By Jim Gardner
Author’s note: While this article was originally written in 2011, it is still valid today. And, because we have returned to a “Hard Market”, it is more important than ever that you are able to find the best value in the market at renewal.
We are in the midst of a soft market that began in 2006. Since then, aviation insurance rates have declined to their lowest point in history. Beginning in the winter of 2010 many in the aviation insurance industry have been predicting a return to a hard market.
A “Hard Market” is generally characterized by fewer markets bidding on a particular risk resulting in fewer options, increased rates and premiums, decreased limits of liability and fewer ancillary coverages offered, and more stringent underwriting requirements on training with less flexibility for the operational managers.
To this point it has been wishful thinking.
There isn’t a single underwriter from any aviation insurance company who wouldn’t like to see premium rise. The consensus is that there are two major factors keeping premium rates down—the poor economy which has shrunk demand for insurance and too much capacity for the market conditions. Even with an economic recovery that many feel is already underway, the consensus is that the soft market will continue unless there is some unforeseen event or outside force which alters the landscape.
The “Big Bang” theory is that a catastrophic event with a huge potential liability settlement (and resulting need to post hundreds of millions or even billions of dollars in reserve) will shock the insurance companies into turning on a dime, drastically raising rates and severely tightening underwriting requirements.
Absent that, the likely scenario may be more pragmatic, characterized by an improving economy combined with a reduction in capacity through merging aviation underwriting companies or a further departure from some are all markets by the insurance companies. Rate increases and underwriting restrictions would be less severe, but more selective as to whom and what type risk each underwriter would be willing to rate.
Either way, every insurance buyer needs to think about the impact on their budget and what they can do to mitigate the increased costs.
Understanding how insurance quotes are generated can help in getting best results at renewal.
Unlike auto insurance and other forms of property and casualty insurance, aviation insurance has not been reduced to a commodity. Except for light pleasure and business aircraft, most aviation quotes are generated manually by an underwriter using a rate book base on a “best guess according to historical experience” of that insurance company. A scale of rates is created for each type of risk that the underwriters must follow with the goal of making an underwriting profit (premiums, minus claims and administrative costs). The big unknown is the dollar cost of claims which may not be known until years after the premium has been set and collected. What makes it more difficult is the different insurance companies do not share trends, claims or rate information with one another so it is harder to generate accurate rates consistent across all classes of risk. And each insurance company has a different appetite and therefore puts a different priority on each class of risk.
The underwriters manually apply these rates to generate the quote based on the information sent to them by the broker. One of the keys to getting the best quote is to help the underwriter get a better understanding of the risk they are rating and to find a comfort zone which will allow their pen to move down the scale of rates instead of up.
The quality of the submission by the broker is the only thing the underwriter has to determine the quality of the risk presented.
There are two parts that make up a quality submission—accurate/full description of the risk and the appearance and organization of the submission itself.
For the individual aircraft operator gathering the proper information need for a quote is a relatively simple process. Most good brokers have a detailed quote form they use to gather information from the insured which includes aircraft information, insured value, liability limits requested, basic pilot information, purpose of use, territory, home base and basic information about the aircraft owner and named insured. However, as the market hardens more underwriters may require addition information to determine the best risks who they are willing to offer higher limits as well as their best quote. This would include more information about the following:
Aircraft Owner and Operator: Who are the partners, shareholders, LLC members, etc? Who makes the go, no go decision? Is there an operations manual and is it endorse by the aircraft owner/management on board?
Aircraft: More detail about the total time on the engine(s), airframe, rotor blades/propellers, and other compliance components. More detail about the avionics and maintenance schedule.
Mission: more details about when and where the aircraft is flown and number of hours per year, especially if it involves international flight or flights into hazardous conditions or unprepared airfields.
Pilot Information: A good pilot history form provided by your broker and properly completed by the pilot should answer all the questions and underwriter should have. The information should include in addition to basic pilot information; Pilot and drivers license numbers, date of birth, date of last FAA medical, last flight review and type of equipment, Instrument proficiency check, recurrent and initial training in each make and model insured plus the training facility used. If not included in the broker’s pilot history form, a supplemental form from the insurance company may be required.
Many times an excellent submission can be completed on a one page form with a pilot history form for each pilot attached.
Pilot History Forms
A quick word about pilot history forms. Pilots hate forms, especially pilot history forms. The hardest job a broker has may be getting a properly completed, legible, and signed pilot history form from the insured. From a common sense point of view, if the insured is asking the underwriter to give them the best rate, and the only thing the underwriter has to go on is information presented on paper, doesn’t it make sense to put that information in the neatest, most organized way, especially if the pilot is short on some experience.
Commercial operator is much more complex.
This may seem like a small point but unless an underwriter can visit your facility or operation, they can rate on what they see. Your website can be an important front porch to display the quality of your company or operation. However the biggest asset you can have is a broker who properly represents your risk with a well polished, accurate, and professional submission.
Substance Matters Most.
To an underwriter, the quality of an operations can be defined by many different parameters.
More experience, better training and the employment of other risk reduction practices that addresses the inherent risks of an operation all play a major role judging the overall risk of an insured. What is so wonderful about aviation (and frustrating to the aviation insurance industry) is that every aviation operation is unique. While all like operations (FBO’s, charter operators, or part 91 operators, etc, share some common risks, each have unique characteristics requiring it to be rated individually.
Operational Improvements and Risk Management measures can turn an average risk into a good risk.
If your operations used older aircraft, make sure your maintenance program is excellent. And, make sure this is communicated to the underwriters.
If you have low time or experienced pilots, make sure the training program is gear to getting them the experience they need while addressing your operational needs.
An FBO which has a fully implemented and documented training program for their line techs, which includes
A picture is worth a thousand words. An invitation to the underwriter to visit the operations can erase many doubts.
The best operators with a clean claims history and a safe operation are going to continue to get the attention of the most underwriters. In the end, the number of underwriters who want your business will determine how much leverage there is when it comes time for policy renewal. If you want to get the best rates in your rate class, be the best risk.
About the author
Jim Gardner is a retired U. S. Air Force officer, a former commercial pilot, and President of The James A Gardner Company, Inc. an independent aviation insurance specialty broker based in Atlanta, GA.