Dennis Jankelow

Insurance is one of the most critical aspects of aircraft ownership and yet so often it is given scant attention with potentially disastrous consequences in the event of loss. Insurance is nothing more than a promise of future conduct and the only time you’ll know if it has worked is when it is too late to change anything. The care and attention that is put into the initial selection and purchase of insurance is of paramount importance.

A well-known insurance underwriter from Lloyd’s was being questioned by a client about the cost of his insurance, which appeared to be higher than what was available from an alternative market.

“We don’t compete on price”, he told the client. “In fact, we like to think of ourselves as being “reassuringly expensive!””.

When aircraft owners first hear that story, their initial reaction is to dismiss it as the ranting of a conceited and arrogant insurance underwriter. But that is too simplistic and there are very important lessons to be learned from it.

The first is that insurance should never, ever, be purchased on price alone. In the eternal search of a cheaper premium, the policyholder will inevitably be the ultimate loser. Because, as we’ve all been taught since childhood, there is no such thing as a free lunch, buying cheaply to save money is like stopping a clock to save time, if it sounds too good to be true it usually is, and all those other cute sayings.

Generally-speaking, a lower premium means one of three aspects has been compromised to one extent or another.

Most often, the coverage is less. This may be something obvious, like the aircraft sum insured, or the level of legal liability insurance. Usually, however, it will be a number of less noticeable things that, taken together, mean the cheaper product is inferior to the one that cost a bit more. These might be found in the “coverage envelope”, which is the “Uses” “Pilots” and “Area” provisions of the coverage, which effectively define how and when the insurance will apply. Or you might have to dig a little further into the nitty-gritty to see where savings have been achieved.

For example, a very important aspect of coverage is something known as an “Unauthorised Use” extension, which basically provides that, if the aircraft is operated outside the “coverage envelope” without the owner’s knowledge or consent, the insurance will remain in force insofar as the interests of the owner are concerned. Some Insurers, in order to help to keep the cost of their coverage lower, and therefore more competitive than other Insurers, will limit the “Unauthorised Use” coverage to circumstances where the aircraft has been stolen. So, if you loan or hire your aircraft to a third party – whether an individual pilot or a charter company – and the aircraft is operated outside the “coverage envelope”, you will have no coverage, even if you knew nothing about it and you had given the third party concerned clear, written, instructions regarding what was permitted and what was not. Since “theft” is an insured peril anyway, the effect of limiting the “Unauthorised Use” coverage in this way is to remove it altogether: it just looks as if the extension exists: “now you see it, now you don’t”. Some Insurers consider that this reduces their exposure to loss (it certainly does, at the owner’s considerably expense) and will therefore offer a lower premium.

Sometimes, the differences are not even as obvious that this. Any aircraft insurance programme is written on the same basic policy wording, which provides basic coverage. The function of a specialist aviation insurance broker is to amend and adapt the basic contract wording to suit your own particular circumstances, to ensure that your specific needs and operation are properly protected.

However, if the broker knows or believes that price is the ultimate factor that will decide whether he wins or loses your business, the temptation will always be to put forward quotations for restricted coverage in order to reduce the price and increase the chances of getting a firm order.

Another casualty in the price war may be the security of the Insurer from whom the cheaper quotation has been obtained. Insurance companies are not infallible and they do fail from time to time. Those who are financially weaker than others cannot offer their financial strength as a selling point and must attract business in other ways…by reducing their premiums. Insurers all over the world are watched by various ratings agencies, which grade them according to their financial strength i.e. their ability to fulfil their claims-paying obligations, which should always be distinguished from their claims-paying willingness! The agency which is the recognised leader in the insurance sector is Standard & Poor’s and it rates over 22,000 insurance companies around their world on a scale starting at AAA and dropping to CCC. Insurers rated BBB or better are considered “Secure”, whilst Insurers rated BB or below are considered “Vulnerable”. If you buy insurance from an Insurer rated BBB, there will be a greater risk of that Insurer being unable to fulfil its claims-paying obligations that an Insurer rated, say, AA. So, in addition to the premium quoted by the BBB-rated Insurer, you should always add something for the additional risk you are taking. And if you do that, chances are you’ll be able to buy from the AA-rated Insurer at the same overall cost.

Insurance is about transferring risk, not merely swapping one type of risk for another.

The third area which is often compromised in order to keep the price down is service. Aviation is one of several specialist areas of insurance where the “go it alone” approach is extremely dangerous. The ownership and operation of aircraft is subject to a large body of laws and regulations, and all aviation insurance policies require strict adherence to applicable legislation. The construction of the policy itself becomes crucial in order to ensure the most effective protection.

