War Risk Insurance…
Is there a rate increase in your future?
As published in World AvBuyer Magazine, September 2014
March 8th of this year, Malaysia Airlines Flight MH370 disappeared with 239 fatalities. The aircraft, a Boeing 777, was insured for a hull value of $100m, 50% of which was paid by the War Risk underwriters after adjusters determined that although not conclusive, there was enough evidence the crash may have been caused by some deliberate action. Passenger liability claims associated with MH370 are still to be settled. In addition, there is an ancillary provision under most aircraft insurance policies that provides coverage for search and rescue expenses.
The coverage limit for accidents such as MH370 normally is a specified maximum sub-limit per occurrence. Whether by mistake or negotiation, however, the sub-limit provision was left off the Malaysia Air policy, thereby exposing the airline to the entire liability limit of $2.25b. By tradition, governments do not seek recompense from airlines for search and rescue expenses, and Malaysia, Australia and China would normally share the costs of the search efforts, but now those governments may look to Malaysia Airline’s insurer for reimbursement.
June 9th, Taliban militants stormed Pakistan’s Karachi Airport, killing 27 in an alleged attempt to hijack an airliner. At least one aircraft parked in the cargo area was destroyed.
July 13th, Libya’s main airport was shelled by militia, damaging or destroying 20 aircraft. Earlier the control tower was damaged by rockets. The resulting liability for bodily injury or death claims and property damage are to be settled.
July 17th, Malaysia Airlines Flight 17, also a Boeing 777, was shot down over Ukraine killing 298. All of the preceding losses occurred within five months of each other, and all involved claims resulting from a War Risk peril. Therefore, most of the burden of the losses falls on the War insurers.
First, let’s understand the size of the market we are discussing. The War Risk market specifically provides coverage for approximately 25 war-related perils that are universally excluded under all aviation hull & liability and airport liability policies. These perils include war, acts of foreign enemies, malicious acts, riots, political or terrorist acts, sabotage, confiscation and hijacking. The coverage is offered by the War Risk insurers in the form of a “buy back”, which deletes the exclusions from the aircraft or airport policy (all except those defined as nuclear are removed).
War Risk is quoted separately as a line item of the overall aviation insurance premium. From a War Risk coverage perspective only, the total estimated claims for the above losses are north of $600m, with premiums of $65m taken in this year by War Risk insurers to cover the cost.
Airline insurance premiums are generally negotiated annually and the resulting insurance contract is set for a year. However, after the events of 9/11, War Risk underwriters inserted additional language in the War Risk coverage that allows them various review and cancellation options. Those options include:
1) The ability to review and amend the premium or geographical policy limits with seven days’ notice to the insured;
2) The ability to cancel all, or certain parts of the War Risk coverage with 48-hours’ notice;
3) The ability to cancel all War Risk coverage with seven days’ notice to the insured.
While the insurance mechanism is sound and will provide coverage for the +$600m in potential claims, with a thin premium pool exhausted in a very short period of time, it is only reasonable to predict the War Risk insurers will either exercise their rights under the policy contract language and take action now (i.e., raise rates), or wait until the annual renewal of each aviation policy.
This rate action affects all aircraft owners, not just the airlines since we are all considered a part of the same small insurance pool. As I tell my wife, rarely I have been known to be wrong. But if nothing else, at least be aware of the potential of a rate increase when budgeting flight department costs going forward. How much? That’s anyone’s guess…
Climbing the Corporate Aircraft Ladder
Important Considerations When Transitioning Aircraft
Is your company transitioning to a more capable aircraft? Depending on the circumstances, the insurance perspective of that move can range from a non-event to an all-out debacle, warns Stuart Hope, in the August issue of World Aircraft Sales Magazine.
The wild card in obtaining coverage for a company aircraft resides in the hand of who will be its pilot. For an insurance underwriter, the primary controlling factors include the pilot’s overall experience-level relative to the category of aircraft you are acquiring; whether he, she or they are professional aviators or owner-executive pilots; and the nature of their training and transition plan. Other contributing factors involve the limit of liability and the insured value of the aircraft.
If the pilot is well-qualified, experienced in the category aircraft under consideration, is a professional pilot (i.e., someone who makes his/her living flying airplanes), and will complete the manufacturer’s approved initial ground and flight school for the aircraft, obtaining insurance will be a Non-Event.
Upon completion of a suitable training program and earning a type rating (if required) from the FAA, the pilot(s) may commence operating the aircraft. However, if the pilot to be insured has no experience in the performance class of your proposed aircraft (e.g., has been flying reciprocating twin piston aircraft, but has no turboprop or jet experience), is an owner-executive pilot, or doesn’t want to complete an underwriter-approved training school, the degree of difficulty will multiply. Indeed, any combination of the above factors, particularly when coupled with a high limit of liability or hull value, produces the possibility of an All-Out Insurance Debacle.
