Binder Vol. 44 No. 2 Spring 2019

VOL. 44 NO. 2 - SPRING 2019

PRESIDENT PAUL HERBERS PASSES THE BATON

AIRCRAFT NONOWNERSHIP INSURANCE 2019 BOARD OF DIRECTOR ELECTIONS

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IN THIS ISSUE Editor John Murray

Murray, Morin and Herman

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President’s message

EDUCATION UPDATE

ATTORNEY DIECTOR’S REPORT

CLAIMS DIRECTOR’S REPORT HOW STRONG IS YOUR LINK?

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CAIP EDXPANSION

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UNDERWRITER DIRECTOR’S REPORT

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PROS AND CONS OF ‘MARKET HOPPING’

AIRCRAFT NONOWNSERSHIP INSURANCE

REINSURER’S REPORT

AVIATION HISTORY

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SOFT MARKET FOR OVER A DECADE, NOW TURNING

The ideas and opinions expressed by authors of articles published in The Binder are wholly their own and do not necessarily represent those of the Aviation Insurance Association.

The articles are not provided as legal advice.

WWW.AIAWEB.ORG

Published by the Aviation Insurance Association 7200 W. 75th St. Overland Park, KS 66204

PRESIDENT’S MESSAGE Paul Herbers - AIA PRESIDENT, Cooling and Herbers

A Few Words Before

Passing the Baton

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These last two years as AIA President have been a most enjoyable period for me, and serving in this position has been both an honor and a daunting privilege. I thank you all and hope you have felt well served. Once again, I encourage every AIA member to actively participate in the AIA, and if your personal circumstances permit, seek a Board position.

The quality and camaraderie of our Board members is unparalleled.

Of course, all the accomplishments of the past two years have been those of your dedicated Board of Directors, our remarkable Education Committee, and many other volunteers among our membership, along with the professional assistance of our Executive Director Mandie Loroff and Onyx Meetings, Inc. The AIA is in excellent shape, and I can report with enthusiasm that the State of the AIA is Strong!

We will review all the year’s developments with you at our Annual Conference, but there are a few items to highlight in this issue of the Binder.

As you know, for the last two years we have engaged in an experiment with Regional Conferences, taking the AIA to Dallas, Atlanta, Santa Monica, Toronto and Chicago. These events were designed to make AIA and the “feel” of the annual conference available to new and younger professionals in our industry, with the idea to expand membership and participation. That effort has been gratifying and successful, but we have also found that the cost in terms of time and resources may be too great for us to rely on those regional conferences alone.

At the same time, following our regional conference in Toronto, the Board decided to institutionalize the Toronto Conference as a biennial conference in the same mode as our biennial London Conference. Therefore, the AIA will now rotate them, traveling to London in November 2019 to Toronto in 2020, and continuing in that manner thereafter.

Furthermore, the AIA educational programs that are available to all our U.S. members, such as the weekend CAIP course and others, will travel with us and be made available for new certification programs in both London and Toronto. This is a most exciting educational outreach with much more to follow.

I would also like to report on the Amicus Brief the AIA submitted to the Montana supreme court, as reported to you all earlier. This involved a case against one of our member companies, involving an attempt to require stacking of aircraft liability coverages. We are happy to advise you that the Montana court ruled in favor of our member company and agreed with the AIA’s position as Amicus, rejecting the idea of stacking such policies.

There are many other noteworthy items that you will hear about in Asheville in just a few short weeks. This conference is shaping up to be another wonderful networking opportunity in the beautiful setting of the Great Smoky Mountains of North Carolina. I look forward to our time together, and once again, thank you for the opportunity to serve you as President during these last two years.

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EDUCATION COMMITTEE UPDATE

JOHN CUNNINGHAM - AIA Education Committee Chairman

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ric Barfield, retiring AIA Education Committee Chairman, established forward-looking goals for the AIA Committee during 2018. Those goals are coming to fruition in 2019. The major thrust of these efforts was conceived specifically to make the CAIP designation attainable for any of our members anywhere in the world. Two groups from the Education Committee were established to accomplish these goals.

