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Insurance Perspective

J

JDRhodes

Well Known Member
It?s probably no secret here, but I am an aviation insurance broker. While I have a handful of RV insurance accounts ? namely my family members, friends, and a few others I?ve collected over the years ? my bread and butter are accounts of a significantly larger nature. Corp flight departments, FBOs, maintenance shops, etc. Because of my professional interest in aviation insurance and my personal avocation of flying RVs (and other little airplanes), I typically monitor and contribute my $0.02 to the ?Insurance? topics discussed here.

I?ve noticed over the years that there sometimes creeps in a theme of ?insurance companies should lower their premiums for RVs. We are safer than the norm and the airplanes are better than the norm, etc... When will some insurer finally recognize this huge profit potential and give us a break??

Allow me to give some perspective, allowed by my view of the big picture that those outside the insurance business aren?t privy to.

I am currently working with a claim. The aircraft in question is an airliner being used as a corporate jet. Several months ago the airplane suffered MAJOR engine damage on both engines due to significant ingestion of FOD. The policy is written with a major aviation insurer ? one that is also one of the more common underwriters for RV policies. The annual premium on this policy is about $150,000 ? 100 times an average RV policy. This premium is actually historically VERY low, for this type of risk, due to the current soft market.

At the end of the claims process this insurer will have paid out about $11,000,000 for repair of the 2 engines, plus an estimated $2,000,000 in airframe damage and a host of expenses related to the claim.

The promised perspective ? If we estimate 4,500 insured RVs nationwide, each paying an average premium of $1,500 ? that?s $6.75 million in premium paid by ?us? RVers each year. That premium is spread over five or six different insurers, with two or three having most of them. The total premium of every RV in the country is half what this one insurer is paying out on this one claim on one airplane ? where nobody was even injured.

My point is that any of the insurers offering RV policies could decide tomorrow that they don?t want ANY of them ? and they wouldn?t even miss them. We occupy a VERY small little niche of the marketplace. It is very important for us to keep our noses clean and not give the insurers we have ANY reason to suspect that RVs might not be worth the trouble. Three or four high profile losses in a year could really make the difference for an insurer. The loss of a single market could easily double the premiums we pay. It?s that important. Fly Safe!
 
Perspective

Hi

I doubt that your explanation will do anything to make RV pilots any happier about their insurance costs. I for one have no interest in what you charge for insuring a Bizjet......... nor what you have to pay out in respect of a claim on that Bizjet. Simply put the premium for the Biz jet should reflect the risks it reflects.

Similarly the premium on an Rv should reflect the risk that it and its prospective pilots represent. If an RV is safer/easier to repair than another type the premium should reflect it.

I have just renewed the insurance on my RV 9. Quotes for similar cover were ?2700, 1750 AND 1260 from three different insurers. Were the providers of the first quote repairing a bizjet which is nothing to dowith me or were they just trying to rip me off, I could ask the same about the second quote.

Bearing in mind that I have been flying for 20 years with no accidents, in fact none of the members of our group have any accidents, in what amounts to over 60 years of flying.

Personally I would return to the days when we did not have to insure as I was happy to carry the risk.

I wonder how many people have actually benifited from us having to insure other than insurance companies creaming in the premiuims.
 
Humm...

My RV9A insured for $1700. My cars insured for $1000 per year.
Value of my insured cars is about $15000 and only one of them carries full coverage. My plane is worth about $80,000.

Yes, I want lower rates, but my current rate doesn't look out of line.

Kent
 
Insurance perspective

I think you should reconsider your perspective. The risks associated with an aircraft claim is essentially the same for all aircraft. The aircraft is but one small aspect of a potential claim. Lives involved both in the aircraft or on the ground make the majority of the risk. Think Tort lawyer. A nasty pitbull dog with fangs the size of a killer whale latching on to your back side.

The author?s point is that our pitifully small premiums are a rounding error on the balance sheet of the insurance companies and thus we are at their mercy, whether we like it or not. He points out we should self police, to ensure we are being as safe as we can. Your lack of claims, though admirable, does reflect in your premium but only to the extent of the hull value as the personal risk NEVER changes. Lets not forget an insurance company is a business and therefore in to make a profit and provide a service, THAT WE NEED, to fly. Compare your insurance premium to your home, its about the same rate but your home does not travel at 150KTS and land on an elementary school or nursing home roof and injuring people.

