That's Just the Way It Is — The Unexplained Protocol of Aviation Insurance

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In uncertain times like these, when insurance rates are skyrocketing and good coverage is hard to find, aircraft owners and pilots have lots of questions for their insurance agents. Tom Chappel of CS&A Aviation Insurance answers these "Most-Often-Asked Questions From Clients and Friends."

In uncertain times like these, when insurance rates are skyrocketing and good coverage is hard to find, aircraft owners and pilots have lots of questions for their insurance agents. Tom Chappel of CS&A Aviation Insurance answers these "Most-Often-Asked Questions From Clients and Friends."


There are only eight standard aviation-underwriting companies and one direct writer remaining in the general aviation industry in the United States. Each of these companies is dependent upon the international reinsurance community for security. All of these companies are offered more opportunities to write new business than their capacity allows. One underwriting manager told me recently that his small underwriting staff of four senior underwriters receives 400 requests for new business quotations each day. This, of course, is the result of the tight underwriting climate and the attempt of agents to assure each client that they have found the best of the worst insurance deals around. Although this is a specific case, all aviation underwriting companies seem to be suffering from the same pressure to perform. This may explain why the average underwriter is not aggressive in chasing new business.

Why is the quoting process so laborious? In order for the agent to adequately "shop" the risk, the customer's information must be prepared and presented to every underwriter for a premium quotation. This means applications, pilot history form on each pilot, checking computer banks for prior submissions or claims, and then the actual preparation of the quotation and submission back to the agent. When this becomes an industry-wide trend, the underwriting community cannot handle the unusually heavy workload. When you have more potential business growth than can be handled, there is no wonder the underwriters develop an attitude of complacency toward new business opportunities.

This fact will help to explain my answers to many questions that I receive from clients and friends.

Why Can't I Change Insurance Companies Mid-Term?

"If I renew my insurance now and later find a better deal, why can't I just change companies?"

The reasons are numerous:

1. First, most companies will impose a short-rate penalty if the policy is canceled prior to the policy expiration. This could amount to approximately 10% of the unearned premium. Although this penalty is weighted more heavily to early cancellations, the 10% estimate is a good rule of thumb.

2. Once an underwriter gives you a quotation, your name and N# will be logged into his computer along with your policy anniversary date. Most underwriters follow the industry protocol not to move a competitor's account mid-term. They don't want to start a rate war. After all, with more business than they can handle coming through the front door each day, why do they want the hassle? In addition, the opinion is if an account will leave one company for a cheaper premium, then the next time a cheaper quote comes in they will move again. Most underwriters want to write loyal, long-term accounts.

In short, unless you have a very good reason to change underwriters mid-term, you are well advised to stay with your current underwriter for the full policy term.

I Have Heard That I Can Buy a Three-Year Policy

"Can I purchase a policy longer than one year and lock in the rate?"

No. In the past, some commercial property and casualty policies were offered on a three-year policy guaranteeing the premium. Some aviation underwriters also issued three-year policies but retained the right to renegotiate the premium annually. In aviation, because reinsurance contracts are renegotiated annually, the underwriters cannot commit to more than 12-month policies or premium commitments.

I Want Competition For My Account

"I want the insurance community to compete for my business. Why can't the various agents bring me multiple quotations (bids)?"

The short answer is, they can. But, each insurance company will quote to only one agent.

Keep in mind, there are only nine aviation-underwriting companies (including AVEMCO) in the U.S. Each company has a centralized automation system through which all client and prospect data are stored. When an underwriter receives a submission for a quote on a particular aviation risk, he immediately logs the name, N#, aircraft, and agent's name into his company's nationwide computer system. If another agent has previously submitted information on the same client to any underwriter with that company, the computer will show that the company is committed to the first agent with a submission. If the client wants to change agents, he simply writes a letter to the insurance company instructing them to recognize a different agent. This is known as an agent-of-record letter (AOR).

The newly appointed agent will receive the same quotation or declination that was given to the first agent. So, don't change agents-of-record thinking the quote will change.

The reason for this protocol is simple. The insurance companies avoid a lot of confusion, hard feelings, and embarrassment by adhering to the "one client -- one quote" rule. In addition, why would an already overworked underwriting staff want to increase their workload by offering multiple quotes on the same risk? They would be competing with themselves.

Note: See also Selecting an Aircraft Insurance Agent.

Why Are Rate Trends So Complicated?

Hull rate versus hull value often creates questions. In short, the higher the hull or aircraft value, the lower the rate per $100 of insured value. For example, the rate to insure a $10,000,000 corporate jet may be 0.25% and the rate to insure a $900,000 jet may be 1.2%. Unfair? Not really. You would expect the less expensive aircraft to be older and have older technology. In addition, the underwriters must develop a premium adequate to pay a partial loss in either case. Most losses are not total losses. Most are partial losses, and the cost to repair is as much for an older aircraft as it is for a new aircraft. In many cases, the lack of availability of parts for the older aircraft may make the repair more costly.

