Boat insurance?

[Murky 1]

Interested to see that the third party aspect hasn't come up in this discussion - seems to me that whether the SR is insured for $30k or $65, it is equally capable of dragging down the topsides of a superyacht requiring a full repaint of that side. No expert but I would guess that could work out to more than a total loss of the 930 (no offence to the 930. On this occasion )

 

Like KM, I am struggling with the concept of the customer's responsibility to contribute to the pool vs covering their own potential liability.

[Guest]

I guess it's because the insurers are looking at the big picture for all their clients whereas you have no interest in anything other than your own vessel. Basic conflict of interests.

They set the terms, so take it or leave it unless you have enough business to negotiate a better deal.

[Fogg 427]

This is a hard concept to convey via to-ing and fro-ing written word rather than face-to-face Q&A but let me try another way.... I will simplify it and use numbers that are not exact but in the right ballpark to make the point...

 

I am a new insurance company. I sell 1 car insurance policy to you. We agree your market value is $10,000. I think about my risks and the premium I need to charge you to be reasonable. I know that the likelihood of you making a claim is about 20% i.e. about a 1-in-5 chance of you making a claim in any one year. Now, say I charge you $1,000 for comprehensive cover. I take your money and invest it, making a small return but of course I have some operating costs which will eat up that return (and some more most likely). But let's forget that for now to keep it simple.

 

Scenario 1: You don't make a claim at all. It's all good (for me that is). And of course you have had 'peace of mind' (in theory).

 

Scenario 2: You make a small claim costing $500. It's OK, I can afford to pay for it but it halves my reserves to $500, minus my operating costs. So we are still both in business but I'm a bit leaner this time. And I might think about a small premium increase next year to recover things to a more comfortable position.

 

Scenario 3: You make a bigger claim costing $1,000. I can just about pay it (effectively I return your entire premium to you) but although allowing for my own operating costs I will go small negative for a while, until I (hopefully) collect next year's premium from you again. But I’d need to increase your premium.

 

Scenario 4: You make a major claim e.g. write the car off or you t-bone a $50,000 BMW at the lights etc. Now we are both buggered. I pay what I can but I am now wiped out of business and you are left short.

 

I don’t like the thought of the last 2 scenarios so I decide to sell more car insurance policies. Suppose I sell a total of 10, exactly the same as yours.

 

Now I have $10,000 in my premium pool for the first year. Now, if you make a larger claim (even a total loss of your car costing $10,000) my ability to cover it is better. In this case the other customers’ contributions to ‘the pool’ paid for your idiotic behaviour in having an accident. Actually that’s not true, you were not an idiot, you just had some bad luck, it happens, it’s why insurance is there. Alternatively, you might not have an accident but one of the other customers (idiots?) does, in which case you have paid towards his damage. Whether that annoys you or not depends on your outlook.

 

But if two of my customers have a total loss ($20,000 cost) then I am wiped out again. The chances of that are obviously less but it could happen. Even if I stayed in business with 2 of my 10 customers claiming, I would likely increase premiums slightly next year to recover my position to one of adequate strength to withstand potential future losses.

 

So you can see that as the size of my customer base increases, my ability to withstand ‘normal’ claims improves. But a new problem emerges if I think of single scenario that could affect all my customers at once, such as a severe weather event e.g. flood. And of course this single event scenario looks different for different types of insurance policies e.g. car, house, contents, travel, medical, liability etc.

 

At this point it is important to note that this balancing act between collecting premiums and paying out claims and other operating costs is regulated i.e. the government ensures that every insurer collects (and maintains) sufficient reserves to withstand most scenarios you could envisage. The regulator does not intervene directly in setting premiums BUT if they see our reserves falling too low they could require action in other forms or else suspend us from trading until we have recovered. I won’t go into more details but this is one place where re-insurance comes in i.e. as an insurance company I could pay another insurance company a large premium to insure myself against the possibility of rare, big events, like a 1-in-100 year storm or an earthquake (like Christchurch).

 

The numbers involved in balancing all these factors a complex actuarial models and we are required to share them with the regulator and our accounts/auditors each year and explain what trends we are seeing (from past and future claims) and our rationale for setting future premiums. This is a 100% technical discussion and does not take into account conventional pricing considerations like market forces and competitors.

 

The problem is if (as some people do) you consider insurance an investment that should yield a guaranteed return every now and again, then this is not the right financial product to buy. Instead, go invest it elsewhere and take the risk of self-insurance in the meantime. But if you consider it an investment to give you peace of mind ‘just in case’ and you understand that the best scenario from your personal perspective is to hopefully never need to make a claim, then it is the right product. And you hope that if you do never make a claim your good behaviour (or good luck) is rewarded with some kind of recognition/discount – but your premium can’t be reduced to zero because you are still part of a pool and despite your good luck to date you still face the same chance of an accident in the future.

