Lockton's Jones: Pricing transparency critical to parametric yacht cover

By Henry Gale

March 5 - (The Insurer) - Pricing transparency is critical to the efficacy of Lockton's new parametric hurricane cover for yachts, which charges clients dynamically based on their vessel's location every day, the broker's Paul Jones told Parametric Insurer.

This publication first reported on Monday that Lockton had launched a parametric product for docked yachts in the U.S., with capacity from NormanMax Syndicate 3939 and Munich Re subsidiary Great Lakes Insurance SE.

Claims are paid if hurricanes pass within a certain distance of an insured vessel, wherever it is docked, using automatic identification system tracking to determine where the yacht is. To account for the varied windstorm risk along the U.S.'s eastern and southern coastline, the premium will depend on the vessel's location every day during the policy period.

An initial premium will be calculated based on the yacht's "home marina". The vessel's location will then be tracked between 2 a.m. and 5 a.m. every morning, and a rate will be assigned based on the pricing zone it is in (Lockton has divided the coastline into 61 pricing zones) and the date. At the end of the policy period, the client will be eligible to pay additional premium or receive return premium accordingly.

Jones explained that the seasonality of risk was one of the challenges Lockton had to overcome in designing this product. "We are completely transparent with our clients at the time of quoting in this respect, so they have a good idea of their total premium based on where they expect the vessel to be. If they don’t know where they will be for the year ahead, they will be able to understand the cost to them if they head to a higher or lower pricing zone," he said.

"This level of transparency is absolutely critical to the efficacy of this product, something that very much resonated with the market during our broking exercise."

Jones said the parametric market was receptive to the product, which is a rare example of an index-based cover for moving assets. "One thing that the parametric market is used to is innovation and using new sources of data to build product," he said.

"The biggest issue was how could we give comfort to insurers around accumulation, and despite previous challenging loss events in the market, we have been able to overcome this hurdle to ensure our clients can access this much needed cover."

Existing forms of coverage for yacht owners are conditional on vessels being stored in a hurricane-proof shelter during a hurricane watch, which are often expensive and difficult to access, Jones said. "In practice the cover offered may have no value at all if clients can't get their vessels into a shelter."

He added that the early reaction from clients and yacht specialists to the new parametric product had been positive.