Insurance rates flatten, though only for some
Insurance premiums for professionally flown corporate aircraft have decreased slightly off their peaks of last year, but charter and helicopter operators and FBOs are not seeing the same relief, though their rates have generally stabilized. Some insurance industry officials don’t expect rates to decrease to pre-9/11 levels, however, claiming that the low premiums enjoyed by clients in the late 1990s meant that the insurance companies (or underwriters) were paying out more money in claims than they were receiving in premiums.
Insurance companies had begun to raise rates even before 9/11 as the soft stock market reduced their income from investments. After 9/11, underwriters raised premiums even higher as they struggled to cope with higher costs for reinsurance and elevated risks. The pool of aviation underwriters shrank, from about 17 to seven, as companies merged and others went out of business, a definite indication of the tough market.
“The first quarter of this year was kinder and gentler,” said broker Bill Behan, president of AirSure of Golden, Colo., meaning that pricing has eased and insurers were now more willing to look at customers they had not been interested in previously. “Usually when a bad event occurs in the industry, such as 9/11, the market shrinks, which is just what happened. Some insurers simply go out of business and others ask themselves, ‘Is this our core business?’ Meanwhile, the insurers that stayed with aviation wanted to know everything about their clients and had little interest in looking at new business.”
Corporate operators, “the créme de la créme,” as Eric Barfield, a broker with Hope Aviation Insurance in Columbia, S.C., put it, are seeing premium reductions of as much as 15 percent when their policies come up for renewal this year, though 5 to 10 percent is more the norm. Still, the rates are not as low as they were in 1999, 2000 and 2001. Barfield said he expects these lower rates to continue for the next few years.
A spokesman for one of the underwriters, who did not wish to be quoted, confirmed there has been a “flattening” of rates and that “the market is definitely easier for placement of coverage for aircraft operators.”
This “softening” of rates for some aircraft operators is obviously good news, but Tom Coughlin, president of Air-Sur, an insurance brokerage firm in Ormond Beach, Fla., is concerned about “the lack of discipline” among some aviation insurers. “If insurers do not hold to cost-based pricing and their own risk assessments, they will not generate the premiums they need to cover their losses,” he said.
Most corporate operators, said Coughlin, would prefer an “adequate premium” to huge swings either way. From the broker’s point of view, he said, “We would rather see incremental changes in premiums, because it’s a lot harder to explain radical changes. They just seem illogical to the customer.”
Making Yourself Attractive to Your Insurer
So what can the typical corporate operator do to get the best possible insurance premiums?
One way is to shop for insurance coverage, but not too often and with an awareness of how underwriters operate. There are an estimated 400 insurance brokers and agents who work as the middlemen between the customer and the insurance companies. You can choose any broker you want and you can switch brokers whenever you want. But there might be consequences if you change horses in the middle of the bidding process.
Insurance companies recognize only one broker on any given account–first come, first served. Therefore, the first broker who presents your account to an underwriter becomes the official broker of record for your account with that underwriter. If you want to change your broker with a particular underwriter, you must execute a “broker of record letter” with the brokers in question and the underwriter.
As you proceed with the bidding process, ask yourself, how does my operation look to an underwriter? Barfield said, “Underwriters love information so give complete information about your operation. What do you do? What’s your company’s and flight department’s history? Who are the pilots, and what are their ratings and flight experience? Show them your safety and security programs and your maintenance procedures. Send copies of training completion certificates. Show them that you’ve really given your submission serious thought and that you’re not just shopping for a quote.”
Barfield also suggested inviting your broker and underwriter to visit your facility to see firsthand how you operate. “This is positive for all concerned,” he said. The size of the account doesn’t matter. Underwriters might make visits to large flight departments a priority, but they are also interested in visiting their one-ship accounts, though it may take a bit longer to set up the visit.
Hangar Rash and Tort Reform
Two areas of concern to many brokers interviewed for this report are ground-operation accidents and product liability. Both affect FBOs and repair stations.
“There has been a great reduction in hangar rash,” said Behan, “but there’s room for more improvement and insurers still lose money on FBO insurance. Three years ago the largest insurers had a 300-percent loss ratio, meaning they paid out in claims three times what they received in premiums. Now that ratio is 150 percent. They can’t continue to do business on this basis.”
Behan said there are three ways to reduce ground accidents: safer operations, higher deductibles and higher premiums. FBOs are already paying higher premiums and accepting higher deductibles, on the order of 10-fold increases over the last few years. “Higher deductibles tend to increase the visibility of accidents to management,” said Behan. “When the deductible is only $5,000, it’s no big deal. But $100,000 or $250,000 deductibles get their attention. It’s then that management realizes the actions of the line department can affect the profitability of the company.”
But the biggest room for improvement is in safer operations, said Behan. “There’s an old insurance axiom, ‘Charging more money doesn’t make something a better risk.’ Increasing premiums is just a Band-Aid, not a solution. To reduce the risk, FBOs need to enhance training and invest in new equipment when necessary.”
NATA president Jim Coyne told AIN, “One of the things NATA has done is to try to reduce losses through Safety First [a professional line-service training program]. The companies involved can clearly show that the program has reduced their claims. The sad thing is that we haven’t seen the insurance industry lowering premiums.”