 

For those of you still with me, I’ll leave it with one final (simple example) to explain the challenge with keeping all of our customers happy all of the time. It’s to do with uncertainty.

 

When Fonterra puts a tub of Anchor butter on the supermarket shelf, they know to the nearest cent how much it has cost them to deliver it to the customer (manufacturing costs, marketing costs, transport etc). They just need to set a price to cover these known costs and provide an acceptable margin/return and they are happy. And they are 100% certain of the outcome and profit they will make. But when I sell an insurance policy, there has obviously been a small cost to deliver it to you on day 1 but I never know what the full cost will be over the rest of the year until your policy period has ended, either with or without a claim. It’s this uncertainty that requires (by law as well as common sense) a degree of statistical comfort in how we set our premiums and premium reserves. Behind the scenes it’s a complex subject (and actually very interesting if you are that way inclined) but it’s extremely hard to convey these concepts simply to customers so they can understand. In fact most customers don’t even want to understand – they just want to buy the policy and forget about it, knowing they can make a claim if the worst happens.

[Fogg 427]

I guess it's because the insurers are looking at the big picture for all their clients whereas you have no interest in anything other than your own vessel. Basic conflict of interests.

They set the terms, so take it or leave it unless you have enough business to negotiate a better deal.

 

No different to any other organisation on this planet then!

[Fogg 427]

Like KM, I am struggling with the concept of the customer's responsibility to contribute to the pool vs covering their own potential liability.

 

Of course as a customer you are only interested in your own liability. It's when you decide that your own maximimum potential liability would exceed your own resources that you want some back-up - and that has to come from a sharing concept.

 

Insurance originated from a bunch of private individuals in London who were concerned about what would happen if their houses caught fire. So they decided to pool together some money 'just in case' any one of them had a fire. They also set up a fire brigade which would go around London town and put out fires for those people who had paid into the membership pool. Other competing organisations (effectively co-operatives) also set up and gave their customers badges called 'fire marks' to stick to the outside of their houses and the fire brigades for each insurance company would only put out fires for houses displaying their fire mark.

 

So it was a societal response for reducing the risk of a catatrophic financial loss by sharing it with a bun ch of friends in a similar position (a co-operative).

 

But if that shared risk model doesn't suit you (because you think you are either smarter or luckier or more risk-loving than other people) then opt out and go for self-insurance!

[Farrari 4]

But if that shared risk model doesn't suit you (because you think you are either smarter or luckier or more risk-loving than other people) then opt out and go for self-insurance!

 

AC, I'm not sure I understand where you are coming from here. From what KM says he sat down with his insurance broker and agreed on a cover based on the most probable outcome. He insured for more than the purchase price and one could say slightly more than the market price of an equivalent vessel (you couldn't get another one with that sort of paint job if you tried!).

 

I still don't understand (from a consumers point of view) why you ought not part insure if you are prepared to take on more of the risk. Excess is one way of dealing with it but that is more about taking risk on the more probable smaller claims, not the less probable bigger claims. I sort of understand that the insurance business and the associated risk calculations are based on full insurance but isn't that a problem with the industry not offering the choice vs. the consumer making the wrong choice?

 

In my case I have insured (with the recommendation of my broker) for the purchase price of my yacht. I completely understand that this won't cover me for a new equivalent replacement if the worst comes to the worst.

 

I see this as more of an agreed value transaction (a bit like car insurance) rather than the older style of trust the insurance company to value an equivalent replacement of policy.

 

Are you able to explain this pool concept a little more? I too am interested to understand how different industries function.

[Fogg 427]

Farrari

 

Not sure if I'm answering your specific Qs but I'll try...

 

It sounds like you've insured your boat on a replacement basis which means, say, that if your boat is 10yrs old and you had a total loss, the payout would cover you to buy a similar 10yr old boat but not a new one. But 'new for old' policies are available (rarely) but cost more. In fact most insurance policies allow for this for the first few years of a new item e.g. if you total your 2 yr old car you will usually get a brand new replacement. But if you total your 5yr old car you will get cash for another 5yr old model unless you agreed a 'new for old' basis at the outset.

 

Remember that insurance is simply a risk transfer mechanism. So if you are looking to hold more of the risk yourself and transfer less of it to your insurer then the most common mechanism is by increasing your excess, thereby reducing your premium. This works from the bottom up i.e. insurance payments don't kick in until a higher amount is reached but go on up to the maximum agreed value for the worst case scenario. And this is the arrangement that most people want and can also understand.

