Insurance costs likely to spiral

Posted on Written by Reagan Haynes

insurance_newBig changes loom after a year of weather disasters; marina construction types might get closer scrutiny

The insurance company is kinda like the house: It always wins.

So what happens after a year that brought more severe weather than any in recent memory — from droughts to wildfires to record numbers of tornadoes to Hurricane Sandy? Obviously that remains to be seen, but with a finite number of dollars in the worldwide insurance bucket, prospects seem ominous, particularly if 2013 brings more natural disasters.

“It’s not just hurricanes on the coast,” says Bob Adriance, technical director of BoatUS, the nation’s largest specialty boat insurance provider. “We’ve had weather-related claims all over the country.”

Even without another year of natural disasters, many insurance brokers, consultants and underwriters agree: Rates will increase across the board. “The first thing marine owners have to focus on is the fact that their insurance is going to go up,” says Andrew Barile, a California-based independent insurance and reinsurance consultant. “Everybody is going to have to pay. The distribution system works that way. If the industry loses money they’ve got to get the money back.”

Given the damage to boats, Sandy’s hit might be felt disproportionately in the marine industry and in coastal locations, where more than half of the nation’s economic productivity is located, according to the National Oceanic and Atmospheric Administration. Boat owners and marine businesses likely will see a sharper rise in rates than others because of the widespread marine damage Sandy brought, says U.K.-based Steve Evans, who owns Artemis.bm, a firm that analyzes alternative risk transfer and weather risk markets, among other industry patterns.

Steep competition for market share has kept rates low in recent years, so the increases could be significant, especially if some insurers pull out of certain markets. In other words, coastal businesses and marina owners in other areas could experience the challenges Florida has been facing for years, due either to insurance providers quitting the market or dealers and owners being priced out of it. “If someone decides it’s too risky and gets out there’s always someone who will come back in,” Adriance says. Customers will “just have to pay for it.”

insurance2Claim checks already are slowing, says Greg Wright of John B. Wright, a second-generation insurance broker at the New Jersey business his father started in 1961. “The first couple of weeks after Sandy, insurance companies were writing checks pretty quick,” Wright says. “Now they’re starting to ask questions. I can see it happening.”

The company’s typical customers-to-claims ratio along the Jersey coast is about 4.5 percent, Wright says. After Sandy that number shot to 41 percent. “I’m not jumping out of the business,” says Wright. “We’ve been doing this since 1960, but this makes you think.”

With $650 million in boat damage alone (the BoatUS estimate), insurance companies will have to increase rates quickly and dramatically, he says. “We were wondering when rates would start to come up,” says Wright. “I thought it would be after the tsunami in Japan.”

That statement begs the question: Why would a tsunami in Japan affect insurance rates in the United States? “There’s just so much money to pay claims,” Wright says. “Picture a world bucket of money to pay claims.”

Already priced out

Property owners should look at their budgets and their policies and analyze their risks annually, says Wright, who concedes that few of them do. “If a marina owner hasn’t sat down with an agent to review their insurance, they’re playing with fire,” he says.

Paul Terzian at Manahawkin, N.J.-based Causeway Marine says he knew his dealership wasn’t covered for floods, even though he’s about a half-mile from the water. “It [flood insurance] wasn’t cost-effective for us, and we’re not a marina — we’re a landlocked dealer,” Terzian says. “Between the deductible and the premium, it’s more cost-effective to self-insure.”

Before Sandy, the worst flood Causeway had seen in 30 years was a quarter-inch of water that receded after eight minutes, he says. This time 20 to 28 inches filled buildings and sheds, destroying parts, inventory, engines, tools and equipment. Despite being on the hook himself for most of the damage, Terzian expects his rates to rise.

“Sandy’s going to affect us all, not just marina insurance and the Northeast,” says John Naybor, a former engineer who owns three marinas in Florida.

