|
AVIATION INSURANCE IN 2009…THE STORM CLOUDS GATHER
Only the most reclusive of recluses could have failed to notice
the crises that have been battering the world’s financial markets in the past 12
months.
Following the 2004 tsunami, many of us in South Africa felt that it wouldn’t really
impact us and it’s true that we were not affected in the immediate aftermath. However,
it wasn’t long before the waves created by that subterranean earthquake on the other
side of the world started to batter the shores of Africa.
The lesson learned was that, no matter where we hide in the
world today, any major disaster – natural or financial – will ultimately affect
all of us, to one extent or another.
The virtual collapse of the world’s equity markets has had a
devastating effect on all sectors of the world’s economy, including the global
insurance industry.
Whilst the insurance market has been in freefall for several
years, there were still profits to be made in certain sectors, with the notable
exclusion of the aviation market which, in 2007, turned in its first major loss
since 2001 and which, by all accounts, will be easily exceeded by the losses
made in 2008.
Insurers who did, however, make good profits needed somewhere
to invest them….and the rest is history.
The near-collapse of American International Group – the world’s
largest insurer – which was saved only by a massive financial bailout by the US
Federal Government, which now owns 80% of AIG’s stock, was the insurance
market’s equivalent of hearing that the Rock of Gibraltar was about to split
open and fall into the sea!By the way, for anyone who has not been to
Gibraltar, it’s well worth putting it on your list of destinations
to visit before you’re too old to travel!
Whilst it appears that AIG had become involved in underwriting
extremely high-risk insurance related to the sub-prime market in the USA, AIG’s
problems did illustrate that not all insurers are the same and, when times get
really tough, only the fittest will survive.
The aviation insurance industry has, in 2009, entered what is
euphemistically called a “hard market”.
All indications are that this will endure for the next 2-3 years until
market forces once more come to bear and, as night follows day, the market will
enter a “soft” phase again.
What are the characteristics of a “hard market” and how do they
affect the average aircraft owner who carries insurance coverage?
1 - Insurance capacity shrinks.That is, Insurers become more selective about
the types of risk they will underwrite, or may withdraw from the aviation market altogether.
This reduces supply and results in increased prices.
2 - Coverage terms and conditions are applied more rigorously. For example, if coverage is based on
pilots with a minimum experience level, additional premiums will undoubtedly be
charged for the inclusion of pilots who do not comply. If recurrency training is called for,
it MUST be carried out timeously. There are many examples.
3 - Premium payment terms are enforced, with automatic cancellation
in the event of late payment becoming more common (and dangerous!).
4 - Claims settlements are made strictly in accordance with policy
terms. If a claim is not covered,
due to a breach of policy conditions, no matter how technical, settlements may
be prejudiced.
5 - Weaker Insurers may fail completely, leaving policyholders with
no coverage, lost premiums and current claims unpaid. Who can forget the fallout from the
collapse of the AA Mutual in 1986, which left thousands of policyholders with
unpaid claims, cars stuck at panel beaters, etc?
The mere fact that the insurance market is entering a hard
phase is no reason to immediately ground your aircraft or put it up for sale!However, just as in any area of life,
when conditions become more difficult, greater care needs to be taken.
So how should an aircraft owner – let’s call him Joe - ensure
that the hardened insurance market will not unduly affect his insurance
protection?
At Dennis Jankelow & Associates, we refer to four keys aspects
of any insurance programme which need to be kept in balance with each other: we
call this The Right Approach to aviation insurance. This is perhaps even more relevant in
difficult market conditions than at any other time.
In no particular order (because they are all equally
important), the four key areas are:
Coverage
Joe must ensure that the coverage being offered is exactly what
he requires, based on his particular risk profile. In particular, care must be taken to
ensure that the aircraft value is appropriate, taking into account factors such
as the current USD/ZAR exchange rate.
In the past twelve months, the value of a $500,000 aircraft has varied
from as little as ZAR3,400,000 to as much as ZAR5,100,000. So, if Joe insured his aircraft for
ZAR3,400,000 in January 2008, a total loss today would cost him up to
ZAR1,700,000 in lost coverage if he hadn’t amended the sum insured in the
meanwhile. Consideration should be
given to specifying a USD value for many types of aircraft, which creates a
built-in “hedge” against currency-related fluctuations. The basic aircraft hull insurance
wording will usually require fairly substantial amendment so as to “fit the
bill” appropriately and to ensure that coverage has been maximised.
Legal Liability insurance is another area that requires careful
consideration. All too often,
liability coverage is overlooked as an unnecessary expense. However, in the event of a loss
involving death or serious injury, the level of coverage that Joe had arranged
will be all that stands between him and potential bankruptcy. In a recent tragic accident, in which
a fully-laden aircraft crashed with the loss of all on board, it was found that
the legal liability insurance coverage was limited to ZAR2,500,000 overall –
hardly sufficient to cover legal costs, let alone provide any meaningful
compensation. The selection of a
sensible and appropriate level of legal liability coverage is a vital part of
the risks analysis that should be carried out by Joe in conjunction with his
insurance broker or other advisors.
