The problem with insurance

The problem with insurance

By John Boyce, Contributing Editor

September 2002

Larry Mattiello, president of Aero Insurance, says the only way the insurance markets are making it is by a "very dramatic increase in premium unlike anything seen in the history of aviation," but he says that there is hope that things will stabilize.

Bill Behan, president of Air-Sure Limited, in Golden, CO, and Tom Coughlin, president and CEO of Air-Sur, Inc., agree that this "hard" market should be softening in the next year or two. Ed Underwood, president of Avsurance, isn’t so sanguine, but is hopeful.
"I have some large and small insurers out there that have differing opinions," Behan says of the length of the current situation, "and re-insurers have a different opinion. I personally think that we have the remainder of this year and probably next year where the market is hard. Beyond that I can’t see it staying hard."
Coughlin, a 25-year insurance veteran, says, "I’ve not seen a prolonged hard market for more than two or three years. And it’s hard to gauge how far we’re into it right now, but a lot of our operators are getting their second round of increases. I honestly think that it’s going to stabilize in 2003.
"The only caveat I would add there is, barring another calamity occurring. If another one happens we could find that we’ve got very few underwriters even willing to come to the table to accept the risk." Coughlin adds that the insurance industry is expecting some $50 billion in claims — $5 or $6 billion in aviation — from the 9/11 attack.
Underwood fears that underwriters not even coming to the table will be a reality even if there isn’t some calamity in the meantime. "I don’t see a softening," he says, "because I see less and less underwriters actively pursuing writing FBOs. Hopefully, the market won’t be up as much next year. But I don’t see anybody new getting into that market. I’ve heard from a lot of underwriters that they don’t want as much commercial business next year. That would include FBOs."
Insurance is a global industry and the underwriters which aviation entities deal with here in the U.S. cushion themselves against loss by buying re-insurance from companies in Europe and elsewhere. This means insurance premiums are not, strictly speaking, governed by the losses in a particular business, a particular industry, or even in a particular country. They are governed to a large extent by global conditions and losses.

Premiums escalate to ’scary’ levels while mitigating risk is difficult

It comes as no surprise to anybody in the aviation business — from the smallest line service operation to the largest airline — that insurance costs are escalating to, as one industry insider puts it, scary levels. It also comes as no surprise that the trend will continue as the insurance industry tries to correct a decade-long series of heavy losses, underpricing, and more recently a diminution of revenues from investments.

