RISKY BUSINESS
Insurance premiums are rising across the board while liability limits are falling, particularly for the small operator.
By John Boyce, Contributing Editor
October 2000
The availability of insurance is tightening and everybody is paying more for their coverage — if they can get it at all. For the foreseeable future, that trend will continue. And the reasons for the upward trend are many and varied.
They include consolidation of insurance
companies and the withdrawal of some from certain lines of insurance;
increasing costs of settling claims on bigger, more expensive aircraft;
increased costs of litigation; and tightening of re-insurance around the
world; and at the FBO and maintenance facility level, the Statute of Repose.
The Statute of Repose, in which aircraft
manufacturers are absolved of liability for their product after a certain
number of years, has shifted the burden of claims on those aircraft to
the maintenance facility.
Looking at the details of insurance, particularly
aviation insurance, one can be overwhelmed by its complexity. The forces
that shape the premiums one pays to keep a businesses safe from ruin are
national and global in nature. And that’s not because of the "new
global economy" that we’re so fond of talking about. It has
always been that way; it’s just that those forces are coming to bear
faster now.
Insurance people, in trying to get a handle
on what was happening in their industry, used to talk of seven-year market
cycles but because of the ease and speed of communication and information
gathering, the market (or the people in the market) reacts much more quickly
to changing events and cycle lengths are harder to identify.
But for all its complexity and seeming intangibility,
one thing is rock hard and clear about aviation insurance: When the supply
(capacity) of insurance shrinks, the demand increases and the price of
the product goes up, and vice versa.
For some observers, aviation insurance represents
the closest thing to the pure core of capitalism; that is, supply and
demand dictates price. And those observers might have added, the little
guy gets hammered.
"Clearly," says Doug Johnson,
president of Southernair in Atlanta, GA, "the trend is up for rates
and down for limits (of liability). The insurance companies are making
an effort to control the hemorrhage of red ink that they’ve seen
for the last two or three years by limiting their exposure and increasing
their income with higher rates. Unfortunately, in some instances, that’s
going to have the effect of putting some people out of business, just
plain and simple.
"As with everything else, the effect
is far more pronounced on the lower end of the scale; the smaller the
operator, the bigger their problem and probably the larger the percentage
increase they’re going to see."
Large airports and corporate operators will
likely see increases but they are among the most attractive risks for
insurance companies because of their good loss histories, according to
some analysts.
Of the airports, Ed Underwood, president
of Avsurance Corp. of Ann Arbor, MI, says, "Underwriters are not
seeing many losses in airport liability from the perspective of the airport
operators or owner, municipal or individuals. You don’t see as much
litigation with that as you do with hangarkeepers claims. That’s
been true over the past few years. There are some very high limits available
for airports which could indicate that the claim experience has been favorable."
VARYING ESTIMATES
Estimates of the average premium increases
that are taking place and will take place across the board in aviation
vary from 15 to 40 percent, depending on who’s estimating. Of course,
that’s an average so some are seeing much more and some are seeing
less.
The major trend affecting all of aviation
is the increase in premiums, says Kyle Sparks, vice president for AIG
Aviation in Atlanta. "There has been a tremendous amount of capacity
over the past few years that has allowed rates to drop below a profitable
base; a lot of capital willing to invest in insurance and aviation…
They’re (rates) slowly climbing in all product lines."
Many of the companies experiencing the most
insurance trouble are those hangarkeepers, maintenance organizations,
and rental and flight instruction businesses that were insured by a group
of companies that have withdrawn from that class of coverage. That means
they are scrambling to find coverage with the limited number of providers
remaining.
Bill Behan, president of AirSure Ltd. of
Golden, CO, says, "There has always been a group of smallest operators
that have insured with two or three companies that just aren’t doing
it anymore, some are out of business and some have ceased writing commercial
— flight instruction, rental, FBO services — for smaller operators.
Where there were five or six providers, today there are three. You can
imagine the results.
"What is just amazing is the number
of those smaller operators who are looking for new homes (i.e., insurance)
are finding that the difference between what they paid in the past and
today’s numbers are 50 to 200 percent increases. This is a small
number, maybe 10 to 15 percent of the operators out there. The people
that have been with the surviving (insurance) companies are seeing 10
to 15 percent increases … So, the people who are being hurt by this
are pretty much the smaller operators that were insuring with the companies
that are no longer in that business. It’s a little wake up call for
them. I don’t want to see anybody go out of business but it’s
a natural process that many industries go through."
However, the increased cost has forced some
FBOs — and not just smaller ones — to reorganize their companies.
Johnson at Southernair reports that one FBO he knows of spun off its flight
school into a separate corporation to avoid either not being able to get
insurance or having to pay a phenomenal amount for it on his entire operation.
In doing that, Johnson says, the FBO is "paying through the nose,"
for the flight school insurance but is "able to save a fair amount
of money on the rest of the operation."
A CHALLENGE FOR SOME
While all segments of the aviation industry
— from airports to the small FBO — will see increases in premiums,
some will experience problems in getting the liability limits they want,
and some will have to live with higher deductibles, say sources. However,
operators in the rental and instruction segment, maintenance organizations,
and those in the hangarkeeping business are likely to experience difficulty
on all fronts.
