The first quarter of 2018 is behind us and many of you spent April reflecting upon the opportunities, challenges and results from the first three months of the year to forecast what the rest of 2018 may hold for your business, flight department, operating budget or other goals. Upon reflection of insurance policy placements made year-to-date we discovered some interesting trends in the U.S. market to share with King Air owners and operators.
Fifteen years ago, many of you may not have owned or operated a King Air. To fully understand the market trends, we need to reflect on the past, so you have a baseline with which to compare. The insurance market for a King Air was significantly more expensive in 2003, compared to the current market. In addition to higher premiums, the restrictions and ancillary coverages were difficult to negotiate in favor of the insured. This was attributed to the limited supply of carriers writing insurance for King Air owners. If a King Air owner needed $50,000,000 or more in liability coverage, there were only three choices. With limited carriers to select from, the underwriters were in control. This is what we call a “hard market,” which is where rates are comparatively high, coverages are limited, and conditions, such as the requirements of the pilot who would be operating the aircraft, were tough. Essentially, the insurance company was greatly reducing their risk while maximizing their premiums. For example, in 2003, a $1,000,000 King Air B200 with $50,000,000 of liability would have cost over $40,000 per year, and many of the carriers would have required two pilots in the cockpit at all times, while single pilot operations were limited to $25,000,000 of liability coverage.
The profits generated by the aviation insurance carriers began to be noticed by other insurance companies who weren’t currently in the aviation marketplace. Not surprisingly, they wanted in on the action too, and the supply of insurance companies for King Air owners and/or operators began to increase. At one time there were over nine insurance companies willing to write a King Air with liability limits of $100,000,000 hull values to cover the cost of a new King Air 350 and allowing single pilot operations. In addition to these increased coverages, the annual premium fell to as low as $13,000 per year for these high liability limits and hull values!
In the mid-2000s, Travelers® Insurance entered the aviation market and they were very aggressive with pricing and coverages; so aggressive that I remember clients asking if the quote was for six months of coverage instead of an annual policy. Within a few short years, the premiums were cut to a fraction of what they once were, ancillary coverages blossomed, and pilot restrictions were slashed. After approximately 24 months, Travelers left the aviation sector, but the market had been forever changed.
As time passes and we watch market trends, it appears 2017 may have been the bottom of the “soft market,” which is the time when the insured controls the market. We saw some insurance companies willing to allow training to be extended to 18-month intervals from the traditional 12 months. Single pilot operations with $100,000,000 liability limits and $5,000,000 hull values were non-issues and could be secured for less than $20,000 per year. In 2004 that same risk exposure, if it could have been done, would have had an annual premium of over $60,000. Owner-flown King Airs, depending on the pilot’s qualifications could get $25,000,000 of coverage, possibly more in recent years. Premiums associated with the owner/pilot operations, have also been very low.
Owner/pilots are typically not offered the “broad form” coverages and expansions that a professional pilot operation can secure. However, in the soft market, many qualified owner/pilots were able to get these policy enhancements for no additional charge. Some were even able to go to non-simulator-based training facilities that are approved by the insurance companies.
With a better understanding of both the hardest and softest market conditions, it is easier to compare the state of the King Air market for the first quarter of 2018. If you took advantage of the soft market by securing the low rates with the best coverages, conditions and pilot requirements, brace yourself. Based on current trends, you most likely will not be getting the, now expected, premium reduction you’ve seen each year for the last decade or more. Chances are, if you had the lowest premium the market offered, you will be getting a flat renewal, meaning no increase or reduction, or a slight increase of three to five percent.
If your operation did not fully partake in the soft market, it is possible there are still some available improvements to coverages and pricing. If you are working with a knowledgeable aviation insurance broker, they should be able to negotiate these on your behalf. As a fellow insurance consumer, I cannot stress enough that while price is important, it should not be your determining factor when purchasing your insurance policy. You didn’t buy the cheapest King Air, you bought the King Air that was right for you and your needs, and then negotiated the price. The same approach should be used in all aspects of purchases for your aircraft, whether it is avionics, paint, pilots or insurance.
As 2018 continues and your renewal comes, focus on how your premium compares to others with similar risk profiles. Your broker can provide you with this information based on their current King Air clients. If your premium is in line with the current market, try and focus on enhancing your ancillary coverages to meet the needs of your exposure. For example; an operator last month disclosed to us that her boss had several friends who ride on their King Air as guests. When doing so, they park their cars in the hangar. Occasionally, they’d have the cars detailed and fueled as a surprise for the passengers. The concern was these vehicles weren’t exactly a Ford Taurus; they were all vehicles valued well over $100,000. This exposure is what we call “garagekeepers” and the cars can be covered under your aircraft policy if they are damaged while in your “care, custody and control.” Do you have enough liability coverage within your policy to cover such a loss? Your broker can address this exposure, as well as have the limits of liability for the “garagekeepers” amended accordingly.
Assuming you benefited from the lowest market rates in the past several years, 2018 is starting off to be the year of flat renewals. As you look ahead, think critically about your renewal. Through our observation of the current insurance market, not exclusive to just aviation, it appears the insurance industry has sustained significant losses through natural disasters and attritional losses (the losses you don’t read about in the NTSB reports, such as “hangar rash”). This tells us the insurance companies are putting a specific interest in being profitable this year.
How can we create a policy to benefit both the insured and the insurance company? One of the ways is through the Profit Commission On Renewal (PCOR) – an endorsement that can be added to your insurance policy. The PCOR endorsement is designed to do two things: First, it shares in the profit of your policy with the insured, assuming there are no losses. Second, it creates loyalty between the insurance company and the insured. In order to share in the profits from the expiring policy, you must renew it with the same carrier. For example, assume you pay $20,000 for your insurance policy and during the policy period there are no losses. The endorsement can read a couple of different ways, one of which is “10 percent of 70 percent of the earned premium.” This means upon renewal of your policy with the current carrier, you will receive $1,400 back. What a deal for everybody! The insurance company wins because you didn’t have any losses, and you win because you get some of your premium back, thus lowering your overall cost of insurance for the year.
There are over 30 ancillary coverages within your policy that should be reviewed and addressed with your broker annually. Every operator/owner has different needs based on their specific exposures – don’t take an “off the shelf” policy. Customize it to fit your needs, just like you did when you bought your King Air.
The market appears to be changing, but being aware of the changes will allow you to be strategic in your renewal negotiations.