The Atlantic region is only seven years into a heavy storm cycle that typically lasts between 25 and 40 years, according to a NOAA report. The last one was from the mid-1930s through 1970. From 1990 through 2008 population density increased 32 percent in Gulf of Mexico coastal counties and 17 percent in Atlantic coastal counties, according to separate NOAA figures. The most densely populated portions of those coastlines lie less than 10 feet above mean sea level, and more than half of the nation’s economic productivity is in coastal zones.

A game-changer

Sandy will change the way marinas are insured, speculates Mark Yearn, marine insurance specialist at Norman Spencer Agency. “It’s extremely difficult to make money insuring docks, no matter where they are,” Yearn says. Some insurers take into account the marina’s exposure to the elements to some degree but usually don’t assess construction.

“The evil truth is that the industry is woefully unsophisticated and the insurance industry is woefully undereducated about dock coverage, in part because the data doesn’t exist either within their own portfolios or even at a collaborative level,” says Christopher Pesce, president of the Maritime Program Group, a marine insurance underwriter. “We don’t need data to know that old docks are maybe not as good as new docks. But I don’t think there’s a carrier out there that can tell you that they have data that floating docks are better than fixed, or styrofoam encapsulated [docks] are better than wood.”

Adriance thinks exposure and age, as well as construction and materials, are a critical piece of dock survival. After Hurricane Ike, BoatUS put together a group to begin evaluating marinas. “If you have floating docks with tall, 18-foot pilings, time and time again they go through the storms. The boats go up, the boats go down,” Adriance says.

Fixed docks can be a problem because boats have gotten beamier over the years, he says, leaving about a foot and a half of space on each side. “Before a storm you try to tie it loose enough so it can move up and down with the waves but tight enough so your boat doesn’t bang against the sides, and that’s very difficult to do,” Adriance says.

Every year boats drift off pilings that are too short and float away, still tied to docks, Adriance says. “It’s not fair that a marina in a sheltered location with floating docks and tall pilings is treated the same as someone who’s completely exposed and has old docks,” he says.

Chris Squeri, director of the New York Marine Trades Association, agrees. “I probably paid the same premium as everyone else, but I have high pilings to hold boats in so our docks didn’t lift off,” he says. “The insurance didn’t take into account that I had less damage because I’m sheltered in the back of the canal and have higher elevation away from shore. We only had one boat fall.”

Cues from Florida

Storms always increase the amount of scrutiny paid to risk, Evans says.

Some might begin looking beyond building codes, Naybor says. “There’s a national code for buildings, but it does not take into account wind load and seas and tidal surge,” says Naybor.

Insurers who lack the resources to send out inspectors with engineering backgrounds could withdraw from the market or raise rates across the board. That might cause others to do what Naybor already did — rebuild stronger and self-insure, Adriance says.

In 2004, Hurricane Ivan wiped out one of Naybor’s three Florida marinas and severely damaged another. The storm set records with its high intensity and low pressure.

Only two national underwriters will insure marina structures in Florida, he says, which led to higher prices. When dock coverage premiums were at their highest, he says, marina owners were paying 16 percent of the docks’ value to insure them. “My theory was that if you built a marina that could withstand most hurricanes and self-insured, you were better off than if you went through an insurer,” Naybor says. “So I built a hurricane-resistant marina with floating docks. It’s really all about engineering. It doesn’t have to do with floating or fixed. It’s all very site-specific.”

Naybor thinks that about 60 percent of Florida marinas carry no storm insurance, although the number often cited is 40 percent.

Paying higher premiums won’t be an option for some who are already over-leveraged in this difficult economy, Naybor says. In some cases, those who raised deductibles to trim a few bucks from the monthly budget won’t be able to afford rebuilding, especially when they factor in the financial hit of the revenue lost while they’re shut down, Naybor says.

“What’s going to happen with a lot of these marinas, particularly the mom-and-pops, if they are leveraged and owe a bunch of money for the deductibles — they’ll be throwing keys to the bank left and right,” Naybor says. “It happens down here all the time. About 5 percent will say, ‘Good luck with that pile. See you later.’ ”

This article originally appeared in the January 2013 issue.

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