The “International Course Equivalents” Working Group presented their recommendations to the Education Committee on February 15, 2019 and received unanimous approval. Co-Leaders Nancy Gratzer, Senior Vice President and Southeast Avi-

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ation Practice Leader for Marsh USA, and Belinda Bryce, Partner with The Magnes Group, Ontario, Canada, created an “International Course Equivalency” for both Canada and the UK, that matches the historical CPCU requirements for a CAIP designation. The Group was launched last year to identify Canadian and UK course equivalents to the four (4) presently required CPCU courses that CAIP applicants must also complete. Because not all international members pursue CPCU courses, this is another necessary step to not only make the CAIP designation more attainable but, hopefully, attract more of the international community to AIA membership. The education committee unanimously approved the addition of these good efforts. The

The goal is to make the Core Principles course more accessible to the membership, particularly internationally, and encourage more people to pursue the CAIP designation. result will be to make the AIA and the CAIP designation truly international designation. Committee plans have been delivered to the AIA Board of Directors that will assure that the established high expectations and standards for the CAIP designation will continue.

The “Digitized Core Principles” Working Group lead by Laura Heft, pilot and Associate at Butler Weihmuller Katz Craig, LLP, in Chicago, IL. has also made great strides over the last year in the pursuit of a “Digitized Core Principles and Concepts Course”. The goal is to make the Core Principles course more accessible to the membership, particularly internationally, and encourage more people to pursue the CAIP designation. The Group’s first focus is continued development of a relationship with the University of Mississippi that will allow for a live digital version of the program once per year. This permits additional international exposure and will allow gauging of student interest level. There are awesome benefits working with a partner with an accredited University Air and Space Program. Secondly, the group is soliciting companies for an ‘entirely digital format’ for the program. Extending AIA’s current offerings to a digital platform is a difficult and complex process, but the Education Committee feels this will be well worth the effort to increase access to our valued educational program and to increase the overall number of CAIP designated professionals in the industry. The working group

is excited to engage in this process and has plans for initial proposals during 2019.

Additionally, the Education Committee is pleased to confirm that the Core Principles and Concepts course in London will go on as scheduled and will coincide with AIA’s biannual London Reception in November 2019. This course will be conducted in the traditional classroom lecture format, providing the first-ever opportunity for non-US aviation insurance professionals to participate without having to travel to the United States.

To paraphrase Eric Barfield: The AIA is committed to enhancing the aviation insurance industry worldwide and the professional lives of those work in it. And since the Association does in­deed have a significant international membership component, the Education Committee believes we should do all we can to make our industry’s coveted CAIP credential more readily available to all. At the same time, we understand the desire of many US based insurance personnel who want to pursue their CAIP designation but are unable to attend the current three-day lecture format. These two teams are in fact doing great work to expand the reach and availability of the CAIP for both these groups of professionals.

Eric, thank you for your significant contribution to our association. The Education Committee will miss you. Best of luck in all that you do.

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CAIP Program Expands to Include Canadian and UK Equivalents T

he AIA Education Committee is pleased to announce the expansion of the CAIP designation to include international course equivalents for CAIP’s CPCU requirements as not all international members pursue CPCU courses. The expansion of this program will enable AIA members working in the international markets to earn their CAIP designation while maintaining the integrity of the CAIP designation for current and future designees.

CANADA

AIA will offer the Aviation Insurance Core Principles and Concepts Class in London, November 5-7 prior to the 2019 London Reception. The final exam will be given the morning of Nov. 7th.

The CII Level 3 Certificate in Insurance will be accepted, provided the participant also completes the courses highlighted below from the optional units list at the right.

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The Chartered Insurance Professional (CIP) designation will be accepted as the equivalent of the CPCU Courses.

UK

The CII Level 4 Diploma in Insurance will be accepted as an equivalent of the CPCU courses.