For the record I have to hold my right hand with my left to endorse my check each year, however I have buddies that have submitted claims and they were glad to have insurance.

Viva la Insurance Company.

So I can fly.
 
Policy

WAM, I think you are missing Jeff's point. By comparing the premium paid by one bizjet operator to the entire fleet of RVs, he is illustrating how little influence we hobbyists have. This is a little like the Avgas discussion, when you are consuming less than 1% of the "product," you have to remember that you don't have much of a vote. Frustrating as it may be, it is the way the system works, and frankly I don't want experimental aviation to ever be "mainstream." As to the "never had an accident" argument, very few of us have had to collect on a policy. But overall the accident statistics are not good when compared to certified aircraft. The lesson that I took away from Jeff's post was that the insurance carriers could, with very little relative loss of revenue, abandon the homebuilt market.

John Clark ATP, CFI
FAA FAAST Team Member
EAA Flight Advisor
RV8 N18U "Sunshine"
KSBA
 
WAM120RV said:
Personally I would return to the days when we did not have to insure as I was happy to carry the risk.
Click to expand...


Self insuring for all or part of the hull value is one thing, self insuring for the liability could be costly, indeed!:eek:

That being said, I don't think there is any requirement to insure your airplane in the US. May be different in the UK.

I appreciate Jeff's post and his perspective.
 
Hi Jeff,

Thank you for the post! Can I ask you an RV insurance question? Do you know of an insurer that offers more than $100K of passenger liability? My insurance AIG through NationAir is $1M liability _but_ (and its a bit but) limited to $100K per passenger.

I suspect if someone died that $100K of liability would disappear like that. Thus making me nervous/careful about taking passengers at all.

Kevin
 
The lesson that I took away from Jeff's post was that the insurance carriers could, with very little relative loss of revenue, abandon the homebuilt market.
Click to expand...


.....as AVEMCO did.
 
JDRhodes said:
My point is that any of the insurers offering RV policies could decide tomorrow that they don?t want ANY of them ? and they wouldn?t even miss them. We occupy a VERY small little niche of the marketplace. It is very important for us to keep our noses clean and not give the insurers we have ANY reason to suspect that RVs might not be worth the trouble. Three or four high profile losses in a year could really make the difference for an insurer. The loss of a single market could easily double the premiums we pay. It?s that important. Fly Safe!
Click to expand...

Jeff,

Your point is well taken that we are a tiny part of the market. Turning this around, why do these companies bother with insuring RVs at all? Obviously they think there is something in it for them. Do the reinsurers look at each individual policy, or do they just take on all the policies of Avemco or whoever? (in other words who is ultimately deciding which kinds of aircraft to insure?)

Personally I think our rates are pretty reasonable, considering the word Experimental is attached to the airplane in 2" letters. On the other hand the process of generating quotes seems rather opaque, perhaps intentionally so? Its nice to have someone like yourself take the time to explain things.
 
Jeff,

Follow-on from Kevin's question. I occasionally use my airplane to get places for the university (state). I have recently been told that I can not do this (officially) unless I have $2M worth of liability (within the state) and $5M liability out of state. Is there anyone out there who offers such coverage? My current insurer indicated to me not, but perhaps you have a different answer? I'm up for renewal in Dec, so would be happy to switch if I can find the coverage I need.

greg
 
Explanation - in a 1000 words or less

Alan Carroll said:
Jeff,

Your point is well taken that we are a tiny part of the market. Turning this around, why do these companies bother with insuring RVs at all? Obviously they think there is something in it for them. Do the reinsurers look at each individual policy, or do they just take on all the policies of Avemco or whoever? (in other words who is ultimately deciding which kinds of aircraft to insure?)
Click to expand...

Ultimately, the money backing the guarantees in all policies comes from the worldwide reinsurance marketplace. You buy insurance from a broker, who shops among several underwriting companies ? these are the names you recognize: Global Aerospace, USAIG, Chartis, Phoenix, etc. Underwriting companies ?underwrite? aviation risks on behalf of insurance companies. These insurance companies do lots of different kinds of insurance, not just aviation. These are names like Old Republic, Chubb, Federal, Fireman?s Fund, Hallmark, etc. Names that we don?t usually associate with our aviation policies, but if you look, those are the names on the top of your policy. That?s where the money comes from.

