One of the most common and useful tools for running any business is an annual budget. Since Flight Departments are very much a business in their own right, the annual budget is essential. But how should aviation insurance be budgeted for and what should you expect in the current market?
Tim Maurer, Certified Financial Planner, best-selling author of books on balancing your money with life needs, and regular contributor to CNBC, Forbes magazine and TIME/Money, says “…what really takes budgeting from routine to revelation isn’t merely mastering the mundane, but planning for the unexpected…with margin.” That advice, especially the part about planning for the unexpected, captures why corporations pay particular attention to insurance.
Budget as defined in Merriam-Webster’s dictionary as “a plan used to decide the amount of money that can be spent and how it will be spent”. For your Flight Department manager, deciding the amount of money that can be spent requires estimating the total amount his or her department will need to cover all expected expenses (payroll, maintenance & reserves, pilot training, hangar rent, insurance, fuel cost, taxes, etc) and also an amount for unexpected expenses (unscheduled maintenance events, an aircraft accident, fuel price increases, etc.); then when the numbers are presented, the manager can only hope that the corporate CEO or CFO doesn’t have a heart attack and sell the aircraft.
Many Flight Department managers fear their job will disappear if they can’t keep the costs of operating the aircraft under control. There is temptation to cut insurance costs, particularly because the safety record of Business Aviation is impressive.
Regardless of overall safety, a company aircraft represents one of the corporation’s largest exposures to catastrophic loss. Yes–insurance costs should be examined and controlled like any other expense item. But remember that protecting against the unexpected must be paramount. There is simply too much on the line.
PROJECTING APPROPRIATE COSTS
From an insurance perspective, the FD manager should consult his or her aviation insurance broker to obtain budgeting data. Future premiums will depend on whether aircraft insurance is in a “soft” or “hard” phase, but knowing the character of the market requires expertise.
As discussed in prior articles, we have been in an extended soft but stable market with insurance premiums remaining virtually flat for the past two years and no change anticipated in the near future. In such an environment it’s easy for your broker to determine what you should budget for your next renewal. But a call from your broker to the underwriter to confirm they don’t anticipate any changes is strongly recommended.
We are seeing many FD managers requesting quotes for higher liability limits when renewing their policies. They wish to take advantage of the historic low premiums being quoted for higher limits ($100M – $500M). If a hard market returns and premiums for the higher limit start to rise, the higher limit can be reduced to control premium cost.
In addition, it is best practice to adjust the insured value of the aircraft’s hull to its current market value or outstanding loan amount, whichever is greater, every year. Over-insuring the aircraft’s hull value is a common mistake in our industry, which results in paying unintended higher premiums and creating a potential claims nightmare.
Even if you have had a significant claim in the last policy period, most insurers will not increase your premium in response.
Pay particular attention, however, if you made significant equipment changes in the last 12 months. I have an important and loyal client that has operated several King Air 350’s for years. The firm recently upgraded its fleet to new Phenom 300’s toward the end of their current policy term. The insured value for hull coverage went from $2M for the older King Airs to $9M for the new Phenom 300’s.
Since the annual premium for the Phenom 300 is pro-rated when the aircraft was added, the FD manager realized the pro-rated premium was NOT the total annual premium, which must be considered when estimating future annual premium for budgeting purposes. If you anticipate adding new equipment in the future, for budgeting purposes call your broker and get the annual premium cost to insure the aircraft.