Courses Required for CII Level 3 Certificate in Insurance Must pass 1 compulsory course: • IF1 Insurance, Legal and Regulatory

OR pass BOTH of the following compulsory courses: • LM1 London Market Insurance Essentials • LM2 London Market Insurance Principles and Practices

Then choose additional courses from the list below to bring total credits to 40 - including the compulsory unit(s) credits above.

IF2 General Insurance Business IF3 Insurance Underwriting Process (or alternatively Il0) IF4 Insurance Claims Handling Process IF5 Motor Insurance Products IF6 Household Insurance Products GR1 Group Risk R05 Financial Protection LM3 London Market Underwriting Principles Other units from within the CII insurance framework

CII Credit Value

CPCU Equivalent

15

As substitute for CPCU 530

10 15

As substitute for CPCU 530

15 15

As substitute for CPCU 520 As substitute for CPCU 552

15 15 15 10 10 15 5-50

Estimated Study Hours Required for Certificate: 160-200 Total Please note. If the candidate took other courses to complete their CII coursework (for example, IF6 and IF9). They would be required to complete IF2, Ill, and either IF3 or I10 in order to consider as equivalent to our CPCU or CIC courses.

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aviation history

AIRCRAFT NONOWNERSHIP

INSURANCE ALEX WELLS - AIA Education Consultant

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he growing congestion of city airports, the expansion of industry away from major metropolitan areas, the increased clogging of highways, the lack of adequate public transportation, and the ever-present need to utilize time more effectively has prompted more and more businesses and individuals to arrange their own air transportation rather than relying on commercial airlines. The major advantage is the flexibility that private air transportation offers. Using general aviation aircraft enables professionals to go where they want to, when they want to, in less time, often at less expense, and with a minimum amount of personal energy expended.

Although businesses realize the necessity for many lines of insurance, the need for aircraft nonownership insurance is often overlooked. Management is frequently unaware of the fact that some of their personnel may rent, borrow, charter, or fly their own aircraft on company business. Even companies with a policy against such usage can never be sure that everyone complies. There is always the chance that some employees are unaware of

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the company policy or that an employee’s “nonbusiness� trip with a customer, flying his own or a rented aircraft, might in fact be deemed a business flight by a court of law in the event of an accident.

Aircraft nonownership insurance is designed to protect an insured for liability incurred while using nonowned aircraft. This can involve loss or damage to the aircraft or liability to the passengers, other persons on the ground, or to other property. Liability arising out of aircraft owned, rented, or operated by or loaned to the insured is excluded under most commercial liability policies because of the unique hazards involved and the large judgements incurred when catastrophe strikes.

There are a number of risk management concerns that arise when companies or their employees use nonowned aircraft for business or pleasure purposes. This article first discusses the exposures to loss and then explains the policies available to cover these exposures.

Liability Coverage Afforded

Adequacy of limits

It is often wrongly assumed that the aircraft owner’s liability coverage protects the user of an aircraft. Those renting or chartering an aircraft (flown by a professional pilot provided by the operator) are usually too preoccupied with business concerns to ask whether the aircraft is insured. And, if the question does arise, in practically all instances the reply would be, “Certainly, all my aircraft are insured.” While this statement may be true, it is misleading in many instances. Of course, it is usually not the operator’s intention to mislead; operators simply do not have a complete understanding of their insurance policies.

Even when coverage is afforded to renters under the aircraft owner’s policy, the limits of liability and coverages may not be adequate. Many small and medium-sized fixed base operators (FBOs) and air taxi operators can only afford liability limits of $1 million, and there is usually a further restriction on the limit for passenger coverage. Because of the commercial nature of the risk, aviation underwriters are either unwilling to offer higher limits or, if available, the premium is often too expensive for operators to consider. Consequently, even if coverage is available, limits are generally far too low for the typical individual or corporation that is attempting to protect itself from the aviation liability exposure.

For example, it is often assumed that a rented or chartered aircraft is covered by insurance. However, renter pilots are often excluded from coverage under a Fixed Base Operator’s (FBO’s) policy. If a renter pilot, as a result, of his negligence, injures a passenger or a third party’s property, the insurance company will defend the owner of the aircraft against all claims arising from the accident and pay any damages awarded to the claimant.

