The Future Of Insurance Rates: Good News or Bad News? How to make the most of what’s to come!
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Editors Note: From time-to-time, FBO Connection bloggers John Enticknap & Ron Jackson invite aviation industry professionals to write a guest blog. For this post we invited Jim Gardener, President of James A. Gardner Company, Inc. - an independent aviation insurance specialty broker based in Atlanta, GA.
By Jim Gardner
As the saying goes, there is good news and there is bad news. Which would you like to hear first?
First, let’s look at the good news for the FBO Operator. We are in the continued midst of a soft aviation insurance market that began in 2006. Since then, aviation insurance rates have declined to their lowest point in history.
Now, the potentially bad news, beginning in the winter of 2010, many in the aviation insurance industry are predicting a return to a Hard Market.
What is a Hard Market? It is generally characterized by fewer underwriters bidding on a particular risk - resulting in fewer options, increased rates and premiums, decreased limits of liability and less ancillary coverage offered. In addition, there are more stringent underwriting requirements on training with less flexibility for the operational managers.
To this point it has been wishful thinking (by the insurance companies) that we are returning to a Hard Market
Needless to say, there isn’t a single underwriter from any aviation insurance company who wouldn’t like to see premiums rise. The consensus is there are two major factors keeping premium rates down:
1. The poor economy, which has shrunk demand for insurance.
2. Too much capacity for the market conditions.
Even with the economic recovery that many feel is underway, there is agreement in the industry, unless there is an unforeseen event or outside force which alters the landscape, the soft market will continue.
Absent a catastrophic event, the likely scenario for increased rates may be more pragmatic. The change would be characterized by an improving economy combined with a reduction in capacity through merging aviation underwriting companies; or a further departure from some or all markets by some insurance companies. Rate increases and underwriting restrictions would be less severe, but more selective as to whom and what type of risk each underwriter would be willing to rate.
Either way, every insurance buyer needs to think about the impact on their budget and what can be done to mitigate the increase in cost.
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, including those for FBO operators, are generated manually by an underwriter using a rate book based on a “best guess according to historical experience” of that insurance company. The underwriters must follow a created scale of rates 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 clear 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’s 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.
At the NATA FBO Success Seminars, the facilitators talk about the “Insurance Story.” This is telling your broker all about your business including: training, internal and external operational audits, and risk mitigation. The key is making your broker part of the business process.
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:
1. Accurate/full description of the risk.
2. The appearance and organization of the submission itself.
For the individual aircraft operator, gathering the proper information needed 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 FBO information, insured value, liability limits requested, basic pilot information (for charter and rental), purpose of use, territory, home base and other basic information.
However, as the market hardens, more underwriters may require additional information to determine which risks they are willing to offer higher liability limits, as well as their best rates. This would include more information about the following:
FBO Owner and Operator: Who are the partners, shareholders, LLC members, etc? Who makes the business decisions? Is there an operations (SOP) manual and is it endorsed by management and the employees to include line service training, fire suppression systems, fuel farms, etc.?
Aircraft: More detail about the total time on the engine(s), airframe, rotor blades/propellers and other time compliance components. More detail about the avionics and maintenance schedule.
Mission: More detail 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 all employed pilots should answer all the questions an underwriter should have.
Commercial operator is much more complex
Appearance Matters
This may seem like a small point, but unless an underwriter can visit your facility or operation, they can only rate based on what they read. Therefore, 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 operation 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 in judging the overall risk of an insured. What is so wonderful about aviation, and frustrating to the aviation insurance industry, is every aviation operation is unique. While all like operations (FBOs, 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
For instance, if your operations use older aircraft, make sure your maintenance program is excellent. And, make sure this is communicated to the underwriters.
If you have low-time or inexperienced pilots, make sure the training program is geared 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 will always be looked at favorably and it will show in their year-over-year loss ratio. Criteria will include initial and periodic training, plus a safety awareness program designed to create a culture of operational excellence.
A picture is worth a thousand words: An invitation to the underwriter to visit the operations can erase many doubts
Safety Saves
It’s no secret, the best operators with a clean claims history and a safe operation are going to continue to get the attention of most underwriters. In the end, the number of underwriters who want your business will determine how much negotiating leverage there is when it comes time for policy renewal. If you want to get the best premiums 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. jim.gardner@jagardner.com