Going even further, these companies often insure the risk of their own portfolios by laying off some percentage of the risk to ?reinsurers.? All these deals are usually negotiated annually and are strictly investment decisions. The duty of Global Aerospace is to make the aviation insurance portfolio profitable for its member insurance companies. When premiums are high and/or losses are low, more insurance companies want to ?invest? in aviation risk. The opposite is true as well. After 9/11/2001, for instance, many insurance companies began to perceive aviation as a greater risk and the underwriting companies found it more difficult to find insurers willing to invest in their risk portfolios. So prices went up and underwriting standards tightened in an effort to boost the premium to loss potential ratio.

A long way around to your question, Alan. ?Why do companies write RVs?? The reinsurers and the insurers at the top of the policy don?t know or care what makes an ?RV? different from a 737, an aircraft paint shop, or Beech Baron. All they know is that that ?our aviation risk portfolio made a 15.67% return on investment last year? ? and how that compares to other risk portfolios that they could be investing in ? trucking, railroads, monetary funds, pork bellies, oil - whatever.

The underwriting companies decide what types of aviation risk to write, and at what terms and pricing. Most of the big companies (Chartis, Global, USAIG, etc.) are in to almost every kind of aviation risk ? Cubs to A-380s. Others are limited to lower hull values and liability limits, because they are backed by smaller investors. Most take the stance that we will write everything aviation that?s within our limit authority unless there is a clear reason NOT to.

Underwriting companies set basic standards for pilots, training, airports, types of use, etc. and then constantly tweak pricing to obtain the right mix of quotes to bound accounts ? if they are getting orders on everything they quote, then the pricing is too low, and vice versa. Then they review losses within certain groups. If there are any patterns of excessive losses, they can decide to stop writing segments of the market. More commonly, though, they will push pricing up so that they are getting fewer of the offending class of business. Supply and demand forces soon spread those premium increases throughout the segment.

The point being ? You DO care about bizjet losses. You DO care about airline crashes in Thailand, you DO care about the safety training that the line service staff at the airport across town receives. All those things go into the mix of determining what reinsurers charge insurers, what insurers demand of their underwriting managers, and ultimately what YOU pay to insure your RV.
 
Greg Arehart said:
Jeff,

Follow-on from Kevin's question. I occasionally use my airplane to get places for the university (state). I have recently been told that I can not do this (officially) unless I have $2M worth of liability (within the state) and $5M liability out of state. Is there anyone out there who offers such coverage? My current insurer indicated to me not, but perhaps you have a different answer? I'm up for renewal in Dec, so would be happy to switch if I can find the coverage I need.

greg
Click to expand...

Greg and Kevin - NOPE. every company - with very rare exception limits the liability coverage on experimentals to $1 Mil LIMITED to $100,000 each passenger. Buy a Cessna and you might can get more. But not much more.

Greg - your employer either had their risk management department write the policy without any understanding of what lmits are available, or more likely, would rather you not use your homebuilt airplane on company (state) business. That's not an uncommon stance. See if they will accept the available coverage and explain that more is not available. SOMETIMES the logic of risk trade off will prevail (ie 1 hour in the plane might be safer than 4 hours in the car). But don't be surprised if the answer in "NO."
 
Quote:
The lesson that I took away from Jeff's post was that the insurance carriers could, with very little relative loss of revenue, abandon the homebuilt market.

DanH said:
.....as AVEMCO did.
Click to expand...

This caught my attention. Dan, are you saying that AVEMCO no longer insures homebuilts? I just called AVEMCO to verify that they cover homebuilts. The lady I taked to told me that they have no problem providing full coverage for what I'm building (RV-9A). She did go on to say however that they won't fully cover some homebuilts. I didn't press her on those details. I'm happy that mine will be covered.
 
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JDRhodes said:
Ultimately, the money backing the guarantees in all policies comes from the worldwide reinsurance marketplace...
Click to expand...

Jeff,

Thanks for the thorough and clear explanation.

My own observation has been that insurance has actually been getting a bit cheaper the last couple of years, as you mentioned. I take it this is partly tied to the global economic situation? (ie competing investments aren't returning as much as they once did?)
 
ArVeeNiner said:
This caught my attention. Dan, are you saying that AVEMCO no longer insures homebuilts?
Click to expand...