However, under the typical fixed-base operator policy, the insurance company is not obligated to defend the renter pilot, nor is it under any obligation to pay claims assessed against him. In the majority of accidents in which negligence is involved, it is the pilot who bears the greatest exposure to liability, not the aircraft owner.

Liability insurance to cover renter pilots is available to fixed-base operators, but many operators do not carry this coverage. The premium cost for this insurance is higher since the insurer’s potential liability is increased.

Some aviation underwriters charge an additional premium of as much as 25 percent of the basic liability premium to provide blanket coverage for additional insureds.

Restrictions or Limitations There are also various restrictions and limitations common in aircraft insurance policies that limit the coverage provided to other parties under the owner’s insurance.

For example, some private and corporate aircraft owners allow other firms and individuals to use their aircraft in order to help offset their operating expenses. Insurers may deny coverage for losses that occur during such use by determining that the accident was a result of a commercial venture and not within the scope of business or pleasure usage.

Similarly, many FBOs today use others’ aircraft on a lease-back arrangement, which includes numerous agreements pertaining to the maintenance and operation of the aircraft. Unless the FBO’s insurance is tailored to fit the particular agreement, there can be gaps in coverage. Again, a typical renter pilot or company chartering an aircraft is generally unaware of any restrictions or limitations in the operator’s policy that may void coverage if violated.

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Physical Damage to the Nonowned Aircraft Umbrella Liability If the nonowned aircraft is damaged during use by a third party, the owner or the owner’s carrier may bring legal action against the third party for payment of damages. General and umbrella liability insurance policies usually do not cover damage to aircraft or other property in the care, custody, or control of the insured.

If an aircraft is damaged, the insurance company providing the hull coverage has a right to subrogate against the third party that caused the damage. For example, if a renter pilot causes damage to a rented aircraft through his own negligence, the insurance company will pay the owner of the aircraft and then may proceed against the renter pilot for the amount it has paid to the owner. In this situation, the renter pilot is a bailee and is obligated to return the aircraft in the same condition as it was received, or bear the burden of proving that the damage to the aircraft was not due to his negligence. If the aircraft is damaged and the renter pilot is found to be at fault, the insurance company is entitled to payment from the renter pilot.

In addition, hull insurance coverage usually contains a deductible clause. The owner of the aircraft agrees to pay the first $50, $25, $500, or $1,000 of every loss. The insurer then pays the loss in excess of this deductible amount. In many cases, either orally or in a rental agreement, the FBO seeks to recover the deductible amount to the FBO believing this would be the end of their problem. But rather than ending the problem, there is some danger that a payment to the operator may be considered an admission of negligence for the purpose of the insurance company’s claim.

While the problem of subrogation primarily exists for the renter pilot, firms chartering aircraft may also be subject to claims by the aircraft insurer. The insurer may be entitled to recover for the loss if it can prove that the charterer’s employees interfered with the operation of the aircraft and thereby caused the accident.

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It should not be assumed that the umbrella liability policy covers any liability arising out of the use of the nonowned aircraft. Some umbrella policies provide such protection only if there is underlying coverage of nonowned aircraft. Even if the umbrella policy does provide coverage, the limits of liability may be inadequate to handle the large settlements that can arise out of aircraft accidents. Because of the reluctance of some umbrella underwriters to cover the nonowned aircraft exposure, or to provide excess limits of liability over their umbrellas, or both, many businesses have purchased aircraft nonownership insurance.

The Aircraft Nonownership Policy Aircraft nonownership liability coverage for a corporation with little or no known exposure is normally provided by attaching a standard endorsement to an aircraft hull and liability policy. Coverage generally applies to any aircraft used for business purposes having a “Standard” Category Airworthiness Certificate issued by the Federal Aviation Administration and that is not owned by or registered to any named insured. Coverage does not apply to liability arising from crop dusters, experimental aircraft, and other limited use aircraft. Some insurers exclude helicopters under their standard form, and most carriers have some stipulation that the insured must report any aircraft used more than some specified number of days (normally 7 days) and pay an additional premium.

