Prior to the recession, a yacht purchase was a buoyant investment that only rose with the tide. The market was so robust that high-net-worth individuals could plunk down millions of dollars more than a new or year-old yacht was worth, rather than wait the two years for a bespoke watercraft to be built, and find that the ship had increased 20% in value a year later.
Staggering prices were being recorded in the heady days before the financial crisis reared. Some affluent people made the purchase and sale of yachts their own personal cottage industry, given the mile-wide margins. Then, just like other bullish investment markets that seemed too good to be true, the bubble burst. Overinflated yacht values sank like an anchor. Financing the ships became more difficult as the credit markets contracted. Suddenly, many owners were confronted with the need to restrict their yacht-related expenses, or worse–sell the prized watercraft in a distressed market.
The reaction to the debacle, while well intentioned from a financial perspective, is misplaced. For example, some owners are reducing their crew and staff sizes or otherwise cutting back on a boat’s maintenance, postponing, for example, the annual light sanding and gel lamination of the yacht’s hull. All that is being postponed in such cases is tomorrow’s financial hardships–selling an ill-tended craft in the future guarantees a reduction in price to compensate for the shoddy maintenance.
There is a better way to assist expense-conscious yacht owners. By working with insurance brokers and carriers, costs can be reduced without affecting the quality of the yacht or its value. See “Five Seaworthy Questions.”
Fair Market Value
Yachts and other valuable possessions like vintage automobiles, antique furniture, fine art and rare jewelry are priced for insurance purposes by specialized insurance carriers on an agreed-upon fair market value basis. Essentially, the owner of the yacht, the insurance company and a marine surveyor expert in assessing the financial worth of the yacht come to terms on the fair market value of the craft at the time the insurance policy is issued. If a yacht valued at $10 million capsizes, a $10 million check is written to the policyholder, subject to the terms and conditions of the policy.
A $10 million yacht that was insured prior to the recession today is probably no longer worth $10 million, however. The insurance policy remains in force, covering