Insuring aircraft and aviation risks is similar to insuring an automobile, albeit on a larger scale
This September is the ninth anniversary of the tragic event that shook the world, and the economy, to its core. While 9/11 had far-reaching effects in many economic sectors, the aviation industry was one of the most deeply affected. Security measures at airports increased, and travellers were afraid to fly.
For insurers, the reduction in passengers resulted in many company closures. This decrease in capacity caused rates to soar, making it an extremely volatile time for companies that tried to stay afloat. Now, almost a decade later, the aviation insurance industry is safer than ever, according to Paul O’Ryan Sr., client manager for aviation and aerospace at Swiss Re.
“Rates have dropped to pre-9/11 levels with market capacity exceeding demand, sometimes by 180% and more,” he says.
The aviation industry continues to improve in step with the overall economy. The Boeing Company estimates airline traffic measured in Revenue Passenger Kilometres (RPK) will grow on average by a ratio of 1.6 to the worldwide GDP, meaning 1.6% traffic growth if GDP grows by 1.0%. And growth of traffic typically results in growth of aviation insurance premiums, according to O’Ryan.
In addition to economic indicators, David Blair, underwriting manager at AVRO Insurance Managers, states that growth of the aviation industry is also subject to population growth. Blair entered the aviation insurance industry in 1978, when the Canadian population was about 24 million and there were 21,000 Canadian registered aircraft. This is a ratio of 1 aircraft per 1,142 people.
Today’s population is about 34 million and there are 33,551 Canadian registered aircraft, or 1 aircraft per 1,013 people, says Blair. “The growth is there but it is very small.”
More insurers are setting up shop in Canada, and there are a number of reasons for this. Recent changes to federal legislation by OSFI (Part XIII of the Insurance Companies Act) require insurance companies doing business in Canada to meet a number of underwriting and administrative requirements by providing the insurance locally, otherwise excise tax may apply to the premiums.
“By having personnel in Canada we have an opportunity for improved results through better knowledge of the clients, and the ability to custom-tailor an insurance policy to fit the client’s needs,” says O’Ryan.
Driven by capacity, competition and market losses, rates also depend on macroeconomic factors, such as availability of capital and interest rates. Generally, as capacity and competition increase, rates decrease.
Blair adds that the pilot’s experience on the make and model of the aircraft, as well as what the aircraft is used for, can also be essential in determining rates. He uses three DeHavilland Beaver aircrafts, each worth $350,000, and flown by experienced pilots, as an example.
The red one is flown 50 hours per year privately for fishing trips in good weather, not too many takeoffs and landings, and relatively low liability exposure because the passengers are family and friends, he says. The white one flies 150 hours per year taking American tourists to and from fishing lodges in the summer and fall (there is great liability exposure for flying American tourists). The yellow one flies 300 hours per year taking crews in and out of logging camps year-round. It has lots of takeoffs and landings, which is where most accidents occur, but minimal liability exposure because workers’ compensation covers the passengers.
“The risk profile for each aircraft is very different and so are the premiums they will pay,” says Blair. “The premium on the red one will be around $10,000. The premium for the white one will be around $20,000 and the premium for the yellow one will be around $25,000.”
Risks and Policies
Risks in aviation include physical damage to the aircraft, liability for third party damage, passenger liability, and terrorism.
“The risks are not that dissimilar to other property and casualty risks,” says Nona McCreedy, CEO at Aurora Underwriting Services Inc.
“Poor maintenance and repair, inexperienced personnel, careless use and operation, and ignoring safety standards [are at the top].”
Additional risks come at the hands of the pilot, and are called “pilot error,” says AVRO’s Blair.
“Forgetting to put the wheels down, moving the fuel selector to the empty tank, misjudging airspeed and running out of runway, and the one that results in the worst claims is pushing the weather,” he says.
There are several common policies in place to protect against these risks. Hull insurance is coverage for physical damage to the aircraft, and is typically required by all finance companies. Third-party liability insurance and passenger liability insurance are required by Transport Canada and the Canadian Transportation Agency.
“In addition, depending on the risk, airline, commuter/regional airline, general aviation fixed wing, and helicopters, coverages can vary greatly,” says O’Ryan.
For a small private aircraft, the minimum limit of liability for it to be legal is about $100,000 and can exclude coverage for passengers, according to Blair. A small aircraft (under 7,500 lbs takeoff weight) operated commercially is required to carry at least $1,000,000, excluding passengers, plus $300,000 passenger bodily injury per passenger seat.
“In the present economy, many commercial operators are only purchasing the minimum limits,” he says. “The physical damage coverage is optional (unless there is bank involvement) and is normally written on an all-risk policy form. The common physical damage coverages are ‘ground risks only’ or ‘flight and ground.’ To put it in car insurance terms, think ‘comprehensive only’ or ‘full collision’ coverage.”
Ranging from minor damage (e.g. hangar rash where a wing-tip hits a wall in the hangar), to fender benders, to poor landings, to fatal accidents, claims are wide and vary.
‘Prop (propeller) strike’ claims are common and can be caused by aircraft dipping into a pothole or going off a runway. This claim usually requires a complete engine teardown and inspection.