The named insured includes the corporation and any employees and directors while using an aircraft for business purposes. Individuals using their own aircraft are not covered under the corporate nonownership policy.

The company would be covered, but individuals who own aircraft should have their own insurance policy. In fact, unlike many FBO policies, an employee’s owned

aircraft policy would cover the employer as an insured under the omnibus provision of the definition of “insured”. However, the limits of liability are generally inadequate to sufficiently protect the employer.

Aircraft nonownership policies are usually written with a single limit of liability (including passengers). Premiums are developed on an individual risk basis and are related to the known exposure, including estimated hours flown per year, type of aircraft, and the number of active pilots employed by the insured. For companies with little or no known exposure, the premium is fairly modest and can be under $1,000 for a $10 million single limit of liability. It is not uncommon for companies to purchase limits of $20-$30 million or higher.

Optional coverages available include baggage liability (included in standard form by some companies), medical payments, nonowned aircraft physical damage liability (subrogation coverage), and guest voluntary settlement coverage. This latter coverage, commonly referred to as “admitted liability”, is always written on a “limit per seat” basis and, regardless of legal liability, offers to pay on behalf of the insured prearranged sums for loss of

life, limbs, or sight suffered by passengers in the aircraft.

This coverage can be written to include employees.

When voluntary settlement payment is offered for a guest passenger a release of liability against the insured must be obtained. In the event a claimant refuses to sign a release, the offered payment is withdrawn. The insured then has the protection of his nonowned aircraft liability coverage.

Personal Nonowned Aircraft Policy Aircraft nonownership protection is also available to individuals who rent or borrow aircraft for business or pleasure use. This policy is designed for a person, such as a sales or technical representative, small business owner, or professional businessperson, who holds a valid pilot’s certificate but does not own an aircraft. This policy is not designed to cover the liability of a professional pilot or crew member except while they are flying for pleasure. Small business owners normally include their companies as individuals to choose their own lim-

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its of liability and avoids reliance on what insurance was following the aircraft, if any, as mentioned earlier.

Key coverage features include single limit property damage and bodily injury liability coverage (including or excluding passengers). Medical payments coverage-which pays reasonable medical expenses incurred by injured parties without regard to fault- is included under most personal nonownership forms. Nonowned aircraft physical damage liability coverage may also be purchased.

In the case of the personal nonownership aircraft policy, the underwriter will normally restrict coverage to nonowned aircraft for which the insured is qualified to fly. Like the corporate nonownership coverage, the premium for this often overlooked insurance protection is very reasonable.

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Summary Many companies have already entered the world is business aviation without realizing it. All that is necessary is an employee or representative who rents, borrows, charters, or flies an owned aircraft with or without the company’s knowledge.

Aviation accidents are not common, but when they do occur, they are usually quite costly. Most commercial liability policies exclude liability associated with aviation accidents. Coverage under the aircraft owner’s policy may be limited or nonexistent, and limits of liability are often inadequate to properly protect the assets. Only an aircraft nonownership liability policy can provide protection at a reasonably low cost.

2019 AIA Board of Directors

Elections It’s time again to prepare a slate of new board members to re-

plication form, by Thursday, April 25, 2019 to Mandie Loroff

place those whose term of office expires immediately following

at mandie@aiaweb.org. You can also e-mail your answers to

the 2019 AIA Conference, May 3 - May 6, 2019. This is your

the questions on the form directly.

opportunity to be an integral part of directing the future of the association. Nominate yourself or another individual that you

You may nominate yourself or nominate others if you like, but

feel will make a positive impact on the future of AIA.

understand that in serving on the board of directors there is both a time and monetary commitment that needs to be tak-

The positions available are: Agent/Broker Director, Claims

en into consideration when volunteering. Persons wanting

Director, International Director and Underwriter Director.

to serve on the AIA board should be committed to serve the

Please note that the director of underwriting position will fill

membership of the AIA and the aviation insurance industry.

the term vacated by Greg Sterling (who will move to an exec-

The most important role of a director is to ensure that AIA as-

utive role).

sesses the needs of the membership and of the industry as a whole, while helping to develop a plan that sets a sound course

Submit your suggestions via e-mail on the downloadable ap-

for the future that the organization can follow.

