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Aviation Insurance And How Costs Are Determined

When I started my own aviation insurance agency back in 1974 the cost of aviation insurance was determined to a large extent by Lloyd’s of London. In the 17th century London, England was an important center of world trade, and the Lloyd’s coffee house in London became the place to go to purchase insurance on ships and ship’s cargo. Since its beginnings in 1688 Lloyd’s has been a pioneer in insurance. So naturally when airplanes came into existence with the first manned flight of a powered aircraft in 1903 by the Wright Brothers, Lloyd’s has been right there providing insurance coverage for entrepreneurs in all areas of aviation. Groups of wealthy men would sit in booths around the coffee house, and ship owners would go from booth to booth securing coverage for their ships and cargo. The owner would take a slip of paper with him, explain where the ship was going, who the sailing master was and what the cargo was. At each stop the group would decide what percentage of the risk they were willing to insure against loss, and the owner would continue his walk around the room until his slip (his insurance policy) was fully subscribed to. This same process continues to this day as you can see in this video: I have been to Lloyd’s on several occasions, and it is quite an experience. The round structure you see in the middle of the room has a bell which is rung every time a ship sinks somewhere in the world. It is a fascinating place. The Reinsurance Market Place For a long time insurance companies would reinsure their risks at Lloyd’s of London because it was the only place to do so; however, in recent years as the world economy has grown more and more reinsurance markets have arisen to compete with Lloyd’s. Reinsurance is where an insurance company in the United States underwrites, services and adjusts aviation insurance coverage and then passes a large portion of the risk to reinsurers like Lloyd’s of London. In some cases the entire risk will be underwritten by Lloyd’s itself which issues an insurance policy to the policyholder. This spreading of risk to reinsurers allows insurance companies to insure more policyholders and has helped foster competition in the aviation insurance marketplace. Over the years insurance rates have fluctuated based upon the overall financial performance of the aviation marketplace as a whole. The Aviation Insurance Marketplace Today Lloyd’s remains a major player in the marketplace; however, in recent years the number of insurance companies providing aviation insurance coverage and reinsurance coverage has increased creating even more competition in the aviation insurance business. Given the state of the world economy, the declining number of general aviation risks and the increase in airline risks around the world, the aviation insurance market has remained rather stagnant with lower rates for almost all policyholders. However, some risks – like medevac helicopters and Alaskan operators – remain expensive to insure due to continuing losses. Commercial risks like fixed base operators, aircraft charter operations and maintenance facilities still find their premiums a significant factor in their costs of doing business. How Can A Policyholder Control His Insurance Costs? For small general aviation aircraft owners and operators there are a fairly large number of insurance companies competing for their business, so rates have remained relatively flat in recent times. However, for larger risks like charter operators, helicopter operations and commercial risks there is less competition and the underwriting more stringent. Many policyholders develop a relationship with an insurance agent over time, and loyalty is an important factor in renewing their insurance coverage year to year. Most insurance agencies try to maintain a license and relationship with all of the insurance companies in the aviation insurance marketplace, and “shop” their customer’s policies with all of the companies for the policyholder. This, in turn, leads to an assumption by the policyholder that his policy has been presented to all of the insurance companies and his agent has secured the best possible terms for the renewal of his insurance policy. This may, in fact, not be the case. The Underwriting Renewal Game The process of evaluating an insurance policyholder’s risk is called underwriting, and usually consists of gathering information about the aircraft, the pilots who will fly the aircraft and how the aircraft will be used. Each year the policyholder is asked to update this information for the insurance agent to present to the various insurance companies. What typically happens, however, is that the agent will market the risk as early as possible with as many insurance companies as possible in order to “block” the market. In other words, by submitting the policyholder’s information first to every insurance company the agent will receive the renewal terms while any other agent who approaches one of these companies will be told that the insurance company is already committed to the first agent. This is why the policyholder will sometimes be asked to sign an “Agent of Record” letter to assign a different agent to an insurance company. The problem here, however, is that if the insurance company has already provided terms to the first insurance agent those same terms will simply be given to the second agent who secured the “Agent of Record” letter. How To Effectively Market Your Risk So, does this mean you are held captive by your current insurance agent? Unless you change the way you present your risk to the marketplace you will be. You see, underwriters are human beings just like you and I, and when an underwriter sees a risk year after year but doesn’t get the order, they naturally have little interest in putting much effort into providing the best terms. In those cases where the policy is moved from company to company from year to year the underwriter may simply figure he will wait until it is his turn to insure the risk. So, what should you do? The first thing is to understand that competition for your policy exists at three levels: the insurance agent, the insurance company and the reinsurance company. But you as the policyholder are in control. The best solution is to meet personally (if possible) with several insurance agents and explore the depth of their knowledge not only just about your risk, but their knowledge about the kind of flying you do, their involvement with aviation outside of insurance and the depth of their knowledge about the insurance marketplace itself. Then select 2 or 3 agents to work with, and divide the various insurance companies up between the agents fostering competition at that level. But you need to be honest with these agents and not play favorites by simply securing terms from all 3 and then feeding them to your preferred agent. The competition needs to be real in order to be effective. To Be Continued…. Until next time keep your wings straight and level Hersch! JetAviator7 ps: Don't forget to sign up for our newsletter "All Things Aviation" here!

by John M. White •