The first and most important offensive weapon in your quest for coverage is a broker experienced in aviation insurance. I tend to harp on this point in my articles, which may come across as self-serving, but it is simply the truth. If your situation in climbing the corporate aircraft ladder places you in the Non-Event scenario described above, the importance of an aviation insurance broker is not critical. However, if your situation is in the ‘All-Out Debacle’ category, a knowledgeable broker can be the difference between getting insurance at a reasonable rate, being placed with a top-tier insurer, acquiring adequate liability limits and obtaining sensible pilot training/transition requirements, and not obtaining adequate (if any) coverage.
Generally speaking, from an insurance viewpoint, it is easier to negotiate approval for a professional pilot than for an owner-executive pilot. In theory a professional pilot is safer because the only job he or she has is flying the aircraft; therefore the aviator isn’t distracted by meeting deadlines, managing project costs, etc. Because of this perception, underwriters are more liberal with terms for professional pilots without experience in a higher echelon aircraft.
The required pilot training depends on the level of “the jump” (are you moving from a Citation 525 to Gulfstream G280 or from a King Air B200 to a G550?) and the pilot’s overall experience level. The required training can range from the pilot simply completing the initial ground and flight school/type-rating to him or her flying a stipulated number of hours with a well-qualified co-pilot after completing the OEM-approved transition course.
On the other hand, an owner-executive pilot presents a greater challenge to the aviation insurance broker (AIB). Insurers underwrite this category of pilot much more strictly. Higher liability limits are very difficult to obtain, transition training requirements can be extensive, and the premium much higher. This is where having a broker experienced in aviation insurance on your side is essential.
Insurance underwriters consider hundreds of quote submissions each day. A good AIB knows how to navigate the system and ‘help’ the underwriter identify and grant reasonable terms on their accounts. They know not only which insurers will be likely to give favorable terms, but which specific underwriter at a given insurance company is the most experienced and knowledgeable with whom to work; in other words, who are the ‘dealmakers’.
In addition, most AIBs are pilots; when negotiating the pilot training requirements, they can ‘assist’ the underwriter (many of whom aren’t pilots) by designing a coherent and rational training program. Many underwriters will simply decline a quote submission where the required training is left up to them because time is of the essence and too much work is required to think through what would be a good transition plan for a given pilot.
A WORD TO THE WISE
When creating your list of action items for the purchase of your new aircraft, put insurance at the top of the sequence to be tackled. It takes your insurance broker time to obtain the right coverage. I get far too many calls from clients who are literally getting ready to taxi out in their new aircraft and “just remembered to question their insurance”. Although the AIB wants to help, the adage, “Poor planning on your part does not constitute an emergency for me,” is particularly relevant in aviation insurance.
Follow “Aviation Insurance” on Twitter@HopeAviationIns for the latest news and industry developments that occur in between issues of The INS Navigator.
“As much as I hate to pay for insurance I owe my peace of mind to the crew at Hope Aviation Insurance. They try their best to keep me protected and for this I say thanks. The care given is above the best!”
HOPE was featured in the September issue of Business & Commercial Aviation in an article about ground handling accidents. Despite increased attention and industry mitigation efforts, this continues to be one of the “big bars” on insurance company claim charts. Earlier this year, the International Business Aviation Council (IBAC) created a new International Standard for Business Aircraft Handling (IS-BAH), modeled after their successful International Standard for Business Operations (IS-BAO) initiative. This new standard is centered on SMS and is designed as an additional industry effort to prevent these unfortunate, expensive events.
HOPE for the Future!
Kristen Hamilton joined our team two years ago this month as an Account Executive. She successfully completed all the training requirements and was conferred the Certified Insurance Service Representative (CISR) credential recently at a luncheon ceremony in Columbia, shown below. Help us congratulate Kristen on her achievement!
See You in Orlando!
Hope Aviation Brokers will be attending the annual Business Aviation Convention & Exhibition (BACE) this month in Orlando, FL. Bringing together a wide variety of business aviation professionals, BACE is a great chance for us to interact face-to-face with both underwriters and clients. Stuart Hope will be presenting at this year’s Emergency Response Planning workshop on Sunday and Monday before the convention floor opens on Tuesday.
In wrapping up this year’s Top Safety Focus Areas before the convention, Safety Committee Chair Eric Barfield was recently featured in an NBAA podcast regarding public policy. BACE will also feature the popular Single-Pilot Safety Standdown, Safety Town Hall, Enterprise Risk Management process and numerous other outstanding sessions.
Plain English Guide to Aviation Insurance
Your aircraft represents a wonderful business tool but also one of your largest potential exposures to catastrophic loss—one that could wipe out what you have spent years building. The importance of properly insuring against such loss should be obvious. Here is an overview of basic policy coverage areas.
AIRCRAFT HULL INSURANCE
What it covers: Physical damage to the aircraft as a result of an accident. The insurer has the option to pay for repairs or to declare a total loss and pay the insured value stated on the policy.
AIRCRAFT LIABILITY INSURANCE
What it covers: Liability for bodily injury or property damage arising from an accident. The coverage is written on a single-limit-per-occurrence basis (e.g., $100 million per occurrence) and includes defense costs over and above the stated liability cap.
What it covers: Who is authorized under your policy to act as pilot or second in command on your aircraft.
What it covers: Allowable reimbursement by non-owners who use your aircraft.
Click here for a closer look at the most critical coverage types and clauses.