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Specialists add value to aviation market

Private aircraft insurance market remains soft

By Dave Willis

The General Aviation Manufacturers Association, an international trade group that represents companies that make and service general aviation aircraft, says shipments dropped modestly in 2011, the fourth straight year of decline. However, the group's leaders say 2011 represents a turning point and that as the U.S. economy gets healthier, sales growth should follow.

Aviation insurance providers say insureds continue to struggle through the lingering economic downturn. "One of the major issues faced by a number of our customers—people who own planes, people who fly them, and the businesses that serve these people—is the slow economy," says George Routon, underwriting manager-Aviation at program administrator Britt/Paulk. "Costs are continuing to rise, and for many who fly for pleasure, it's becoming too expensive to go out and fly for fun."

Among the items that are more costly is fuel, which in many parts of the country is topping $6 a gallon this summer. "Nationwide, sales of aviation fuel have been declining over the past few years," notes Reed Clawson, Britt/Paulk operations manager-Aviation. "General aviation airplanes are simply not flying as much as they have in prior years."

This can pose a challenge for underwriters. "Pilots are not keeping as current as we would like them to be," adds Clawson, whose firm serves a range of aircraft owners and the businesses that serve them. "We would prefer a pilot fly 50 to 100 hours a year or more. We're seeing more and more submissions from brokers telling us that many pilots are only logging 10 to 15 hours per year."

Reduced flying has affected airports and airport businesses that count on fuel sales for revenue—and profits. In addition, says Britt/Paulk Aviation Underwriter Robert Lombardo, aircraft owners may be delaying upgrades to avionics or other systems, which also affects aviation-related businesses. They're not out of work altogether, though. "Aircraft owners are required to have FAA mandated annual inspections completed in order to keep the plane's airworthiness certificate in force," he notes. "So annual inspections and engine overhauls are still taking place."

One segment of the aviation business is seeing an uptick. "A trend I've seen among pleasure pilots and those who fly on business for themselves is increased use of small, simulator-based training," says Routon. "Costs for that are much lower than actually going out and flying an airplane." As simulator training improves, more and more people will take advantage of it, he adds.

"If they can't afford to fly a real plane," he adds, "flying a simulator will keep their skills and decision-making abilities sharper. When they do fly, they will be much better prepared for whatever comes up in flight, whether it's an emergency procedure or filing and flying into instrument conditions. I can't say practice makes perfect, but it sure does help."

An area where costs are not increasing is insurance. "The current aviation market is very competitive," explains Bob Watson, partner at Aviation Markets, a wholesale broker offering a range of aviation insurance services and access to every domestic aviation market, as well as the London market. "Over the past few years, several new companies have entered the aviation insurance market." This is putting continued downward pressure on prices.

Connie French, senior broker and aviation vice president at Arlington/Roe, a wholesaler with access to a broad range of aviation insurance and other coverages for aviation-related risks, concurs.  "The aviation insurance market is still extremely soft," she says. "Some of the prices we've seen, especially on corporate jets, are extremely low, particularly when you consider the exposure. These are high-valued aircraft with high liability limits." Despite what buyers may think, she adds, "insurance is probably one of the least expensive parts of owning a corporate jet. Upkeep and fuel costs are higher—and rising."

This means it is, for the most part, a buyer's market today. "There are not a whole lot of coverages that can't be written," French notes. "Plus, with greater competition among markets, carriers may tend to be a little more lenient on certain underwriting rules, like pilot training requirements."

Serving aviation clients

Insurance providers, along with local agents and brokers, can play an important role in protecting pilots and others in the general aviation arena. "From a risk management standpoint, most individuals who have a pilot's license are not risk managers," explains Lombardo, "nor do they have access to one. Most rely on their brokers to fill this gap." Agents and brokers should be aware of aviation risks and insurance, he says.

"Ideally, brokers should review their insureds' net worth and other factors, and get a feel for their requirements for liability protection," Lombardo adds. "The broker should understand and counsel his insured about the experience, training and ratings needed to enable an insured to advance into more complex aircraft and still maintain the liability protection they require. Certain aircraft models and pilots with limited flying experience may not qualify for the highest liability limits available from an insurance carrier."

Agents and brokers without in-house expertise can rely on specialists. "Often, agents are uncomfortable dealing with aviation, because it's not something they handle routinely, like their normal P-C type coverages," explains French. "Plus, they don't have access to all of the markets we do."

Watson agrees. "Most agents and brokers, even non-aviation wholesalers, don't have access to a wide range of aviation markets," he says. "It has become increasingly important that aviation risks be marketed to all available companies, and that's our function. We like to think of ourselves as our agents' aviation department, bringing expertise and service to agents and insureds."