Many fixed base operations have, of necessity, taken higher deductibles and less limits of liability just to bring the premium down. While these are two obvious ways to gain the insurance an FBO needs at an affordable price, there are other ways to manage risk and reduce exposure in all phases of the FBO business from line service to charter and rental. "It’s how you manage risk," says Larry Mattiello, president of Aero Insurance in Addison, TX. "Increased exposure is not necessarily worse or bad, but how you manage it."
Mattiello and other insurance executives suggest a retraction closer to a core business as a means of reducing exposure. For instance, Eric Barnum, president and owner of Crow Executive Air at Toledo (OH) Metcalf Airport, is getting out of the flight school and rental business, partly because of the insurance concerns.
"I think the return on investment isn’t there anymore," Barnum says. "I don’t specialize in it, I specialize in aircraft maintenance ... The insurance problem is the straw that made me decide that I don’t need to be in the instruction business anymore."
Marty Fitzpatrick, general manager at Glendale Aviation in Glendale, AZ, has yet to get his renewal this year after some increase last year. But he has taken steps to mitigate what he expects to be a sizable increase by slowly divesting himself of aircraft in his instruction and rental fleet which he terms exotics — aircraft, he says, that the insurance industry seems less friendly toward.
"We’ve found that by going to what we call a generic fleet," Fitzpatrick says, "we have mitigated dramatic increases. We have 152s, 172s, and one as a complex trainer ... Part of our model is to stay away from the non-common equipment. Over time we have eliminated the Bonanza, the Mooney."
For Edwin Zwirin, vice president at Ft. Lauderdale (FL) Jet Center, hit last November with a 70 percent increase in hangarkeepers insurance and 115 percent in property liability insurance, it’s been a matter of divestiture of segments of the business that was seen as a risk factor.
Although the Jet Center is a stand-alone operation, it has a sister operation in Daytona under the same general liability insurance policy. That facility had a heavy duty truck repair facility that had to be dissolved due to the underwriter not liking that it wasn’t aviation-related. Addition-ally, Zwirin says, his company got out of the passenger check-in and baggage handling segment to reduce exposure.
"We’re basically getting back to our core business which is fuel," Zwirin says. In that regard, Zwirin says he hired a full-time safety consultant to oversee and develop rigid safety procedures for ground handling to avoid aviation claims and worker’s compensation injuries. "He’s paid for his salary three times over by reducing claims," Zwirin says.
Additionally, the Jet Center invested in a whole new fleet of ground handling and fueling equipment. "We had to spend some dollars," Zwirin says. "It was twofold (in purpose), for marketing plus it reduced our risk by having a modern fleet."
For many, it’s difficult to look on the bright side when insurance costs have risen anywhere from 20 percent to an eye-popping 310 percent in some segments over the past two years or less. As vice president and co-owner of Executive Air Avitat in Charleston, WV, Earl Whyde, says, "Between the insurance premium and the new security regulations, which we still don’t know yet, it’s not the easiest business to be in right now."
Whyde’s liability insurance on his charter operation went from $18,000 to $57,000 a year in August, 2001 and that’s with lower limits of liability. Whyde says he has had no claims but still, "this year we’re waiting for the hammer to drop."

TRAINING, LOSS CONTROL
Training and loss control are two concepts that have gained currency of late, particularly as they pertain to line service. Insurance underwriters become more comfortable at the mention of training.
As Jim Thomas, general manager at Edwards Jet Center in Kalispell, MT, says, "We have ongoing training programs. We use the Tiger Spirit Premier training program; we use the API training program and the insurance companies definitely look at that."
Ed Underwood at Avsurance in Ann Arbor, MI, gets more specific when it comes to line service safety and procedures. "We call it loss control," he says.
Having two people wing walk every airplane as it is put away is the number one preventer of hangarkeepers’ losses, he says. It prevents a common type of loss where an individual operating the tug misjudges the edge of the hangar door. "It’s not negligence, it’s really an accident. They find that if there are two line people working at the same time it usually prevents that type of thing."
Underwood goes on to give other suggestions for mitigating loss and increased premiums. "Make certain," he says, "that everybody is well trained and everybody signs the fuel ticket whether they [the customer] want jet or avgas. That way there is no confusion. Of course, the pilot should stay there while you’re fueling it, but that’s not realistic. That’s a loss control device."
While he recognizes that cost is always of concern to FBOs, Under-wood suggests that line people get better compensation to increase the likelihood of getting better people. He cites examples where a bonus program for line people has been successful in preventing losses. "Many of our FBOs who have been successful in preventing losses have had incentive programs where the line people get a bonus every quarter for having an accident-free quarter. That works well," he says.
Training is particularly important nowadays with the advent of fractional ownership and the concomitant introduction of larger, new business jets into facilities that perhaps didn’t have the experience with that class of aircraft.
Says Tom Coughlin, president-CEO of Air-Sur in Ormond Beach, FL, "...Many operators, frankly, didn’t have a) the experience in handling and managing that kind of equipment and b) the proper equipment or training in dealing with that kind (of aircraft), and I think it caught a lot of operators a little unprepared. As a result, the industry is seeing a lot of ground-related claims related to damaged airplanes. I think the industry has been trying to catch up, and I think they’re beginning to get their arms around it a bit.
"That’s not helped the situation (rising premiums) by having claims happening that could perhaps have been prevented or mitigated through better and more adequate training."