As Florida grapples with the devastation of Hurricane Ian, its impact on the insurance industry is already making the headlines. Estimates of “insurable losses” are between $25-$40 billion. While this is a big range, even the lowest of estimates is a meaningful, industry changing number. You will hear of possible litigation between the insurance companies and the policy holders to determine the cause of the occurrence. Was the damage caused by wind or flood? The results will determine which insurance carriers can afford to stay solvent, and those that will pull out of the Florida market altogether. This is not a new issue for the state. The Florida Insurance Guaranty Association (FIGA) was created in 1970 to help protect consumers. FIGA is funded through taxes on insurance policies, which now include aircraft policies. If an insurance carrier becomes insolvent and a court orders them to be liquidated, their outstanding claims are processed through the FIGA.
The taxes from FIGA are pooled together to provide some relief to those suffering a financial loss that may not be remedied otherwise. The aviation insurance industry is attempting to self-adapt so they don’t end up in dire straits and at the mercy of state sponsored facilities like FIGA. You can learn more about FIGA at www.figafacts.com.
Insurance companies are, like most companies, in the business to make money. If they aren’t making money in a particular industry segment, they leave it. For example, about 15 years ago you may remember the insurance carrier Travelers. It came to the aircraft insurance market and took on risk for a fraction of the price of its competitors. Unsurprisingly, they were taking on significant risk for inadequate premium, and pulled out of the aviation segment after about 18 months. The roller coaster of rates is not conducive to an owner trying to manage annual operating budgets.
Most of the day-to-day claims in the aviation market segment are measured in the thousands to tens-of-thousands of dollars. However, a “bell ringer” of a loss that ends up in the tens or hundreds of millions of dollars could cause a carrier to leave the aviation sector entirely. Many of the ultra-high-end net worth business jet owners and Fortune 500 companies have at least $500,000,000 of coverage. A major accident that results in loss of life and an additional $70,000,000 business jet, definitely classifies as a “bell ringer.” As the aviation insurance carriers take a step back and evaluate their portfolios, they are becoming more strategic in managing the risk they assume. This strategy isn’t necessarily new; the airlines have structured their coverage this way for years. It is commonly referred to as a “quota-share” placement. This means multiple carriers participate on one policy with a defined percentage of the risk. With large jury awards becoming more common and increasing costs of aircraft hulls, we are seeing more aircraft insurance companies evolving and making quota-share placements in the general aviation sector more commonplace.
In a perfect scenario, 10 carriers would each assume 10% of the global aircraft market. This would mean each carrier would only be liable for 10% of any given loss, thus protecting them from the potential “bell ringer” claims. In the King Air market there are many liability limit variations between each carrier, but a good rule of thumb for a single pilot operation seems to be $10,000,000. This means if you have a $5,000,000 King Air and the $10,000,000 in liability coverage, the total carrier capital exposure is $15,000,000. This is a great opportunity to do a quota-share placement and avoid a plethora of declinations to quote from underwriters because the risk is seen as too large.
Quota-share placing brings more stability to the consumer, as well as the marketplace. For example, if Travelers had come to market and subscribed to just a 25% share of a $40,000 policy premium, their piece would have been $10,000. If, at renewal, they felt they needed more money, they could have increased their pricing by, perhaps, 15% or $1,500. If other carriers left their pricing the same, this equates to a 3.75% increase to the King Air owner. Much more palatable than a 15% increase. On the flip side, if Travelers kept their 25% stake, but reduced their premium at renewal to $8,000, the total premium reduction would be just over 5%. Both scenarios offer more stability for annual budgeting of aircraft costs versus the unsustainable price decreases we saw 15 years ago, followed by the shocking increases that came to fruition a few years ago as the market attempted to correct.
An insurance carrier’s appetite for certain risk profiles can also change over time. What they once viewed as an opportunity, may now seem like an unwanted exposure. For example, I recently saw a post on social media where an aircraft owner stated, “My insurance agent said my premiums went up because I’m over 70. But that doesn’t make sense because I’ve been over 70 for five years now!” Five years ago many carriers were comfortable taking on this risk profile, but it is changing in the current market. This is where quota-share can, once again, work in your favor. If your carrier appetite has changed where your risk profile is concerned, such as pilot age, a quota-share placement makes it much easier for your broker to remove a participating line carrier and find a replacement, as opposed to finding you a new carrier to assume 100% of the risk, or worse, not being able to find any coverage.