 

But if you wanted your insurer to cover the lower risks and not the more expensive risks then yes you can arrange this but not normally as part of a standard personal policy - it requires more special treatment, typical of commercial insurance arrangements. The analogy for your private boat, worth say $100k, is that you could arrange to have a cap at $75k. So your insurer pays for losses up to $75k but nothing more. It would obviously cost less premium but would require a conscious agreement by customer and insurer. The trouble is that most personal insurance contracts are rated on the basis of the bottom up excess only, not a top down capped limit. Or you could agree a conscious 'under-insurance' % amount e.g. you agree that your insurer will pay out 75% of all claims. So if you lose a $40k rig then they will pay $30k. If you lose your $100k boat they will pay $75k etc.

 

But if you lost your $40k rig and you wanted them to pay all $40k and only apply the 75% rule for higher amounts e.g. total loss, you could do this but it would require a different premium calculation because the risk is different. Anything is possible and for large commercial risks this kind of thing is done - but for mass market small personal risks the complexity outweighs the cost benefits and 99% customers want the same thing, notably a simple bottom up excess and an agreed maximum payout.

 

If you want to do something outside the norm, like KM’s arrangement, then it is especially important to do it via a trusted professional adviser (insurance broker) to make sure you get the desired outcome and not a nasty surprise.

 

I’m not 100% sure I have answered your question though? I have addressed KM’s partial insurance point rather than the pooled concept. That is a totally separate principle which I tried to tackle in my earlier (very long) post above.

[Guest]

AC with regard to Insurance companies being like any other, I agree.

It's peoples perception, in conjunction with the touchy feely advertising used to sell one company over another that makes people think otherwise.

I went many years with no insurance (had a company car) and never been caught out.

It's only once I had things that didn't pass Squids "Walk away with no regrets" test that means I now have the full range.

Talking about "self insuring", Honeywell in the UK only had 3rd party on their "Big" fleet of cars. It was cheaper to pay for the damage than to pay premiums.

[Farrari 4]

But if you wanted your insurer to cover the lower risks and not the more expensive risks then yes you can arrange this but not normally as part of a standard personal policy

 

Yep, that makes sense. So your original message to KM's post could be interpreted slightly differently and perhaps I got that wrong. Short answer I hear is agree the right policy with a broker you trust.

[Fogg 427]

Talking about "self insuring", Honeywell in the UK only had 3rd party on their "Big" fleet of cars. It was cheaper to pay for the damage than to pay premiums.

 

That's exactly right and probably a better example than I have given to date. Many large organisations with large fleets do this because they effectively have a big enough fleet of vehicles to create their own 'pool'. Usually behind the scenes, each department that has cars would be paying the equivalent of an insurance premium to the internal finance departmen, who would then administer the money and claims. Only the 3rd party bit (a legal requirement) would need to be placed with an official registered insurer who is guaranteed to have the funds to cover multi-million dollar liaibility claims. The only organisation that I am aware of that is legally entitled to also cover themselves for TP risks is the military e.g. army vehicles having accidents on public roads.

[Fogg 427]

But if you wanted your insurer to cover the lower risks and not the more expensive risks then yes you can arrange this but not normally as part of a standard personal policy

 

Yep, that makes sense. So your original message to KM's post could be interpreted slightly differently and perhaps I got that wrong. Short answer I hear is agree the right policy with a broker you trust.

 

That's right. My only reservation about KM's arrangement was that it sounded like they had simply deflated the total amounts based on likely outcomes and ignored the small (but still existent) possibility of a total loss - which would leave KM out of pocket. And also if the insurer was handling a smaller claim (say for a damaged rig) and they worked out that there was any deliberate under-insurance in place (they saw the market value of the boat as $x and they had a sum insured of only 75% of x then they might apply that same ratio to his rig claim i.e. only pay 75% of it). But hopefully the arrangement is better than that and has been lost in translation.

 

No drama.

[Guest]

Ahhh...becoming clearer. Joe is wanted to keep the 'pool' up, just as Mary is. It may mean one or both pay a little more by insuring their goodies at a higher knot likely but an outside chance of happening amount, which both may knot like as Joe never claims so is somewhat irritated to have to top it up for Mary BUT Mary is also doing the same so that on the off chance, which maybe very very unlikely in his eyes, Joe does totally cock it up the pool has enough coin to pay him out fully or as required. Sharing the love so to speak.

 

It was the houses on fire example AC, well explained. Makes some sense even if it sounds like it was thought up by the Labour Party.

