The South African aviation insurance industry is in crisis and you need to make sure you don’t become an unwilling victim.

Times are tough: real tough.Factors such as intense competition, the unprecedented strengthening of the Rand and the appearance of “fringe” insurers have created extraordinary problem for local insurance companies as they try to balance the need to provide proper protection against the need to remain faithful to basic insurance principles of indemnity, insurable interest, and so forth.

Following the events of 9/11, I wrote in my company’s newsletter of the need for every aircraft owner to take the time to review his insurance policy carefully, to ensure that he understood all the terms and conditions, that the coverage was precisely what he needed and to also take a good look at the service team that was assembled behind his policy: the insurance broker responsible for arranging coverage and the Insurer actually carrying the risk.

My advice was based on the certain knowledge that the insurance losses arising from the events of 9/11 would severely strain the resources of Insurers and those that survived would not do so by being charitable when it came to paying claims. Rocketing premiums post-9/11 also meant “fringe” Insurers came into the market, looking for a quick profit.

The Rand, which had been weakening gradually, went into freefall, hitting R13,50 briefly in December 2001, before starting a recovery that has become the most popular dinner subject in SA, replacing dual citizenship and emigration consultants!

Incredibly, following 2001 as the worst year for global aviation Insurers on record, 2002 was the best, 2003 was as good and 2004 hasn’t been half bad, which has meant that the higher premiums following 9/11 have not been sustainable and the global aviation insurance market has been in a “soft” cycle (of reducing premiums) ever since, giving rise to over-capacity in areas such as general aviation and, for local Insurers, competition from the international market, desperate to regain lost premium income.

So, at a local level, we have Insurers competing with each other for a finite pool of business, while trying to remain profitable in the face of increasing competition from the international market. And just to make matters really interesting, the Rand has been behaving in an extremely unsporting manner!

The owner of a $2,5m turboprop might have borrowed R25m originally. The owner who buys it today only needs to borrow R15m. The aircraft is still worth $2,5m in both cases. Both owners need to insure. It creates an interesting predicament. Basic insurance principles dictate that the R10 aircraft should now be insured for R15m (the current market value). But that would leave the Owner R5m short following a total loss.

It’s cold comfort to consider that, as concerned as an individual aircraft owner might be, the local aircraft finance companies must be in a state of near-panic. After all, they loaned R25m on an aircraft that is now only worth R15m….and did that on how many deals they wrote while the Rand was weaker than it is today?

There is a solution to this particular problem, but this column is not the place. Call me!

On the positive side for local Insurers, repair costs should have fallen, because of the strengthened Rand. However, labour rates continue to rise and, depending upon the type of repair, the labour component can be substantial. Prices of spares that are imported now will obviously cost less. However, many repair facility carry spares stocks that were acquired when the Rand was weaker, so those prices will only reduce as stocks are replaced over a period of time.

Insurers have a big problem.

Firstly, they need to write business in order to get premium income. They have to compete to write the business, so it’s likely that the premium will be low, if not the cheapest in town (see last month’s column). Having got the initial premium income, the only way to try to achieve profitability is in how the insurance is managed. So this might include seeking additional premiums wherever possible. In other words, you got a competitive price on the basis that all pilots would have at least 1000 hours flying experience but Fred (remember him?!) now wants to hire your aircraft for a week and he only has 750 hours. Suddenly, up goes the price.

Another way for an Insurer to protect its position is by becoming more careful about claims and their settlement. The partial loss that, in the past, might have resulted in a write-off, is now repaired because it’s cheaper and the Insurer is not stuck with unwanted salvage to dispose of. However, the repair is going to take 10 months. Sorry for you!

Another claim has some technical difficulties. An AD hadn’t been carried out. The pilot’s medical had expired last week. Fred was the pilot (see above) and the additional premium hadn’t been paid. His previous accident history wasn’t disclosed. Your debit order had bounced and you hadn’t had time to pay the outstanding instalment yet. And so on. I could fill three pages.

So, the Insurer has a claim on the one hand and what appears to be valid and legal (if not particularly sporting) grounds for denying the claim. Times are tough. Jobs are at stake. The Insurer discovers that he only got this particular risk a month ago and the Insured has a history of chopping and changing on price alone. You choose.

But let’s assume that, as in most cases, there is nothing wrong with the claim and it gets paid without argument. What options does the Insurer have then? Well, there’s subrogation.

We’ve discussed this before. If an Insurer pays your claim, he is entitled to take over any rights of recovery you might have against a third party and you are obligated to assist the Insurer to exercise those rights (if you don’t, the Insurer can get its money back from you).

So the Insurer decides to sue the responsible party. That might be a workshop, a flying school or even poor old Fred. This is where you need to be sure you got the paperwork in order. If you agreed, in a jobcard or lease agreement, that you would not hold the other party responsible for any losses, that holds good for your Insurer as well. If Insurers weren’t asked first, they can get really difficult. This can be grounds for, once again, recovering the amount already paid to you. Even if there was no paperwork, what about Fred? He knew he’d need to pay your Excess (for which he has got his own insurance), but the entire R625,000 repair cost?!

As I said at the outset, the local insurance market is in crisis. Times are tough. It’s something of a war out there. You need to make sure you understand your side of the insurance contract and stick to it rigidly, make sure the paperwork is in order, pay your premiums timeously, tell your Insurer about any agreements in force, particularly those that affect your (and their) rights of recovery. And perhaps most important of all, make sure you have selected your broker carefully and that you are insuring with reputable, responsible Insurers who have a proven track record.

And on that happy note, I hope you enjoy the festive season and my best wishes for a safe and peaceful 2005.