As the market is evolving, we must pause and evolve our own navigation of the aviation insurance marketplace. This means our strategy must change too. You, the King Air owner/operator, should consider how to capitalize on the market and its options, such as having multiple carriers on your placement. The aviation insurance industry is small, and the underwriters are taking notes. You may not realize it, but you have a reputation amongst the aircraft insurance markets; humans are building out your quotes, not computers. Use this human element to your advantage. Start aligning yourself with a “brand ambassador.” One of the easiest ways to start building your “brand” is by showing loyalty to your current carrier. If you open your policy up to a quota-share placement, you allow other carriers to have a slice of your business, while keeping them competitive on pricing and still show loyalty to your “lead” carrier.
Your broker is another major representation or ambassador of your brand. They should be respected by the underwriters they work with and viewed as conducting business with integrity and trust. You also want to be confident they understand your specific needs and develop a strategy, with your input, to place your coverage.
Recently, I was on a phone call with a King Air 200 operator who said, “I am amazed that a simple two-page insurance questionnaire is what so many underwriters use to determine my insurability and assume millions of dollars of risk.” He is right. The strategy and effort to evolve with the market and place your coverage requires details and personalization. Transition pilots especially should put a considerable amount of effort into building their marketing submission. The official application still needs to be completed and submitted, but you can provide so much more information to be more than just a name with numbers transposed from a logbook onto a PDF document.
We’ve all heard about the shortage of homes for purchase across the country over the last five years. Potential buyers started including letters with their purchase offers, hoping to pull the heartstrings of the current owners. Whether it was a newly married couple wanting to start a family in a home that the current owners are selling because they have outgrown it themselves, or a family looking for the “perfect” backyard for their kids to play and dogs to run. Become the letter writer; write your story. Start with describing your aviation background; become relatable to your underwriter. Most aviation underwriters are in this business because they have a passion and interest in aviation, as well. Who knows, maybe you had your first airplane ride as a child in the EAA Young Eagles Program, just like that underwriter. Or maybe you volunteer as a Young Eagles pilot and they were a recipient of one of those donor flights as a youth. The story and details in your letter may have a technical aspect, such as you have a minor in meteorology. To an underwriter, this could be a big attribute that wouldn’t be found on the application. We all know King Airs do a great job of getting us just high enough to be in the thick of icing and thunderstorms. Having a strong background and understanding of weather may hold a great deal of appeal to some underwriters. Speaking of weather, maybe you are an owner who is more risk adverse and have self-imposed weather minimums or duty days. Highlight those standards in your document. For example, assume you are a restaurant franchisee in the northwestern part of the country. You have 10 locations that you visit every two weeks. As a busy entrepreneur you also rarely use your King Air for personal use. Share all this information with your underwriter. On their desk it will read as:
Same 10 airports every two weeks = they know the airport environment and the approaches intimately
Using the aircraft for business = limited third party passenger exposure, probably employees on board so they will have workers’ compensation coverage
Well established business owner who regularly sees their properties = if the weather is bad they’ll go the next day and not push themselves with “get-there-itis”
Your broker can help you with this also, pointing out things that are worth noting in your letter. It should be part of your broker’s submission to the markets. After you’ve built out your profile with the underwriters with your formal applications and letter, reflect on what you are looking for in terms of ancillary coverages, liability limits, deductibles and conditions, for example, training requirements. If you’re looking for a quota-share placement, determine which carrier you would like to have lead your policy and which carriers would be a good fit for a following line. Sometimes the pricing/rates are the same for all the participating carriers. Sometimes their pricing will vary, and oftentimes the lead carrier charges a “lead fee” since they are issuing the policy, conditions, exclusions, endorsements, and will administer a claim should one arise.
Before you go to market on your next renewal, have a pre-renewal strategy meeting with your broker. Discuss the current market conditions and the success your broker has had in the last 90 days with risks similar to yours. When reviewing your specific risk, review your ancillary coverages and risk profile. See if they are still adequate, accurate and relevant. Being proactive with your broker and the renewal process will result in managed expectations and more favorable long-lasting results, especially for our aging King Air owners and those seeking higher liability limits with single pilot authority.
Kyle P. White is an aviation insurance specialist for a global insurance brokerage company. He has professionally flown King Air 90s and B200s and holds an ATP and multi-engine instrument instructor license. You can reach Kyle at kpwhite816@gmail.com