Safety programs essential to keep insurance costs down
“You can bet the insurance market is going to change. All the ingredients are in place and it’s only a matter of time,” Jim Gardner, v-p of Insuramerica Aviation, an affiliate of J. Smith Lanier, told AIN.
“It has been a buyer’s market in which corporate jet operators have enjoyed several years of record low rates and competition. It was partially because of the entry of a few new competitors but also because the financial environment allowed it. Underwriters sold product for less than it cost them to produce it,” he added.
According to Gardner, insurer profit equals policy premium plus investment income less administrative and sales costs and claims. Until recently investment income more than compensated for low premiums, making it possible for insurers to offer policies for less than their actual cost.
“Those days are over. The market has plunged 37 percent in the past year, so the pressure is on to reverse the premium trend,” he said. “The first change you’re going to see is the evaluation standards that underwriters use to rate clients. I think they’re going to take a much stronger look at operational excellence and operational issues.”
While past loss history will always be a significant factor in determining a premium, Gardner believes flight departments can expect a lot more scrutiny regarding the type of operation–air ambulance, Part 91, Part 135, frequent short trips, international travel–and the volatility of typical destinations, to name a few.
“The competitive juices will still flow for those flight departments out there that display the qualities and risk management practices that underwriters prefer,” Gardner said. “Preferred customers will continue to have many bidders and the more insurers interested in the flight department, the lower the rate.”
Gardner said preferred customers will have a low claim or accident potential. “Following internationally established best operational practices is a key factor, as is the quality of training; the better the program, the better the risk,” he said.
“While implementing these programs may not totally pay for them in premium reduction, it will pay off in the long haul with a safer operation. Operators must look at insurance as more than just premiums; it’s an aviation risk-management issue.”
While insurers have successfully steered most operators toward sending their
pilots to formal recurrent training programs such as those offered by FlightSafety International, SimuFlite, SimCom and others, implementing industry standard best practices is still catching on.
Ray Rohr, director of regulatory affairs for the International Business Aviation Council (IBAC), was the organization’s past standards manager overseeing the International Standard for Business Aircraft Operations (IS-BAO).
“A key factor in convincing an insurer to offer you the best possible premium is an established safety management system [SMS],” Rohr said.
“You can have all the policies, procedures and training you want, but the flight department must have a culture of safety for it to work. People must feel free to bring up problems and not fear losing their jobs.”
The purpose of an SMS is to identify hazards and associated risks in a specific flight department based upon the way it operates. Once a risk is identified it is possible to mitigate it to the lowest reasonably practical level, if not eliminate it entirely.
The only 100-percent safe operation is one that doesn’t fly, so practical policies and procedures are important and the ability to develop them is what makes IS-BAO so valuable. Once these policies are implemented, everyone in the flight department monitors the situation and policies and procedures are modified as required.
“It is that dynamic that insurers want to see,” Rohr said. “Having policies and procedures in place is essential, but it is also essential to evaluate how well they work and to modify them accordingly.”
IS-BAO was developed by industry, for industry and is a code of best practices to help flight departments operate safely, efficiently and effectively. One of the most compelling reasons for implementing the system is that it is scalable; it can be implemented by single-aircraft flight departments or larger, multi-aircraft operations with processes matching the size of the operation.
A recent Marsh Aviation study of 297 business aircraft accidents that occurred between 1998 and 2003 determined that IS-BAO implementation likely could have prevented between 35 and 55 percent of those mishaps. The study also found that addressing certain human factors and management issues that IS-BAO standards could have identified “might well have prevented a high percentage of the accidents.”
According to Rohr, a number of operators who have implemented the IS-BAO, which includes a requirement for the operator to have an SMS, report that they have had significant reductions in their insurance premiums because they were able to “demonstrate effective hazard identification and risk management to the insurer.”
IS-BAO standards give the flight department a set of guidelines that they can build upon to reflect the reality of their own operation. The standards cover such areas as organization, management, flight operations policies and procedures, maintenance policies and procedures, operational control, transportation of dangerous goods and hazmat security.
Shopping for Insurance
Once a flight department has developed a safety culture that includes industry best-standards policies and procedures, there is one more factor in determining premium: being a savvy insurance buyer.
Victoria Diaz, risk manager for Jet Fleet International, which offers a service to help smaller operators get the best premiums, said the average corporate flight department manager has little or no insurance industry experience and therefore pays a higher premium than necessary.
“We prequalify, pre-underwrite and prepare paperwork to present our customers to Wells Fargo, our insurance broker,” she said. “Wells Fargo then takes the information we provide about the client, goes out to the market and buys the appropriate coverage.”
Diaz said that saves the client money. “Not everyone knows about profit commission, for instance. If you meet the insurer’s qualifications as a good risk you might qualify for a profit commission that allows you to regain some of your premium back at the end of the policy term. Very few people have ever heard of it, but it can save you significant money.” Diaz also explained another little known insurance option–lay-up credit.
“You can have a provision written into your policy that will give you a ground rate if the aircraft doesn’t fly for a specified minimum period of time,” she said. “The minimum time varies among insurers but is generally between 30 and 45 days. If the aircraft doesn’t fly for that period of time the underwriter reduces the premium for that period because you’re not at risk.
“You have to know these options exist as most insurers aren’t going to offer them to you.” Jet Fleet International doesn’t charge for the service; it is available to any flight department.