Yacht insurance – key considerations to protect seaborne trophy assets

6 Dec 2023

For yacht owners, the outlay for a vessel is a huge investment – one that can, and should, bring enormous pleasure, but one that also brings risk which must be mitigated – including through appropriate insurance.

Yachts, unlike some other luxury assets such as fine art or collectibles, are not kept behind glass or in a safe. They are bought to be used and as such, require adequate, protection.

Hazards abound at sea (and even in port): From fire and lightning strikes, to accidental or malicious damage, to theft and third party liability.

A Hull & Machinery policy is the main type of coverage required, which insures  the hull but also the yacht’s equipment and materials, including the engine and any associated service craft (also known as the ship’s boat or ‘tender’). H&M insurance covers the essential working parts which keep a vessel in good operational order. Additional cover may need to be procured to protect any valuables and other chattels that are kept on board – an important consideration for owners who are likely to spend significant time aboard ship.

Why flag state matters

The ‘flag state’ of a yacht will be a key consideration for underwriters. We have reviewed wider issues relating to flag states here but, put simply, the flag flown by a vessel denotes which jurisdiction and laws it operates under and who is therefore responsible for regulating and inspecting it.

Beyond a ‘black letter’ assessment of the legal and regulatory framework provided by a flag state, insurers will closely consider a flag’s reputation – which can have a significant impact on insurance costs.

Yachts flagged in countries which are seen as less reputable are much more liable to being boarded and inspected – as part of, say, a state’s war on drugs or simply official patrol work.

The better the reputation of the flag, the lower the perceived risk, and the lower the potential insurance premiums.

As necessary as part of their risk-assessment process, insurance companies will review the chosen state’s performance on enforcing environmental and safety procedures and standards, their compliance with international regulations and their casualty record.

Flag states in high esteem

Among the jurisdictions of repute that stand out on the international stage are the “Red Ensign” group of nations, which are often recommended by insurers as suitable flag states. One reason that the Red Ensign flag is so popular with insurers (and yacht owners) is that yachts registered in one of these states (comprising the Crown Dependencies and British Overseas Territories as well as the UK itself) are considered to be British vessels. They therefore enjoy the protection of the British Navy should they need it (as well as diplomatic protection and consular and other support).

Other popular flag designations include the Marshall Islands and St Vincent and the Grenadines, which have advantages similar in nature to the Netherlands registry but are often better suited for pleasure yachting and charters based in the south Pacific. They are part of the Paris MoU white list, which rates the quality of flags based on their risk (with those on the white list being lowest risk), and they have the added attraction that they impose no taxes on operating profits.

Malta is another frontrunner for yacht registration, being one of the most common flags of registry for superyacht owners in the EU. It is ideal for those who must remain registered under an EU flag but are seeking to minimise VAT exposure given the reliefs available through Maltese registration. Moreover, vessels flying the Maltese flag receive preferential treatment regarding port charges and taxes. Malta also offers expedited, 24-hour registration services plus extensive yacht owner support. Another bonus is that it places no restrictions on the nationality of the master, crew and officers of the vessel, thus avoiding staffing headaches.

More widely, the chosen flag state has wider financial implications, with a vessel’s flag state also governing its mortgage (if there is one). Lenders will want to see the vessel registered in a jurisdiction with well-established admiralty law. This gives lenders comfort that their mortgage is secure, and that they will have powers of repossession in the event of a default. British Admiralty law, which extends to the UK’s dependent territories (and therefore applies to Red Ensign flags), enjoys an excellent reputation worldwide.

Yacht valuations and risks

According to recent figures (published here by Boats Group), the value of vessels sold in H1 2023 have increased by almost 20% compared to the same period in 2019. Average vessel values have meanwhile increased almost 40%.

Rising values, partly driven by a general lack of market supply and high demand, coupled with increasing cost of materials are driving up premiums – amid wider risk concerns ranging from geo-political tensions to rising reports of piracy to potential risks caused by new / alternative fuels. The International Union of Maritime Insurance recently reported global hull premiums had risen almost 6% in 2022, reaching USD8.4 billion.

Yacht owners, therefore, should consider carefully their approach to insurance and seek to mitigate and minimise potential risk wherever possible – not least beginning with flag state selection. This can be a passport to lower insurance costs and greater accessibility to finance, as well as creating tax efficiencies and easing the administrative and bureaucratic processes involved in owning a yacht.

Saffery Trust provides tailored yacht management services, encompassing vessel acquisition, management and sale. Capabilities range from flag state registration in top tier jurisdictions (including those described in this article) and compliance with all international and local / port authority regulations, to operational support including crew staffing and vessel supply. To find out more about our services contact Natasha Bunting.