AVEMCO still covers homebuilts, but they were double what I was quoted by other insurers.

And, I have a 20 year claim free history with them.

Needless to say, AVEMCO is not getting my business for the 10.
 
AVEMCO's strategy is a little different. No they didn't abandon the homebuilt market, per se.
But, they do HEAVY advertising. If you're not doing your homework, that might be the only airplane insurance market that you know of. Hey - they're all over Oshkosh, they sponsor airshow persormers, my buddies alll wear the free hats they send out.
So you call and get your policy. ...and it automatically renews year after year after year. ...and you don't know that you're paying 2X too much for 10 years. :eek:
 
Jeff, Several years ago as the first dozen or so customer built RV-10's were being born, there was a gentleman in Arizona or Nevada (iirc) who was trying to put together a group of RV-10 fliers to unite and self-insure. Do you remember that discussion? If so, do you have any comments on the idea? I'll try and do some research and dig up the thread...not sure if it was on VAF, Matronics, or maybe even the Yahoo/James McClow forum. TIA, -Jim
 
Insurance works when a large group shares the risk, making it finite for any one member of the group. That's the very basis of insurance.

With a small group, I don't think you'd have the premium volume to handle any real risk.
Let's say you could get 50 RV-10 owners to join your group. To make it worthwhile, I would think that you'd want at least one of the following:
1) lower premium
2) more lax underwriting (ie pilot qualification)
3) enhanced coverage - higher liability limits, maybe?

If all 50 of you paid $3,000 annually in premium, you'd generate $150,000. That premium wouldn't be enough to cover even one total hull loss the first year. If you make it a year loss free - great! If not, you've bankrupted your tiny insurance co-op and all of you have wasted $3,000 and now have no coverage.

I don't think 50 RV-10 owners are going to take this risk when they could just go buy commercially available insurance for the same $3,000 and be guarenteed to have their loss paid.
 
Knowledge is always a good thing. However, when I hear someone in the insurance business "explain" something to me it comes across as a cost rationalization. Why does the insurance industry (or investors) deem the need for 15+% profit in a 1% CD market? Yes, it's not equal risk but when spread out over large enough groups of insureds it's generally not risky as proven by annual return statistics. Gambling is "risky" yet a casino can accurately predict margins well in advance. The 50 folks self insuring RV10s is risky because it's only 50. Even at that it would take a 2% payout (very high) to deplete their funds. Still, too small a group for balancing risk.
My "explanation" for my personal attempt at rationalizing insurance goes like this this. In 1989 I insured a Varieze, Liability only--standard 100,000/1,000,000. The cost was $92. If I were to call for that same coverage on the same plane today, it would be in the $500 range. Keep in mind, inflation is NOT a factor as the dollar limits are identical then and now. It was as unfriendly a tort market back then with more high dollar aviation cases than now. My personal opinion is that underwriters and investors want higher returns with less risk (in a low return environment). Premium monies that were also invested have poor returns and the industry overhead has outpaced inflation.
Overall, insurance "risk" doesn't add up. If an average 100K hull premium is 2K is there really going to be more than one in 50 aircraft getting totaled each year??, Not sure what the real number is but if it is 1 in 200 or 300 that doesn't sound very risky. Yes, there are catastrophic events such as tornadoes but in a shared risk nationwide environment it's a small percentage and not all encompassing like stock investing when the market dumps.
 
Flybuddy2 said:
Knowledge is always a good thing. However, when I hear someone in the insurance business "explain" something to me it comes across as a cost rationalization. Why does the insurance industry (or investors) deem the need for 15+% profit in a 1% CD market?
Flybuddy,

Sorry you feel that way. Really - I'm just trying to help my fellow VAFers understand the process. Not rationallizing anything. I'm a broker - so my job is to buy for by clients as low as possible anyway.

If insurers were happy with 1% margin, then they'd just buy a billion dollars worth of CDs. To get any busisness to take a risk, there has to be some upside potential. That said - underwritng profits in aviation are no where near 15%. 90% loss ratios are considered very good years.
Click to expand...
Click to expand...
 
Thanks!!

Jeff, thanks for taking the time to explain all of this to us.

Really appreciated.
 