A proper “needs analysis” should be conducted (it doesn’t need
to be as formal as it sounds!) to ensure that the various coverages, which are
available to deal with different exposures, have been identified, considered and
a decision made as to whether or not to effect such insurance.Following a major engine breakdown is
NOT the time to discover that Joe could have insured against such a loss but
no-one thought to say anything! The
same goes for a variety of types of aircraft-related insurances, such as Loss of
Use, Deductible Buy-Down, Total Loss Only, Personal Accident, and so on.
Security
In difficult times, only the most financially secure insurers
will be able to survive whilst maintaining high levels of coverage and service. But how does Joe establish what the
financial strength of any given insurer is?
This is where the ratings agencies come in. These are companies which specialise
in monitoring a whole range of companies – including insurance companies – and
reporting on their financial strength and/or creditworthiness. For the insurance industry worldwide,
the most widely-followed rating agency is Standard & Poor’s, although there are
others who will also rate insurance companies according to their own rating
philosophy. The key here is to
choose a ratings agency and stick to it. All too often, it is tempting to look at different agencies’ ratings of
the same insurer and then choose the rating that looks the best!Unfortunately, many insurance brokers
fall into this trap and the result can be extremely misleading.Follow one agency and commonsense
dictates that you will always get an accurate comparison between one insurer and
another and you will quickly learn what rating should be considered as a
minimum.
In general terms, most international insurance brokers will
require a minimum “A series” rating from Standard & Poor’s in respect of any
insurer being offered to their customers. style="mso-spacerun:yes">
Where other insurers are concerned, such brokers will either decline to
use them or may ask the customer to sign an indemnity undertaking, absolving the
broker from any blame should things go wrong. style="mso-spacerun:yes">
Such undertakings are variously referred to as “chicken letters” or
“weasel words”…the names say it all…and Joe should avoid such insurers (and
insurance brokers) like the plague.
Not all insurers in
South Africa are rated by Standard & Poor’s,
although the major ones are.The
only A-rated insurer in SA, which offers aviation insurance, is currently Santam
Ltd.
Service
Once insurance coverage has been arranged, the levels of
service offered by both the insurance broker and selected insurer(s) are
crucially important.After all, what
good is the best coverage from a fine insurer if they are not there when Joe
needs them and cannot provide day-to-day service and advice to support his
operation? Of course, once the
insurance has been purchased, it’s too late for Joe to worry about service, so
this is an aspect that needs careful consideration in advance.
There is a difference between an insurer’s ability to pay a
claim (i.e. its financial strength) and its willingness to pay claims.Whilst financial strength is
fundamental, it becomes meaningless without a high quality claims service and
proven claims-paying willingness.
Similarly, an insurance broker which is not well-versed in
aviation insurance, with a proven track record of service, advice and
claims-handling (bearing in mind that brokers administer claims, they don’t
actually pay them) is going to be of very little benefit once the policy has
been arranged.
Cost
When all is said and done, it always comes down to the money!The finest coverage, most secure
insurer and unsurpassable service levels will always come at a price.The expression “you et what you pay
for” is certainly applicable to any form of insurance and especially so in terms
of aviation insurance.
It was John Ruskin (1819-1900) who encapsulated the dangers of
buying on the basis of price alone, when he wrote:
There is hardly anything in the world that
some man cannot make a little worse and sell a little cheaper. People who
consider price only are this man’s lawful prey.
It is unwise to pay too much, but it
is even worse to pay too little. If you pay too much, you lose some money, that
is all. If you pay too little, however, you will sometimes lose everything, as
the thing you bought cannot do the intended job.
The law of economy forbids to
obtain something of high value for little money. If you accept the lowest bid,
you must add something for the risk taken by you. And if you do so, you have
enough money to pay for something of higher value.
A well-known Lloyd’s Underwriter was
once as quoted as saying that he believed his premiums were “reassuringly
expensive!”.The message remains
clear: for everything, insurance included, there is a reasonable price at which
the product will do what you intended, properly, efficiently and without causing
any undue problems.
Trying to save money by buying cheaply
can be likened to stopping a clock to save time.
And this is more true in the aviation
insurance market in 2009 than at any time in the past 10 years.
So whilst the storm clouds are
certainly gathering, there is no need for panic or concern.However, more so than ever before, it
is incumbent on aircraft owners like Joe to take a detailed interest in how
their insurance affairs are conducted and to make decisions based on the factors
I have outlined – The Right Approach – rather than emotion or the desire to save
premium, no matter what the consequences.
|