Aviation insurance should never be arranged directly with an insurance company, notwithstanding the number of times you hear the radio exhorting you to “…cut out the middleman…”. Nor should you leave it to your general insurance broker to handle your aviation insurance requirements. There are many thousands of extremely good insurance brokers in South Africa, and the quality of the service and advice they provide is unquestioned. However, Aviation is one of several specialist areas that requires specific knowledge and experience. Either contact a specialist broker directly or discuss with your general broker the advantages of working through a specialist firm. Don’t ever believe that, by dealing directly with an insurance company, the insurance company is saving money and that will ultimately benefit you. The commission they don’t pay your insurance broker goes to the telesales staff, the cost of the massive computer system, and so forth, and the overall cost to the insurance company is greater than if they paid brokers commissions. No, the attraction to the insurance company is that it is able to deal with the policyholder one-on-one and guess who’s going to be the loser every time? It’s much easier to fight Mr Public, who pays XYZ Insurance a premium of R10,000 a year, than to fight Mr Public’s insurance broker that pays the same insurance company a premium of R25,000,000 a year.

Regardless of the business concerned, service costs money. Whether it’s the cost of providing the 24-hour attendance at your local veterinary clinic, or the all-night supermarket down the road. So it is with insurance and you should carefully consider the levels of service that the broker and recommended Insurer are able to provide as part of your selection process. The broker that offers the cheapest premium, but is unable to provide you with day-to-day service and advice, or whose idea of claims-management is to give you the direct telephone number of the Insurers’ claims department, is not part of the team that you need in your corner.

The same goes for the Insurer itself. The lower premium which comes from an Insurer based in Russia, India or even Costa Rica (don’t laugh…they’re out there, believe me!) may look very tempting on paper, but consider what sort of service you are going to receive the moment your hard-earned cash has been transferred out of the country? There are many examples, in South Africa, of aircraft owners who have rued the day they allowed themselves to be smooth-talked into buying their coverage from such Insurers. Any time you are offered insurance from “the alternative market”, run like hell! Remember to ask for the current Standard & Poor’s rating of the Insurer concerned. If it’s “BBB” or below, reject it. If it is not rated at all, this is not necessarily a bad thing - several Insurers in South Africa are not followed by S&P – but don’t accept any foreign-based Insurers that do not carry a current S&P rating of “A-“ or better. A “secure” S&P rating is no guarantee that all your claims will be paid or that the Insurer will never go to the wall. However, it is proven to be a very accurate indicator and one that should always be followed.

How often have you purchased something on the strength of an advertisement, or a picture in a magazine, only to have been disappointed by the reality? Any marketing executive will tell you that the way in which the product is presented (packaged) is as important as the product itself. Because if you don’t catch the consumer’s eye with the packaging, you won’t even get the chance to prove the quality of the product itself.

Some people call this “marketing”. Other, more cynical types, refer to “smoke and mirrors”. Be wary of the smoke and mirrors when considering which aviation insurance product to purchase.

One particular favourite is the “No Claims Bonus up front”. You need to be very careful of this one. It is not uncommon for insurance companies, particularly in the South African market, to offer a No Claims Bonus as part of the package. In the simplest terms, this means that if you don’t claim, you’ll get some of your premium returned to you.

But there’s a catch. The No Claims Bonus is only payable if you renew your insurance on the same basis and with the SAME Insurer. It is not paid if you don’t renew your policy for any reason (you moved to another Insurer, sold the aircraft) or even if you renew on a difference basis (“Ground Risks Only”, for example). So, a No Claims Bonus is really a “No Claims Plus Renewal With Us on the Same Basis Bonus”.

That’s the first point. Then it gets really creative. To make the packaging look even better, some Insurers will discount the up-front premium by the amount of the potential NCB i.e. on the assumption that you’ll renew in 12 months, without claim, on the same basis, etc. So that makes the premium look cheaper straightaway. The catch, of course is, what happens if you have a claim? Well, read the fine print: you’ll have to repay the up-front discount in addition to your Excess, etc. If you don’t have a claim, but decide to move your business to another Insurer, what then? Well, let’s just say that possession is 9/10ths of the law and the discount is already in your pocket!

Insurance is a very serious business. Aviation insurance the more so, because of the nature of flying and the potential for significant losses. The decisions that are taken at the outset are crucial, because when a loss has occurred it is too late to change them. So you have one chance to get it right. Use a broker, ALWAYS. Ensure your broker has specialist aviation knowledge and ability, ALWAYS. Resist the temptation to “cut out the middleman” – you’ll lose every time. Insist on mainstream aviation insurers and always ask for the current Standard & Poor’s rating. Ignore the smoke and mirrors.

Remember that insurance is a means of transferring risk. Do not merely swap one type of risk for another.