The problem with insurance
By John Boyce, Contributing Editor
September 2002
Insurance Providers See a Hard Market, but One that’s StabilizingLarry 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."