"Why are the rates for my piston-powered aircraft higher than for a turbine or jet aircraft?" Usually, piston aircraft are less expensive than turbines and turbines are less expensive than jets. I know there are exceptions to every statement, but in looking at an overview of the industry, this is true. It is this broad-brush approach that the insurance actuaries and trend plotters use to predicate rates and the value brackets by aircraft type. As mentioned above, the higher the value, the lower the rate.

In addition, the underwriters believe that turbines have fewer losses than pistons, and jets have fewer losses than turbines. This may be reflective of the aircraft performance, or it may be the fact that the higher up the scale you go, the better trained the pilots are. Most losses are the result of pilot error. Every underwriter today requires all turbine and jet pilots to complete annual simulator-based training. This is not the case with many piston-powered aircraft. The facts are that loss experience is better in jets than in piston-powered aircraft, and the rate per $100 of aircraft value reflects this experience.

Is Annual Recurrency Training Required?

"I have logged more than 1500 hours in my aircraft. Why do I need to go to annual training? After all, I have forgotten more about the aircraft than the instructor knows."

This is our most frequently asked question.

The answer is: If you fly a fast twin like an Aerostar, you must attend an underwriter-approved school every 12 months. A simulator is not required, but a strong training syllabus is required before the underwriters will approve the training.

If you are flying a turbine or jet, all underwriters require annual simulator-based training. It doesn't matter how much you know, how much experience you have, or how pretty you think you are. Even if you are a doctor, a lawyer, a business tycoon, or a professional pilot, you must go to school if you want to buy insurance. Usually, Simcom, FlightSafety International, and SimuFlite are the schools that have earned the underwriter's recommendation.

"Are the underwriters in collusion with the flight training centers? We know that Berkshire Hathaway owns FlightSafety, and they also own USAIG. Aha! No wonder they insist on recurrent training."

Well, I must admit that this looks a bit sinister, but the fact is increased training does reduce losses. No matter how it looks, all underwriters writing turbines and jet aircraft insist upon simulator training annually, and only USAIG and a training facility are mutually owned.

Why are Professional Pilots a Preferred Risk?

Underwriters define "professional pilots" as those pilots whose full-time occupation is the safe operation of an aircraft. If you are a professional pilot between the ages of 25 and 60 (to 65), and your skill level and training are acceptable, you are usually thought to be a preferred risk. You will receive lower rates and better policy forms than the owner pilot or non-professional.

"But, I am a commercially rated pilot and have an ATP. I have strong credentials. Why am I not considered a professional just because I run the company?"

That's just the way it is. The underwriters say non-professional pilots have too many things on their minds. They say you can't keep your mind on the flying if you are preoccupied with business problems. Well, I can personally give you a lot of examples of superior cockpit management and capability from the non-professional pilot. But which ones keep their minds on flying and don't drift away during those long uneventful stretches? Again, non-professional pilots are painted with the underwriter's broad brush. Maybe it isn't fair, but from the underwriter's vantage point, you just can't tell the good guys from the bad guys. So you treat all non-pros the same.

What Does Age Have to Do With It?

I have written volumes about the older pilot. In fact, I am probably the greatest proponent of the senior in the cockpit. You might be pleased to know I have found some (a few) underwriters who agree with me. The senior pilot usually plays by the rules. He usually keeps himself in good physical shape, he has a good experience level, he goes to school, and is focused on his flying as much as any professional. He is an aviation enthusiast and is passionate about flying. What more could an underwriter ask for in the cockpit? And to prove it, the senior pilot has very few losses as a class.

Where is that broad underwriting brush when you need it?

The fact is, one major underwriting company begins to resist accepting new accounts that have pilots age 60 or above. Others begin to resist at age 65, and other companies will stay with you into the early to mid-seventies.

In much the same light, young pilots flying turbine and jet aircraft for corporate or charter use have a difficult time regardless of experience until they are at least 25 years old.

"That's age discrimination and I'll sue."

No that's underwriting, and the courts have already ruled for the underwriter. The very practice of underwriting is discriminatory. Too old, too young, too inexperienced, no annual training, whatever the criterion, the underwriting community continues to try to select the most desirable risk. It is legal. And, it is underwriting.

Can They Really Put In Hidden Charges?

"Did the hard market and the September 11 attack create any additional premium charges?"

You bet they did. When you receive your renewal quote, you may ask your agent what percent increase you are quoted. It could be 25% or 50% or even 100%. You should then ask, "Is this for the exact same coverage as last year?" Many underwriters are quoting your renewal but making you buy back such coverage as guest voluntary settlement (GVS) or war-risk hull and war-risk liability at an additional premium. Last year many policies included these coverages at little or no additional premium. I don't know if there is much you can do about the practice, but for your own peace of mind you will know the policy terms are different and you can calculate your real increase.

Where Did the Excess Limits Go?

