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The Real Cost of Aircraft Insurance
By Bob Mackey, EAA Insurance Solutions administered by Falcon Insurance Agency, Inc.
May 18, 2017 - The No. 1 question from aircraft owners is: how much will insurance cost? On TV some insurance ads say you can pick your price for auto or homeowners and the insurance company will design coverage to match your price. Wow! But the ad doesn’t tell you what or how much insurance you get. The cost of insurance matters regardless what insurance you are buying, but coverage is equally important. Focusing on cost might save money but ignoring coverage might also leave you uninsured or underinsured.
Core components of insurance.
When you look for aircraft insurance two important things to know are what’s covered and who’s involved in the process.
The “what’s covered” isn’t that hard to understand. While there are several parts to a policy, the main coverage parts are liability insurance if you hurt someone or you damage someone’s property, and physical damage (hull) insurance to repair or compensate you up to the insured value of the aircraft.
The “who’s involved” isn’t that complicated either. It includes you (the aircraft owner), the insurance company, and the broker (or agent). You need insurance so you contact a broker who then works for you by contacting the insurance companies to find the policy that meets your requirements and hopefully at a price that also meets your expectations. So it’s you, the insurance company, and your broker.
The origins of insurance.
Insurance evolved out of the financial need of the individual. If you are independently wealthy, you can handle potential financial obligations if you hurt someone or you damage someone’s property. You can also deal with the loss of a personal asset, like an aircraft. However, if you are not rolling in money, what do you do? This is where insurance comes in.
The law of large numbers, sometimes referred to as the theory of insurance or risk sharing, groups individuals into a large group where risks are shared, the premium (cost of insurance) is shared by the group, and the insurer spreads risk over the group. In other words, each individual contributes money to the group (premium dollars), and the insurance company uses that money to pay the losses arising out of the insured risk of the group. If the insurer sets the price correctly and only selects participants that are less likely to have a loss, then the insurer has money left over (profit for the shareholders) after all expenses and claims are paid. If the insurer does a poor job of selecting participants or sets the price too low, the insurer would need to come up with additional dollars to pay losses and expenses, which causes the shareholder to be unhappy, sell their stock, and the insurer goes out of business.
Here is an example: ABC Insurance Company (company) decides to sell aircraft insurance. Aircraft Owners Insurance Agency (broker) advertises the availability of aircraft insurance and their skill at finding the right insurance at the best price for aircraft owners (you). You respond to the broker’s advertisement and the broker in turn contacts the company who has a favorable policy and price. The company tries to keep their policy terms broad and their price attractive for the aircraft and pilot they feel are less likely to have a loss. Hopefully, the company is successful in the selection and evaluation of risk process (underwriting) and collects enough money from the group of aircraft owners to pay all of the losses and retain a reasonable profit for the stockholders. Sounds pretty simple!
What does the insurance company do with the premium?
Individual dollars go toward three main items: expenses, losses, and profit. Expenses include a wide range of items: labor (salaries and benefits), facilities, equipment (computers, desks, communications, etc.), documents, taxes and fees, commission for the broker, etc. Losses include payments for liability claims and physical (hull) claims plus expenses associated with losses such as attorneys. Profit, well that’s fairly straight forward, profits are distributed to the shareholders.
It’s a buyer’s market out there!
Ten years ago, there were roughly eight aviation insurance companies in the United States and these companies focused on certain portions of the aviation community where they felt they could successfully underwrite risk at a profit. Today, the number of aviation insurance companies has doubled. At the same time, the number of insurable aircraft has not significantly grown. This has created a “buyer’s market” resulting in lower prices for insurance and more risks being considered insurable. This “soft market” is certainly pleasing to aircraft owners; however, it has been brutal for some companies. What is remarkable is the continued influx of money from investors and companies seeking a share of a market that has been essentially flat for more than a decade.
Aircraft owners can take advantage of the soft market conditions; however, this should be done with a bit of caution and assistance from an aviation insurance professional. Here are a few considerations in choosing a broker:
- Choose one broker - Aircraft owners should first focus on making sure they select the best broker. Calling more than one broker is more work for you and it doesn’t inherently offer any pricing advantages because the number of insurance companies who work with brokers is finite and accessible to all brokers. Beyond the wasted time communicating your information with multiple brokers, it can also create confusion, delays and related challenges in representing you to insurance companies.
- Choose a broker that listens - Aircraft owners should seek a broker that asks questions, listens, and confirms the objectives of the aircraft owner. Some owners are more comfortable with self-insuring a portion of their risk and a smart broker will accommodate this by getting quotes with several options so the owner may review and develop their own level of comfort.
- Reputation Matters - Owners should find a broker that is knowledgeable and has a solid reputation within the aviation insurance community. You want a broker with a reputation for solid client communication, relationships with insurance companies that they can leverage in securing a quote, and the endorsement of fellow pilots, aircraft owners and member organizations.
One last tip: Think like an underwriter!
Assume for a moment you are the underwriter; you decide which risks to quote and how aggressively you want to set the price for aircraft insurance. In doing this, your objective is to pick the right aircraft, pilot, and use that will reduce the chances of a loss. If there is a loss, the loss, combined with all the premium collected for all of the accounts you have underwritten, will be enough to pay the loss and cover all of the expenses with money left over for reasonable profit.
A smart broker thinks like an underwriter — they know which risks each underwriter and insurance company prefers and which risks they tend to stay away from. A smart broker also knows how to gather exact information about the risk and they use this information to sell the quality of the risk to the underwriter. Information like a breakdown of hours in tailwheel or retractable gear experience or recent recurrent and proficiency training will help sell the risk to the underwriter. Aircraft owners can play an important role in this process.
A smart broker will also share information about new aircraft designs, links to websites about the aircraft being underwritten, pictures of the aircraft, etc. These pieces of information may not be needed for every risk, but they will help when the risk is a little out of the ordinary. In addition, this will help build the relationship between the broker and the underwriter; so, that is why you the aircraft owner need to think like an underwriter!
In conclusion, there are many ways to save money on aircraft insurance. The keys to success are to educate yourself on how aviation insurance works, know who the players are and how prices are determined, and make sure to work with one professional aviation insurance broker who can find you the right insurance coverage at the best price.
EAA members have a great resource with EAA Insurance Solutions administered by Falcon Insurance Agency, Inc. If you would like to learn more about how we can help you get the right insurance at the best price, give us a call at 866-647-4EAA (4322) or go online at www.EAA.org/insurance. One of our aviation insurance experts will be happy to help you with your aviation insurance needs.
Bob Mackey is senior vice president with Falcon Insurance Agency, Inc. the official administrators of EAA Insurance Solutions. Bob has been involved in the aviation insurance industry for over 35 years and he is a Commercial Pilot with Instrument Ratings. If you have any comments about this article or if would like to see a specific aviation insurance topic addressed in a future article you may email Bob at firstname.lastname@example.org