The haves and the have yachts

Stepping on to a £1.7m motor yacht on the River Hamble in Hampshire’s Swanwick Marina, for a private tour by Princess Yachts, is enough to make anyone feel like royalty.

The craft oozes wealth, adorned with leather sun loungers, sleek wood flooring and fitted cabinets, three bedrooms with attached suites, and a classic beige décor.

One would think a cruise around the Solent with a glass of champagne in hand would be surely in order. But alas, the tour was ended in five minutes and poof – this princess was turned back into Cinderella.

In hindsight, maybe the sales team should have pushed a little harder, considering the smaller yacht market – which is roughly any boat with a price tag below £2m – has been hitting rough waters.

Brokers and insurers who deal in this end of the market are noticing a direct effect on the industry due to the credit crunch, as the averagely wealthy – such as City types who are seeing their bonuses slashed – are feeling the pinch.

Demand for smaller crafts has lessened because anyone who wants to buy a standard yacht costing in the region of £250,000 to £2m, wouldn’t necessarily have the money to buy it outright. And financing is of course more costly now. Added to this is a spike in fuel prices. Diesel has shot up from 60p to 120p per litre so it’s costing double the amount of money to fill a boat.

In an attempt to cut costs, some boat owners have been scaling back on repairs and maintenance, which is causing boats to deteriorate and therefore, drop in value.

So what does this mean for the insurance industry?

“The implications for the insurance industry are considerable,” says Nick Smith, director of Charles Taylor Marine. “For underwriters, an immediate problem is agreed value policies. The value of vessels is dropping by the day and no boat can be sold in the current market for any less than a 10% to 15% discount on the asking price.

“The yacht broker will also be charging the owner 10% of any sale price. An agreed value policy based on original asking price will be worth at least 20% more than the owner’s share of a sale.”

Interestingly, the super-rich are still happily snapping up yachts worth over £5m and the gap between this end and the small boat market is growing.

Orders for these luxury vessels have increased 18% on last year, nearly four times the level four years ago. Nearly 1,000 yachts of over 24 metres in length are currently on order, and yards building these vessels are booked through to 2011.

But keep in mind, this end of the market that caters to a small group of uber-rich people is financially worlds apart from the vast majority or even the averagely wealthy portion of the population.

Smith believes that considering the conditions in the small boat market, underwriters should place greater emphasis and importance on pre-risk surveys.

Simon Tonks, development manager for Navigators and General, agrees that small boat owners have been affected by the dismal economic conditions. He adds that people are increasingly deciding not to renew insurance on their vessels.

“With whispers that the sale and purchase at the smaller end of the market are beginning to be affected by the so-called recession, it is pure economics that insurers will have less to insure and brokers will have less to broke.

Mark Feltham, Willis

He says: “The cost of running a boat roughly costs owners about 10% of the value of the boat per year for the fuel, repairs, mooring and maintenance. The trouble for a lot of smaller boat owners who have finance is that the likelihood is they cannot afford to buy that boat outright, or they don’t want to invest that much cash into it.

“Having a yacht is a luxury item even at the smaller end of the market. These are people who have seen their businesses grow and have decided to indulge themselves. With such luxury items the reality is the spend on them is the first thing to go when credit becomes a struggle.”

But Tonks says the best brokers will branch out and target other business opportunities such as super yachts.

“If they are any good they won’t be affected by the credit crunch as they would diversify their book and wouldn’t be dependent on a specific segment of the manufacturing range,” he says.

He adds that many brokers tend to refer the small boat portion of their business to one of the half a dozen specialised brokers in the UK who deal solely with boats of this size. Therefore, he says, those brokers would have passed on the unprofitable business and will be enjoying the boom in the high end market despite the credit crunch.

Mark Feltham, executive director for marine and yachting at Willis, says: “We don’t tend to do much broking for anything less than £5m, but with whispers that the sale and purchase at the smaller end of the market are beginning to be affected by the so-called recession, it’s pure economics that insurers will have less to insure and brokers will have less to broke.”

It’s true that there has been a decline in general luxury brand sales because some of the rich have been more hesitant to flaunt their wealth in times of trouble.

But fortunately for the insurance market, the luxury yacht market is alive and kicking. For the super rich, who seem immune to ‘ ‘ the economic slow-down, bigger is better and it’s all about keeping up with the likes of Roman Abramovich. The Chelsea football club owner already owns three of the largest yachts at sea and is rumoured to have ordered the build of the biggest private yacht in the world – a yacht more than 160 metres long, and roughly one and a half lengths of a football pitch. The growth in this market has attracted an increasing number of insurers. As a result, marine insurance is probably very similar to the non-marine market in terms of rates. Navigators and General believes that a lot of new insurers are coming into the super-yacht market thinking there is easy money to be made.

Service is key

However, the insurer warns that these new players tend to undercut the market and are not always the best for offering high net worth clients the best service. Tonks says: “What we’ve found is those who may have chased those lower rates are now coming back because they didn’t get the service and with high-net worth clients, the service is key.”

Feltham agrees that as more insurers have entered the super-yacht market, rates have become increasingly soft. He estimates that the market has softened by 10% in the past year.

However, he does cut newcomers some slack. As a specialist broker at the high end of the market he warns that broking rich clients is by no means easy. He says: “A broker would have to be very brave to enter this market; there is a lot of exposure in it for a company if you don’t know what you’re doing.”

With huge commissions and an opportunity to gain the world’s wealthiest clients, it’s no wonder brokers and insurers are attracted to luxury yacht owners. But with only an estimated 90,000 people on the planet who can afford a 20-metre plus boat, it is certainly an elite club.

It remains to be seen whether the credit crunch or other factors will ultimately anchor or at least slow down the boom in super-yachts.

But so far, it’s smooth sailing as yachts have remained the ultimate luxury item, and money has continued to pour out of countries like Russia and Saudi Arabia. While demand continues, so will the demand for insurance.