Criteria to be considered for nomination: • Be a member in good standing of AIA.

Specific areas of responsibility are: • Board members serve for three years, one year as director-elect and two years as director. The elected director will take office during the AIA Annual Conference.

• The effective director will be knowledgeable of the affairs and activities of AIA and will recognize the fiscal and legal responsibilities of the board.

• Directors are required to attend at least two (2) board meetings per year at their own expense, with one meeting taking place every other year in London during the International conference - which will be November 7th 2019.

• Board members are also required to: participate in board or committee conference calls throughout the year. to represent AIA at the annual convention (meeting and greeting attendees) write articles for the AIA newsletter that address the activities and other issues that affect that

VISIT: bit.ly/2CWdWp2 TO FILL OUT aN APPLICATION FORM

division.

All nominees are asked to provide a short bio for the membership to review.

If you have any questions regarding the nomination process please feel free to contact Mandie Loroff, Executive Director of AIA at 913-627-9632 or by email at mandie@aiaweb.org

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AIA Eagle society On behalf of the AIA Board of Directors, we are pleased to announce that the following individuals have been elected into the 2019 AIA Eagle Society

JIM ANDERSON STARR AVIATION

ERNEST DESPAIN

W. BROWN & ASSOCIATES

TED DUNLAP NTSB

ALAN FARKAS SMITHAMUNDSEN

RANDY HARDY

An AIA Eagle Society Member will have demonstrated their dedication to the AIA with their actions and deeds on behalf of the AIA, as well as having made substantial contributions to the aviation industry and/or demonstrated achievement in their career in aviation. Membership in the “AIA Eagle Society” is conferred by nomination by the President of the AIA and awarded with the concurrence of the majority of the Board of Directors.

The AIA Eagle Society award is presented annually at the AIA’s Annual Conference and has no limitations on the number of inductees. At the time of their induction, recipients shall have had at least ten (10) continuous years of membership in the AIA, unless this requirement is waived by a majority of the Board for good cause being had.

HARDY AVIATION INSURANCE, INC.

MIKE MYERS

W. BROWN & ASSOCIATES

The Eagle Society installation will be held during the 2019 Annual conference at the Grove Park Inn. Please join us in congratulating our new members of The Aviation Insurance Association’s Eagle Society.

MARK PENNINGTON W. BROWN & ASSOCIATES

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All Current Eagle Society Members are Invited to attend the New Member Installation during the Annual Conference.

ATTORNEY DIRECTOR’S REPORT

CLE & WOMEN’S INITIATIVE

IN ASHEVILLE NICOLE STOUT - Director of Attorneys’ Division

I

am looking forward to seeing everyone at the Grove

Many of you have asked me about the new Women’s

Park Inn in Asheville for our Annual Conference.

Initiative that we are rolling out at this year’s confer-

As many of you are aware, we are experimenting with

ence. The initiative is part of our newly formed Mem-

having the Continuing Legal Education (CLE) session

bership Committee. The purpose of the initiative is to

earlier in the conference schedule. This year, the CLE

recruit and encourage membership and leadership of

session will be held on Friday afternoon beginning at

our female colleagues in the aviation insurance indus-

1:00 p.m. We hope that this change will allow more

try. We will have our first official meeting/event on

of you to attend the CLE sessions. We would like your

Saturday morning of the annual conference. We plan

feedback on holding the sessions earlier in the confer-

on meeting in the Blue Ridge restaurant where we can

ence, and we welcome any ideas to help make the CLE

have fun getting to know each other and coming up

more convenient for everyone. These AIA-sponsored

with ideas to make the Women’s Initiative a mean-

CLE sessions are a phenomenal way to meet your CLE

ingful part of AIA. All are welcome and encouraged

requirements, network with fellow members of the at-

to attend.

torneys’ division, and hopefully learn something new!