I remember, not too many years ago, the underwriters would give you excess liability limits for very little premium. Five million dollars was only slightly more expensive than one million. Ten million dollars was only slightly more than five. The higher the liability limit, the cheaper your cost per million was. "Those were the days, my friend." And, those days are gone.

Today, regardless of your cockpit prowess or type of aircraft, you will pay dearly for high limits of liability. Your renewal quote may cost as much for one million in liability as you paid for five million last year. Although the price may appear reasonable, check the liability limit being quoted against your prior year's policy. This is not an attempt by the underwriter to confuse; in many cases, he simply doesn't have the capacity to match your prior year's limits.

The simple fact is that we were spoiled. We expected to receive high limits for very little premium, and that could not continue forever. The courts are handing down higher and higher awards, and the attorneys are cleverly finding new ways to tap into liability policies. Someone has to pay, and that someone is the consumer.

In many cases, the important issue is not the cost of the liability insurance, but whether it is available at any cost. The capacity may not be available to offer high limits of liability at any price.

Should I Buy War-Risk Hull Insurance?

Following the September 11 terrorist attack, all aviation insurers ordered the mid-term cancellation of war risk insurance from all aviation policies that were endorsed to include the coverage. They then offered to sell the coverage back for an additional and much more expensive premium charge. This action has stirred a variety of questions, which should be discussed with your agent at renewal.

Most of my clients are buying back the war hull coverage. Don't lose sight of the reason we carried the coverage in the first place. If you operate your aircraft outside the United States into less stable countries, the confiscation and seizure protection offered under the war endorsements is well worth the cost. There are 28 perils included in the war write-back endorsement. War and terrorism are just two. In addition, coverage for malicious acts, strikes, and labor unrest are also included. My advice is to read the endorsement form before you make your decision.

Note: See also War Risk Insurance - Misunderstood and Underappreciated."

How Much Does Hull War-Risk Coverage Cost?

The cost for this insurance currently is 0.15% of the aircraft value. Depending upon the value of your aircraft, this could be quite expensive. There is no need to shop this around, because all underwriting companies follow the same premium structure. (They all buy from the same reinsurance facilities.)

"Can war-risk coverage be cancelled in the event of a new round of terrorist attacks?"

Yes! The endorsement form offered by most companies follows the Lloyd's form and allows for seven-day notice of cancellation following an increased hazard such as a terrorist attack.

"Should I buy back war-risk liability?"

This is up to you. As an insurance professional, I cannot recommend that you not purchase the coverage. If I did and something happened, you would look to me for having given bad advice. Just remember, this is liability coverage. Liability coverage is designed to protect you if you are negligent. Of course, your liability policy would come into play if you were alleged to be negligent. I have a hard time finding that an aircraft owner could be anything but a victim during a terrorist attack. But who knows how the courts would rule in this day of "deep pocket law." So, use your own judgment. The cost is a surcharge of 20% of your liability premium, with a maximum coverage of $50 million or your policy's liability limit, whichever is less. Oh, did I mention this is an annual aggregate limit?

How Long Will the Hard Insurance Market Remain? What Do You See For the Coming Renewal Year?

The insurance industry goes through cycles. Premiums go down, underwriting standards relax in order to attract more volume, and underwriters begin to lose money. When this occurs, some underwriters and reinsurers leave the business. This causes a lack of capacity and the premiums go up, underwriting standards tighten, and the underwriters begin to make money again. Seeing the profitability, underwriters come back into the insurance market place and once again begin to bid down the prices, and the cycle starts all over again. This is an industry with no memory.

At the moment, we are in the stage of declining capacity created by underwriters and reinsurers leaving the market. Predictably, insurance prices are on the incline. My best guess is this will continue through 2002 and into mid-2003 before underwriting profitability reappears. At that point, we will plateau for a while. With renewed industry-wide profitability, we will begin to see new reinsurance money (capacity) come back into the market, and the bidding process will begin again. This should begin the new cycle in early 2004. This is just a guess. I have no crystal ball.

And please, don't shoot the messenger.

-- Tom


Tom ChappellTom Chappell is the President and CEO of Chappell, Smith & Associates, parent company of CS&A Aviation Insurance, and has a degree from Middle Tennessee State University. He is a member of several local and national professional organizations, as well as the international Aviation Insurance Association (AIA). He writes insurance articles for numerous aviation trade publications dealing with aircraft operations and the changing trends in aviation insurance. He has served on various boards and insurance company advisory councils. He was honored in August 2000 to serve on an advisory panel for the National Academy of Sciences, advising NASA on their "Small Aircraft Transportation System Initiative." Tom is considered one of the industry's foremost authorities on aviation insurance, having been in this specialized field for over 29 years. Tom has distinguished himself in the area of aviation risk management and in the placement of insurance for high-performance aircraft. He works extensively with FBOs, maintenance, parts, training, and service organizations. He is respected as a speaker in the area of aviation insurance and risk management, and is often asked to participate in aviation insurance seminars.