The Anatomy of Aviation Insurance©
$ticker $hock!
By Jim Gardner
jgardner@insuramerica.com
http://www.insuramerica.com/
770-973-7721
That has been the reaction the last couple of years when owners of aircraft or aviation related businesses stare at their annual insurance premiums. Their second reaction depends on their understanding of the aviation insurance industry. Some blame greedy insurance companies. Some blame lack of competition within the industry while others blamed their broker. Very few consider that the expectation of a return to the premiums of the mid 1990’s is unrealistic. The realities of the current hard market are more fundamental, predictable and even correctable.
In the mid 1990’s everyone enjoyed record low premiums. Insurance companies fell all over themselves competing for business, often underwriting premiums with a cash flow mentality. Everyone was happy. Insurance rates were at a record low and the insurance companies were making plenty of profits from investments in the red-hot stock market. But, the insurance industry was ignoring the fundamental necessity of making a profit on their insurance business.
Reality reared its ugly head in late 2000 when investment income started a slow decline. But it didn’t set in until post 9/11 when the aviation industry witnessed its worst down turn in history and the stock market panicked into full scale retreat. The industry made a collective gasp reminiscent of the pilot who is suddenly staring at a low oil pressure light and impending engine failure.
The reaction by the insurance industry was predictable—raise rates to stop the bleeding.
But that was only part of the solution. The ensuing hard market has not only squeezed your pocket book, the underwriters have gotten more selective in the standards under which they are willing to insure your risk. Deductibles have increased, coverage limits have become more restrictive, pilot training and recurrent requirements have gotten more stringent, and those with poor loss records are being rejected all together.
I’ve always quipped that insurance is a perfect marriage between pure capitalism and pure socialism. Insurance 101 teaches that in order to make the numbers work, insurance companies require an homogenous group to derive predictable loss rates and compute premiums which will produce profits over a defined period. Although the number crunching will make their computers smoke, the formula is simple:
Premiums + investment income - claims - administrative and marketing costs = profits.
Therein lays the real answer.
The re-insurers, those who supply huge sums of money to share in and spread the risk of insuring the aviation industry, have dictated if underwriters can’t or won’t make a profit on their insurance underwriting operation, they will invest their dollars elsewhere. They have further cautioned that a return to the cash flow mentality of underwriting prevalent in the 1990’s is not an option. Since administrative and marketing costs are historically stable, investments are in the tank, and premiums are at the breaking point, the only way to long-term profitability is to focus on claims reduction.
Industry figures indicate over the past decade the cost of claims has risen dramatically. The misfortunes of the airline industry aside, aircraft in general aviation have gotten bigger, faster, and more expensive to repair. Our endemic litigious society has also put upward pressure on liability awards. To put in succinctly, even though premiums have gone through the roof, the cost of claims has outstripped premiums by a margin of nearly two to one!!!
We collectively suffer from the sins of our homogenous group from which our rates are derived. That is why certain aircraft owners and certain aviation businesses are finding themselves between the proverbial rock (high premiums) and a hard place (reluctance of insurance companies to underwrite their risk). Fortunately, there is a solution.
$afety $aves.
Anyone who loves aviation has heard many axioms concerning the nature of flight. One of my favorite depictions of this is the bi-plane stuck in the tree with the admonishment below that goes something like “Aviation is not inherently dangerous, but terribly unforgiving of ignorance or neglect.”
The picture of this accident is seen from many perspectives. The pilot sees a visit to the hospital, a job search and possibly a visit with the FAA to defend his license. The claims adjuster sees the cost of repairs. The Insurance underwriter sees a higher risk and the need to readjust insurance rates. The insurance company sees a rise in the cost of insurance and a reduction in profit. The aircraft owner sees nothing but headaches, work, lost productivity and lost revenue. Every time you see the picture of an accident or read an accident report, one thing is universal—everybody involved lost something. That loss has a cost.
One of our clients who successfully operates a large fleet of G.A. aircraft instills in his organization that the cheapest way to operate is to do it the right way the first time, every time. A tour of his facility and discussions with his employees bears this out in spades. You won’t see a lot of flash and color. What you will see are a clean, safe and organized work place, employees who follow standard operating procedures and use checklists, and a training program whose written syllabuses for every job description include training over and above the minimum FAA requirements.
His organization goes the extra mile by addressing problems before they cause an accident and a claim. He understands that, although his safety and training programs have a price, the cost of an accident far outstrips the added cost of doing it right, not only in terms of lost assets, productivity, and the administrative cost of dealing with the myriad of headaches an accident creates, but in human terms as well.
Underwriters know how this attitude affects their claims and therefore their bottom line. It is human nature that while writing a particular risk, this knowledge transfers to their pen when it comes time to quote premiums. This is the kind of operation all the underwriters want and they will compete for the business.
This understanding is also why those who own and fly more complex aircraft are seeing underwriters require more initial training and time in type, more stringent and documented recurrent training, and annual proficiency checks. From their point of view, the preferred risks do it anyway. By requiring it as a condition of insurance they are targeting that part of the homogenous group that have the biggest negative impact on their claims.
Safety really does save money. In my humble opinion, it is the key to lowering and stabilizing premiums in our now volatile industry.
Ever since man began his quest to fly, success has always evolved around another humorous axiom. “Learn from the mistakes of others. You’ll never live long enough to make them all yourself!” I prefer to put it in the positive. “Learn from the successes of others. You’ll live long enough to enjoy spending the money you’ve saved.”
About the Author
Jim Gardner is a retired U.S. Air Force Officer, a former professional pilot and aviation operational manager, and an aviation insurance broker with Insuramerica Aviation, one of the largest independent aviation insurance agencies in the Southeast.
Jim came to Insuramerica Aviation with a strong background in aviation as a distinguished military and commercial pilot and aviation operational manger with a solid background in public relations. He is an accomplished commercial pilot who has logged over 14,000 hours in a variety of military, commercial, and general aviation aircraft. His pilot certificate includes both Single and Multi-engine Commercial Instrument and Air Line Transport ratings.
Jim is an experienced aviation manager. After his graduation from the University of Arkansas in 1972, Jim began his aviation career as pilot in the USAF. During his 22-year military career, he flew worldwide airlift missions as a C141 aircraft commander. As a line pilot he served both as a training and safety officer. As an Air Operations Officer he planned, coordinated and commanded large-scale airlift operations, creating full scale airport operations at isolated airfields around the world in support of United States military and political objectives. These operations included aircraft and crew operations, aircraft maintenance, air and ground cargo operations, and passenger service. Jim completed his military career as the Chief of Wing Plans at Charleston AFB, SC where he was responsible for planning and coordinating the training and wartime readiness of 3400 Air Force Reserve personnel.
Jim’s aviation experience extends far beyond the airport environment. As Director of Communications for the Air Line Pilots Association at US Airways he gained valuable experience in corporate communications and public relations, supervising the publication of a monthly magazine, producing informational videos, writing aviation related articles, and performing interviews with large market televisions news organizations. He also served as a representative for the Eastern Air Lines pilots and a member of the Air Line Pilots Association Board of Directors. He currently writes aviation insurance related articles for several aviation publications.
As part of our aviation insurance team, Jim’s experience gives Insuramerica Aviation an added dimension which allows us to provide you with the best aviation risk management services available.