Jeff--I apologize...Not personally directed toward you, just expressing my (generally uninformed) opinion. I appreciate the fact that you did post and passed on an informed opinion and valid info. Insurance, overall, just never seems to add up to me. thx Tom
 
Jeff,

A random question...

What happens if a monster T-storm comes through Oshkosh one year and balls up or seriously hail damages 10,000 airframes in one 15 minute disaster?

Are the underwriters sufficiently stable to handle $100,000,000 or more in claims?
 
Chump change

Kyle Boatright said:
Jeff,

A random question...

What happens if a monster T-storm comes through Oshkosh one year and balls up or seriously hail damages 10,000 airframes in one 15 minute disaster?

Are the underwriters sufficiently stable to handle $100,000,000 or more in claims?
Click to expand...

One new A-380 costs over $350,000,000. I have to think that the financiers/leasing companies demand that they are insured.

John Clark ATP, CFI
FAA FAAST Team Member
EAA Flight Advisor
RV8 N18U "Sunshine"
KSBA
 
Kyle Boatright said:
Jeff,

A random question...

What happens if a monster T-storm comes through Oshkosh one year and balls up or seriously hail damages 10,000 airframes in one 15 minute disaster?

Are the underwriters sufficiently stable to handle $100,000,000 or more in claims?
Click to expand...

Yes - But that would be quite an aviation disaster. I've worried about that before as one of those late summer black monsters gathers around OSH.

The insurance industry pays out $100 Mil in many airline disasters. But it does cut in to their obscene profits for the year;)
 
fehdxl said:
Jeff, Several years ago as the first dozen or so customer built RV-10's were being born, there was a gentleman in Arizona or Nevada (iirc) who was trying to put together a group of RV-10 fliers to unite and self-insure. Do you remember that discussion? If so, do you have any comments on the idea? I'll try and do some research and dig up the thread...not sure if it was on VAF, Matronics, or maybe even the Yahoo/James McClow forum. TIA, -Jim
Click to expand...

That was me. The concept was based on several self insured groups I managed at the time. I approached several insurers who specialized in managment of such groups. They were interested and said it was a doable project. Basically the group would have a large deductible, boiled down to one RV-10 loss, after that an excess policy would cover anything above and beyond that. The key was to not have any losses for several years, building up members equity in the fund. If you wanted to participate we had mandatory risk reduction measures such as the ASF couses, FAA wings etc. The up front costs were not that bad but you had to make a financial commitment of one year contribution (premium) and a initial buy in to the program to cover setup. And yes, there would be risk of losing your investment. In the end there was just not enough people interested in risking their cash to become a member. Bullet dodged? maybe the only RV-10 fatality wsas one of the first to commit to the program. The soft market in insurance is another possible bullet dodged.
 
Kyle Boatright said:
Jeff,

A random question...

What happens if a monster T-storm comes through Oshkosh one year and balls up or seriously hail damages 10,000 airframes in one 15 minute disaster?

Are the underwriters sufficiently stable to handle $100,000,000 or more in claims?
Click to expand...

My dad was in the insurance business for 50 years..not with airplanes though. For catastrophic losses, insurance companies have insurance companies. In other words, once a claim reaches a certain level, re-insurance kicks in...or if the company suffers multiple large losses (tornado's) then it kicks in. I think that is how it works.

My dad and I had HUGE arguments about insurance when I was young and stupid. Clearly, I always lost.
 
Yes...

Pave Tim said:
My dad was in the insurance business for 50 years..not with airplanes though. For catastrophic losses, insurance companies have insurance companies. In other words, once a claim reaches a certain level, re-insurance kicks in...or if the company suffers multiple large losses (tornado's) then it kicks in. I think that is how it works.

My dad and I had HUGE arguments about insurance when I was young and stupid. Clearly, I always lost.
Click to expand...

...but when a company puts all of it's eggs in one basket (or homebuilts) and a large loss occurs - then they bail out and competion for your insurance $$ is lost.

This happened to our house policy after the Northridge earthquake - 20 th Century Insurance dropped all house policies because their basket had become too localised in Southern California. We had no damage or claims.

Insurance needs to be spread out over a very large pool.
 
900 x 100

jeff
Any chance interest for a product like this could be put together? EAA has it for Young Eagles so some re guy is doing it now? Just a thought.

In interest of full disclosure I was a broker in my working life.
 
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