 

And it appears my set-up isn't the norm, or knot at least in the 'retail consumer' area even if maybe in the commercial, and has come about, or been tolerated one may say, due to my already large expenditure within the industry. The boat is in with all my commercial (with the full knowledge of everyone as to it's use) and is a single figure % of the total cost, and probably a 0.00000something% of a payout assuming I got total payout on all policies at once, which would be far less likely to happen than Murky becoming PM and giving everyone in NZ a R930.

 

Yes my number was reached with total knowledge, in conjunction with the Insurance lads and with every ones full knowledge I do clearly know I have a level of self-cover in it all and are OK with that. Interesting to note that it was a quick clean chat and zero came up about much mentioned here but that could have been as I went in saying 'She'll never go down so can I just cover the most likely to be seen sh*t happens being the rig etc and I reckon 65 will do it'. They sussed the number (they boat so have a good idea) and said 'Sweet. it'll cost ya this and these are the rules/excess's if you feck up. That OK with you?', 'Yeap sure are, done deal'.

 

I do tend to go into something knowing what I want and why (including a few yacht races over the last few years ) so have noticed if you do that some won't try to swing you other directions unless they have a very strong case, knot something I totally agree with but then I don't have to suffer sales pitches that'll go nowhere anyway. I do usually say 'This is what I want, if possible. Can it be done? What's the cost? Now what downsides are there in reality rather than in back room accountant/marketing peoples heads?'. Most people I deal with know that, just as they do that I will quickly drop into 'all accountants are wankers and I don't give a rats arse' rant if I suspect blatant up-selling just for their good rather than mine or both of us. Also I do tend to be loyal to those who I perceive aren't screwing me and won't change companies or whatever just for the sake of a saving a few bucks. Let me find out they are screwing me and all hell will break loose and my custom will go elsewhere fast, which something I'm knot shy in telling them either but I do do it with a smile.

 

I have learnt over the years there are 3 people never to bullshit. Your accountant, your bank dude and your insurance people. If everything goes tits up those 3 will be the first ones who will quickly become your best mates or your worst enemies. You don't want any of them as your enemy, while they may knot win every battle 99.9% of the time they will win the war.

[darkside 61]

You only insure if you will be financially embarrassed by the loss.

It is obvious that on avearge you can never win.

AC what is the critical mass for a car fleet for it not to be worth insuring?

Not much value to a boat owner unless you pool with a yacht club or whatever.

Most won't do that as "yachtie X" is a higher risk than them.

[Fogg 427]

AC what is the critical mass for a car fleet for it not to be worth insuring?

 

Unfortunately there is no simple answer but I've seen companies get interested in the concept of self-insurance once the fleet size gets into 30+ vehicles range.

 

But it depends on what your motives are. If you are purely asking "Will I come out ahead by self-insuring?" then you are obviously focused on the $s only AND you are able/willing to handle the extra administrative burden of handling your own insurance arrangements, you have (or hire) the right staff etc. But if you decide your business is too small to be distracted by such 'noise' then you elect to outsource this function to an insurer.

 

It also depends on your financial strength and your immunity to weathering a large loss. If you are a small but extremely high margin investment banker operating out of your tax-efficient haven in the Cayman Islands, then you might decide that you are happy to self-insure even though you only have 3 Ferrari's in your company fleet, cos any loss would hardly make a dent in your weekly profits. But to another company struggling through the recession, the total loss of just one vehicle in their fleet of 10 critical cars used by the salesforce could cause a painful loss of earnings, hence they chose to buy full insurance despite the cost of premiums in hard times.

[Guest]

It is obvious that on avearge you can never win.

I reckon at the moment I'm at about break even. Had a big whoppsy a few years back which resulted in being handed a LARGE cheque. But you are right generally I'd guess.

[Fogg 427]

It is obvious that on avearge you can never win.

 

Mmmmm, that still potrays an expectation of a return which isn't the point really. If you sleep easy because you have removed the risk of financial embarrassment by transferring the risk to someone else for an acceptable price, then you've arguably won.

 

And think about a different type of insurance, life insurance. At the end of the sailing season do you say, "Bugger, the life insurance company is still ahead of the game cos my widow hasn't been able to make a large claim. Maybe next year."

 

If you never have to make an insurance claim then you are most definitely ahead in the most important game!

[rigger 47]

If you sleep easy because you have removed the risk of financial embarrassment by transferring the risk to someone else for an acceptable price, then you've arguably won.

 

I did rest / sleep easier once I found out my life / trauma policy covered me when I was rather sick in hospital. I guess I did win - still alive and did not end up in debt due to illness, would have ended up in debt if not for the insurance policy.