Lombardo says wholesalers can be especially useful for certain agents and brokers. "If you have just one or two aircraft policies in your office, it makes sense to deal with a wholesaler who has the expertise and the time to guide you, and who has access to numerous markets as opposed to just one," he explains.

Even with such partnerships, agents and brokers need to pay attention to details—and communicate well with clients and providers. "Many agents and brokers may not be fully aware of the exposures associated with general aviation flying, or the nuances associated with aviation insurance policy contractual language," he says. "When dealing with aviation insurance specialist brokers, who don't have direct contact with the insured, important data can sometimes become lost."

Clawson says retail agents and brokers who want to provide the best service for their aviation customers should educate themselves about aircraft insurance. "One way to do this is by taking the basics, course available online through the Aviation Insurance Association," he explains. "It's a three-hour course that gives the fundamentals of how the aircraft policies are structured and offers some good knowledge about how the aviation insurance market works." The course qualifies for agents' continuing education requirements in many states, he adds.

French believes opportunities to find and serve aviation clients are plentiful. "Pretty much every small town and every city has a municipal airport," she explains. "That's a good place to start. Call on your local airport and see who writes the insurance.  Then, approach the businesses and aircraft owners based at that airport." Also, lists of aviation prospects are readily available from a number of sources, including private and public entities.

Many smaller aviation risks have insurance with national association programs. "They have their insurance through people they don't even know," she adds, "and they're not dealing with the local agent who writes all of their other business." French encourages agents and brokers to become familiar enough with the business to feel comfortable approaching these local prospects.

Lombardo encourages retailers to view the market from a workflow perspective.  "I would examine my office and determine if we were capable of handling a large quantity of small individual aircraft policies, each with a relatively small premium," he explains. "I might determine that we would do better to pursue larger commercial risks that sometimes require less service once written."

He likens small personal aircraft insurance policies to personal auto policies. "The relationship with the insured on a small policy can be difficult to maintain, as these risks can move regularly to the market offering the most competitive premium," he adds. "With larger commercial risks, the broker can develop a risk manager-style relationship and hopefully retain the business for longer."

John Paulk III, national sales manager at Britt/Paulk, says that whatever approach a retail agent or broker chooses to take, partnerships are key. "Develop a good working relationship with your underwriters or wholesaler and let them provide the counsel on issues that might revolve around the market and the policy," he says. 

Something special in the air

As agents and brokers come across—or seek out—aviation risks, some may not fit the traditional mold. That's where specialty underwriters come into play. "We do a lot of things that wouldn't be considered run-of-the-mill general aviation," says Doug Semler, vice president of the Marine & Aviation Division at Old United Casualty Company. Such risks include antique aircraft, war birds, home-built and experimental aircraft, transitioning pilots, ferry flights and more.

"We look at anything in the general aviation market 25 years or older," he notes. "And we cover ferry flights, where people deliver planes from the United States to virtually any country in the world. We insure what general aviation markets consider high risk—things that require greater underwriting expertise."

According to Dan Strother, operations director at Old United's sister company, Specialty Aviation Underwriters, "Many of our risks are high-end, valued at one- or two-million dollars or more." Owners of these aircraft aren't as affected by the economic downturn as are others. "They may keep them in the hangar more than they had but, short of that, the economy hasn't had much of an effect." 

One segment of the business—ferrying operations, where pilots fly recently purchased planes to new buyers around the world—had been down. "That seems to be turning around pretty well," Semler notes. "Deliveries are up in certain markets. For instance, we've recently had applications submitted for a few deliveries to Brazil."

Air shows and events help drive business, too. "Four of our insureds sent planes to a competition in Hungary this summer," Semler adds. Such overseas coverage requires underwriter familiarity with disparate rules and regulations. "Planes going to the European Union, for instance, require special coverage," he says. "Liability limits are different, and they are mandated based on the weight of the craft by the E.U."

Other issues exist in writing older aircraft. "We look at not only the value of the craft, but also the availability of parts," Strother explains. "A lot of parts will need to be specially made. When we look at the risk, that's something we look at. We also have to check the manufacturers."

War birds represent another set of challenges. "If an owner has the original data plate from the plane, even if it goes down and is a total loss, he can rebuild the plane just from the plate. That increases the salvage value. One of the hardest things we have to do is establish initial values on these planes. And the values tend to fluctuate."

Semler says insurance capacity has increased for these risks, as standard markets try to expand market share. Still, he believes, specialists can bring extra value to retailers. "When they come across a plane—perhaps an antique or other non-standard craft—and say, 'What in the world am I going to do with this?' that's where we come in," he says. "Individual underwriting offers a real advantage."

Ferrying operations present another opportunity for retailers. "We understand the risks, as well as the rules and regulations that apply," Strother notes. "What's great about these policies is they're limited in scope—generally for a defined, short period of time—and the premium is usually built into the sale price of the plane."


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