“If the shock from the propeller striking something solid causes a crack in the crankshaft or connecting rod, we want to find it because it is a matter of time before the engine fails and we have a serious claim,” says Blair. “A typical prop strike costs about $30,000 just for the propeller and engine. Going off a runway usually results in some sheet metal damage and landing gear damage as well.”
He adds that claims for theft and vandalism are the most rare with airport security being as tight as it is.
Experts Speak Out
It’s not easy for the average regional broker to place an aviation account because many insurers only deal with larger firms. But for brokers in this niche market, here are some tips.
As policy wordings and coverages can differ greatly between companies, it’s important for brokers to align their clients’ needs with a market best suited for them over the long term. Brokers should be aware of what insurance companies are able to offer, including new products, multi-year policies, and their ability to offer various lines of insurance (e.g. property, D&O) in addition to aviation. Also, have an open dialogue with the client and create a strategy for their renewal.
— Paul O’Ryan Sr, Client Manager Aviation and Aerospace, Swiss Re
Probably the single most important thing for brokers to know when writing aviation is that “the devil is in the details.” For a risk to be considered, underwriters require detail on the aircraft, its usage, and on the pilot, as well as any other risk. The claims history is very important on both the aircraft and the pilot.
— Nona McCreedy, CEO at Aurora Underwriting Services Inc.
Have the client complete and sign an aircraft application and pilot report–the best way to avoid an E&O because you won’t forget to ask important questions. Also, beware the word “type.” Transport Canada defines “type” as aircraft in the same weight category, with the landing gear configuration and same number of engines. Most pilots know this definition. To Transport Canada, a Piper Cub is the same “type” as a Cessna 185 or a Beaver. To an underwriter, “type” means the specific make and model being insured. Since Transport Canada does not pay claims, we ignore their definition. If a client tells you he has 150 hours on “type” he might be thinking in terms of the Transport Canada definition. You relay to the underwriter that the client has 150 hours on type and the underwriter hears 150 hours on make and model. Potentially you have an E&O.
Lastly, the client needs to be aware of the exclusions. The two circumstances responsible for the majority of coverage denials are violations of the pilot clause and violations of the “approved uses” clause. The pilot clause stipulates who may fly the aircraft. It might name each pilot specifically or it might specify pilots who have a certain total number of hours and a certain number of hours on make and model. If the aircraft is operated by a pilot who does not meet the criteria in the pilot clause, there is no coverage. The “approved uses” clause specifies what the aircraft is used for.
— David Blair, underwriting manager at AVRO Insurance Managers
Case Study: The Magnes Group Inc.
Advice from an independent brokerage that specializes in selling aviation insurance
Knowledge of the aviation industry is what propelled the Magnes Group Inc. to succeed in the market. In fact, this specialty brokerage employs three executives who are licensed pilots.
“We’ve dealt in the aviation business prior to being involved in the insurance side of it,” says Paul Hamilton, executive vice president for aviation and partner at the Magnes Group Inc. “We are focused and specialized in this practice.”
Hamilton says understanding the exposures and risks of this product is difficult due to the catastrophic nature of it and the fact that it differs from aircraft to aircraft.
“Taking that knowledge and transferring it to understand the risk for the client, and then finding the proper product at a reasonable price is tricky.”
The trends with pricing and limits are driven by capacity. Today, high limits are easy to obtain and aren’t too expensive. “Insurers are still underwriting higher limits, and they are available and at a reasonable cost,” he says.
The company continues to deal with the challenges of placing this insurance after 9/11, particularly when clients fly in areas of high terrorist activity. For the first three years after the terror attacks, there was a reduction in capacity, with fewer companies selling the product. This led to rate increases from 10% up to 40%, says Hamilton.
However, over the last five years there has been a complete turnaround. “There is almost an over-capacity of new players with offices located in Canada, and rates are at the lowest point I’ve seen in my 20 years in the industry,” he adds.
At a global level, Canada is an anomaly, and this is because other countries have experienced stabilization in rates, according to Hamilton. The reason for this can’t be pinpointed because the market currently isn’t driven by the typical hard/soft cycles.
“We’re still seeing new players coming in, whereas in the rest of the world this isn’t happening. We’re not exactly sure what’s driving it. As a group we are forecasting that in the fourth quarter of 2010, Canada will see some firming up of rates, and the decreases will likely stop.”
Another change since 9/11 is the US Terrorism Risk Insurance Act (TRIA) of 2002. The US government requires all brokerages and insurers to offer TRIA coverage, which protects against acts of terrorism.
The coverage can double the current price of the policy. For example, if a client currently has a liability policy of $100,000 in premium, TRIA coverage might add another $100,000.
“We must offer the coverage but client’s aren’t required to buy it,” says Hamilton.
The Magnes Group Inc. recently joined Assurex Global, a worldwide network of independent brokers.
“It brings us into the worldwide marketplace, as opposed to just national,” says Hamilton. “This will make it more seamless for our clients to do business with us in other parts of the world.”
© Copyright 2010 Rogers Publishing Ltd. This article first appeared in the September 2010 edition of Canadian Insurance Top Broker magazine.