Said Air-Sur’s Coughlin, “The single greatest challenge, not just to the aviation industry but to the entire insurance industry, is tort reform. Liability claims are beginning to eat us alive.” No industry is immune to lawsuits in today’s litigious society, he said, but aviation “is more of a bull’s-eye for tort lawyers.”
The General Aviation Revitalization Act (GARA) of 1994 had the unintended, though not unexpected, consequence of shifting the focus of aviation litigation to repair stations and FBOs while it shielded the aircraft manufacturers. “When GARA passed,” said Coughlin, “plaintiff attorneys warned that the act would deflect lawsuits from the OEMs to the repair facilities. We’re beginning to pay some of the tab for that now. Insurers are paying out large amounts to settle lawsuits because they are scared to death to get in front of a jury and be forced to pay an even bigger award.”
Barfield of Hope Aviation said maintenance facilities have seen a huge increase in claims activity since GARA was enacted. “When there’s an accident,” he said, “the lawyers start asking, ‘Who did the last annual on the aircraft? Who did the last engine overhaul? Who replaced the last component?’ Essentially, ‘Who was the last person to touch the aircraft?’”
The result has been ever-increasing litigation costs. One major aviation insurance company calculated that its average cost for a passenger bodily injury in 1990 was $8,733 and the average cost for a liability claim was $61,900. By 1999, these costs had risen, respectively, to $41,850 and $244,000.
“Many of the claims are without merit, but it still costs the insurer about $100,000 just to investigate a claim,” Barfield said. “And this cost is going up as plaintiff attorneys are becoming more clever.”
Coughlin said the aviation industry itself cannot bring about tort reform, but should take part in a push by the broader society. Establishing reasonable limits on damages and changing the fee system to increase the risk for the plaintiff bringing the lawsuit are two reform possibilities. With contingent fees, plaintiffs don’t have to pay their lawyers if they lose. Forcing the losing side to pay the costs of the winning side is one way to force plaintiffs and lawyers to think twice about taking on dubious lawsuits.
Documentation is the answer. “Documentation and over-documentation,” advised AirSure’s Behan. “That’s the best defense. If the owner or operator wants to defer replacing a part until a later inspection, get it in writing. If the airplane crashes and the repair facility knew about a defective part and didn’t replace it, the tort lawyers will find a way to show how that part contributed to the accident, even if it had nothing to do with it.”
A consequence of this increased liability exposure has led many FBOs and repair stations to refuse to do pre-purchase inspections. Pointing out potential problems or discrepancies in an inspection and then not doing anything about them could leave the FBO open to litigation later.
The alternative, said Behan, is for the repair station to do a full annual inspection when asked to do a pre-purchase inspection. “With an annual, when you find something, you have to fix it or you can’t sign off the aircraft as airworthy. An annual gives the repair facility the authority to ground the aircraft. With a pre-purchase inspection, there’s no such authority, and the owner or prospective owner can decide to fix a problem later.”
Very Light Jets on the Radar
The first very light jets (VLJs) could be in customers’ hands by next year–and certainly by 2006–and the aviation insurance industry is already looking seriously at the risks. “The underwriters are in the education stage on the very light jets,” said Eric Barfield of Hope Aviation Insurance. In fact, the subject was on the agenda at meetings of both the Aviation Insurance Association and NATA last month.
The insurance industry believes that two pilots in the cockpit of a business jet or turboprop are simply better than one. Thus, some operators who have safely flown Citations and King Airs single pilot for years have seen clauses added to their renewed insurance policies that require a two-pilot crew at all times. Approval for unrestricted single-pilot operations requires meeting a stiff list of criteria and payment of an additional premium.
Within general aviation, corporate jets flown by a crew of two salaried pilots who receive simulator-based training at least once a year are the preferred customers of the aviation insurance companies. Finding ways to tailor owner-operators and air-limo pilots of the very light jets to this corporate jet model is the challenge.
Several insurance officials said the solution to the VLJ single-pilot conundrum could involve some sort of mentoring arrangement, in which new VLJ pilots will have to fly for a minimum number of hours with an experienced jet pilot or even an instructor pilot before being allowed to fly solo. One suggestion is to combine mentors with dispatchers and maintenance in VLJ “mini-management” companies. After they’ve acquired enough experience with a mentor pilot, new VLJ pilots would “graduate” to structured solo in which a professional dispatcher would provide flight planning and have the go/no-go approval authority for the flight. In some cases the dispatcher might determine that the weather, route, airport or other conditions are such that even an approved-for-solo VLJ pilot must fly with a mentor on a particular flight, or not go at all.
Simulator training could become mandatory for all VLJ pilots, at least from the standpoint of their insurability. VLJ simulators will likely come into service at the same time as the first airplanes come off the production line, if not before.
VLJ air-limo pilots who will be flying passengers for hire will no doubt need to meet even stiffer requirements than owner-operators. For obvious economic reasons, the air-limo companies and OEMs may want to see air-limo single-pilot operations, and they’ll press their case by pointing to the VLJs’ ease of operations and advanced avionics and other systems. But the FAA and insurance companies might not be inclined to bend on this point–at least not until each particular VLJ model and the air-limo operators prove themselves after many hours of safe two-pilot operations.