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CLAIMS DIRECTOR’S REPORT

“A chain is only as string as its weakest link”.

HOW STRONG

IS YOUR LINK? STEVE TELLER - Director of Claims Division

A

s we see each year at our conference, now just around the corner, there are many aspects to, and crucial players in our business. As a team, a “supply chain” if you will, we all either create and/or service the product that we take so much pride in; responding with compassion, expertise and resources to victims on the worst day of their life.

I’m writing from a claims perspective, but there is so much that goes into the process before our team steps onto the stage.

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Carriers, Consortiums, Reinsurance, Investors Investment capital, financing and risk sharing provide the resources to respond to losses and require skillful management for which a profit is enjoyed (some years more than others).

Underwriting As the critical link between the carrier and the agent or broker, rates are decided here, and business is accepted or declined. If accepted, conditions are set by them for each policy which form the basis of the coverage contract and anticipated financial risk.

“Nothing can said to be certain but death and taxes” and aircraft accidents.

Agents and Brokers Closest to their clients, and looking out for their best interests, their needs are assessed, and the best markets are queried and engaged. Trust, as with all links in this chain, is the hallmark of the agent and broker’s work, both with their customer and with the underwriter.

The Claims Department The second responders. Once a loss has occurred, we step in, be it in company management, claims examining, surveying, field investigation and claims management, through experts, and with legal counsel as necessary. Settlement takes place here, unless coverage is not available, usually amicably and usually sooner rather than later.

H

We must do everything possible so that for our part we have made the product better, the chain stronger.

Whether they are our superiors, clients or customers, all must know that when they call or email us that there is intelligent life on the other end. A strong link they can rely on.

Chains can be large or small, they can serve many purposes, but in the end, whether you have lost an irreplaceable heirloom because a chain around your neck breaks, or chained heavy cargo breaks free, creates aft CG and the aircraft goes down with all lost, the principle remains the same. The weakest link gave way, and that chain was only that strong that day. It was supposed to be 10 or 100 times stronger, but on that day, it was not.

After a crash, in claims, we look at failed materials forensically and the probable cause findings vary: the application perhaps exceeded the design capabilities, or the design was inadequate, or the materials used were impure, or below grade, or the manufacturing process was flawed, or there was sabotage. No matter why it failed though, the results were sadly catastrophic.

arry Truman had the sign on his desk that said, “the buck stops here”. For each of us, as links in the supply chain this must be the case. While everybody answers to somebody, we must not “pass the buck” on to them or “kick the can down the road”.

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It is no one else’s job for you to be the strongest link possible that others can count on.

By application, as professionals, at any point in the supply chain we can be ready for the moment of testing, and we can be a strong, vital link. We can succeed and not fail that day. Is this statement arrogant? It is not, because it is squarely and entirely our personal responsibility to be strong. No one else is responsible for us to be ready.

We do it through: Preparation “Give me six hours to chop down a tree and I will spend the first four sharpening the axe” said Abraham Lincoln. This is listening well, this is training, formal continuing education, or just staying informed.

Humility When I began in the business, I thought I knew everything and didn’t ask many questions. Now I ask questions every day, sometimes many times a day.

Losing my mind? I would say no, but also yes to losing some pride, some independence, some isola-

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tion. Suggestions are made on how to do what I do better. I listen, and I try to evolve. “I wish I knew now what I thought I thought I knew then”.

Relationships Each link is attached to the next. Do you stay in touch professionally and socially all year round?

Do you communicate often? Do you know who to call and when to call them when you see that you are out of your depth (see humility above). Do you have people in your professional life you can trust?

Are you trustworthy?

Initiative and Hard Work Are you proactive? Are you willing to stay on task until you are done? Are you willing to sacrifice?

There has only been one time in 43 years that I have almost been fired (so far). I was about two years in, working for a respected independent adjusting firm. I had an excellent opportunity there at age 23, having found that the demand for historians in Northern California when I left college was very limited. And I was floundering.

