underwriter and Dubai regional manager – MS Amlin.