"Your instruction and rental class
of business," says Mary Bade, manager of the aviation division of
Lockton Companies in Denver, CO, "is in a very critical situation
based on diminishment of (insurance) providers. That situation has made
this class of business, in some cases, uninsurable. And in cases where
the other companies are willing to pick up the business their prices have,
in some cases, doubled and even tripled. I’ve written several in
the past six months where the best quote we could get for them was double-plus
what they have been paying.’’
Tom Coughlin, president of Air-Sur in Ormond
Beach, FL, agrees and says, "Deductibles have been going up on the
hangarkeepers’ side and, frankly, on some of the fleets for the better
part of the past 18 months.... (And) the operators with at least eight
to 12 airplanes the (liability) limits are still available to them but
they’re the ones that are better managed, have good loss records,
and they’re tied into some type of tighter training arrangement.
For the well managed, the limits are still available; it’s more pricey
but still appears to be pretty affordable. Those (companies) not as well
managed with no strong track record, no strong business success plan’’
are going to have difficulty getting the limits they need.
"The (insurance) industry has seen
between 200 and 300 percent loss ratio the past two or three years,"
Behan says. "Instruction and rental has been very problematic. Where
we could get $5, $10, and $20 million limits for that (flight schools
and rental facilities) five and 10 years ago, it’s very difficult
to get more and $2 or $3 million today.... So unless you’re paying
some six digit number (in premium) you really don’t have a full array
of liability limits for a lot of these operators.
"That applies to maintenance also.
The smaller maintenance companies are being hit very hard. Where those
people were paying $5,000, $6,000, and $8,000 now can’t get it for
less than $30,000. They really need to wake up to the fact that this is
the world they have to be able to compete in, and if it just doesn’t
work for them then there’s some distasteful options they have to
consider."
Coughlin is concerned that newer, bigger
business jets will just exacerbate the insurance problem for FBOs. "The
FBOs have not been all that (well) equipped to make the transition to
managing that kind of equipment. In other words, having the appropriate
size tugs, better training, better tow bars, and really doing an employee
orientation," he says.
INSURANCE PROVIDERS
AVSURANCE CORPORATION
Ed Underwood
800-472-7090; www.avfuel.com
Agent for the leading airport liability
and property underwriters.
AERO INSURANCE, INC.
Ed Seib
972-416-7883
Aero Insurance, Inc. offers customized
protection for every type of flight operation and associated ground
support structures.
AIG AVIATION, INC.
Dave Baker
404-249-1800; [email protected]
Coverage for airports and all related
aircraft and aviation exposures.
AIR-SUR, INC.
Thomas K. Coughlin
800-342-3896; www.air-sur.com
Air-Sur offers risk management programs,
and services primarily to aviation and aerospace clients.
AIRSURE LTD.
John Lord
303-526-5300; [email protected]
Coverage for airports, commercial
aircraft operators, FBOs, helicopters, corporate and private aircraft
owners.
ALL-WEATHER INSURANCE AGENCY
Claudia Esposito
800-686-3226
Protects airports from the unexpected
increase in budget expenses due to the above average snowfall.
AON AVIATION
Phil Dressen
316-943-9331; [email protected]
Coverage for FBOs, charter companies,
corporate aircraft, airports, and manufacturers.
AVEMCO INSURANCE COMPANY
Steve Kroh
800-325-8079; www.avemco.com
Avemco has been providing insurance
coverage to FBOs for almost 40 years.
CUSTOMIZED WORLDWIDE WEATHER INSURANCE
Rich Kushner
800-500-5801; www.weatherins.com
Weather insurance, snow removal, and
business interruption coverage for all aspects of aviation.
GOOD WEATHER INSURANCE AGENCY INC.
Lauralee Tillman
800-324-7759; www.goodweather.net
Snow removal and temperature cost
containment weather insurance.
GREAT AMERICAN INSURANCE COMPANY
Nick Walton
214-775-9400; www.gaicaviation.com
Insurance for public and private airports,
FBOs, ground support operations, flight schools, charter operators,
air shows, and personal, corporate and municipal/government aircraft.
HUNT INSURANCE GROUP, INC.
A Hilb, Rogal and Hamilton Company
Bruce Allaire
800-763-4868; [email protected]
Coverage for commercial and general
aviation airports, helicopters, including airborne law enforcement
aircraft.
JOHNSON INSURANCE SERVICES, INC.
Earl Hill or Mike Hill
414-271-2375 or 800-477-4379
Coverage for individual aircraft,
FBOs, charter, cargo/freight, and airport premises and operations.
NATION AIR INSURANCE AGENCIES
Hal Williams
800-456-0248; www.nationair.com
Independent brokers with nine regional
offices specializing in aviation insurance.
Liability and the Statute of Repose
A major portion of the difficulty for maintenance facilities is
the Statute of Repose, which Congress enacted in 1994. While the
statute was designed to release manufacturers from extended liability
for their aircraft and presumably encourage them to begin making
piston aircraft again, it has had the effect of burdening the people
working on those aircraft with the liability for problems with the
aircraft; a burden that was previously shouldered by the manufacturers.
Doug Johnson at Southernair explains:
"The problem is, that the plaintiff attorneys now, instead
of shooting at one big pocket (manufacturers), are going after a
whole bunch of little pockets (maintenance shops). It has thrown
the burden back on the retail suppliers, and where a retail supplier
used to be able to buy their way out of a lawsuit for $5,000, their
insurance companies are having to pay $250,000, $500,000, $1 million.’’