My boss called me into his office, shut the door (not good) and said, “What’s your problem? You are very capable, but I am about to fire you because you just cannot cut it”. And mind you I was working hard and the best I could with what I knew. I replied, “I think I lack motivation”. Without missing a beat, he said, “Your problem is not lack of motivation, but lack of success”. He may as well have been speaking another language to me. I sat for a good while thinking about it and trying to see the wisdom and the practicality of it. He said nothing. Then, finally, asking one of my rare questions at that age, I sincerely asked, “So how do I get success?”.

I did all this, and in a few months, I went from being the worst to the best producer in the office, and a year later I got a call from someone who said I had been referred to them very positively and asked me if I wanted to work for them in aviation claims. I took the job and the company bought me my Private, sent me to USC Safety and Systems Management, and allowed me to follow around a top-drawer investigator for a while to just watch him (sound familiar?). I went on to gain invaluable experience and later to manage my own firm for many years.

And here I am today as Director of Claims writing about weak links!

To this very good question he had a very good answer.

He told me to show up the next day at 7:00 AM when he arrived and to follow him everywhere he went. He said to write down everything he did and to do exactly the same thing he did on my files. Some of those days went on into the evening. He said to do this for two weeks and then to come in and see him whenever I needed advice, even if it was a dozen times a day (and sometimes it was).

My mentor back then was not only a strong link himself, but he helped to make me one, and this is my final point.

Let’s look around for the younger ones, or the ones newer than us to the business, or to our department and make ourselves available. Let’s be the one that people can come to.

Let’s be both strong links and make others stronger too.

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UNDERWRITER DIRECTOR’S REPORT

Feel the Churn Pros & Cons of “Market Hopping”

GREG STERLING - AIG Aerospace

W

e’ve all heard the saying, “A penny saved is a penny earned”. This famous quote is often misattributed to Ben Franklin. Franklin actually never said this but rather in his 1758 almanac stated, “A penny saved is a penny got.” Regardless of the verbiage we all know in our businesses that customer retention is as important as the acquisition of new business.

All prudent businesses track customer retention and my own is no exception. I was recently reviewing some end-of-month lost business reports and noted an account which I recalled was written as new business just the year before. I wondered what circumstances might have contributed to the business moving away from us after only a year. As I looked into the account further I discovered that in the two years prior to our writing the business the account had been with two other markets, for a total of three different carriers in as many years.

We all recognize that insurance is a somewhat intangible product – that is until it is needed. It is easily com-

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moditized in the minds of consumers, but as I’ve said in earlier articles we’ve really no one to blame for that but ourselves. It falls to all of us to differentiate our products and services in whatever market we trade in, and in doing so, not allow ourselves to defined solely by a number following a dollar sign. Perhaps in this case the client was simply following Mr. Franklin’s advice and looking to save a few pennies of premium, but more often than not I find that the benefits of forming long-term trading relationships are often under-communicated and overlooked.

It goes without saying that price should rightfully be a factor in any buying decision. But only with a careful understanding of what is being purchased can an informed decision truly be made. As one old sage of our industry once told me, “You can order Chicken Cordon Bleu at the Four Seasons or at Mel’s Diner. It looks the same on the menu. But it ain’t the same in your mouth!”

Non-monetary product differentiators - such as product features - are often overlooked. In the case of insurance,

the coverages, policy terms and conditions and timeliness of service are a few differentiators which readi-

One area where a long-term trading relationship with an underwriting company can yield significant benefits is

ly come to mind. But unless a client is only going to be purchasing coverage for one year, also to be considered should be how their selected broker and/or underwriter will be able to serve their needs for years to come and the benefits of long-term relationships.

in the area of pilot age. Including all certificate types, pilots age 50 and older now account for more than 40% of the total US pilot population. That’s why it’s important for pilots to explore how their insurance carrier handles older pilots before they become one of them. Often carriers are able to provide more flexibility in this area to current customers than to a new account without a demonstrated track record.

For example, most underwriters take a different view on accommodating unusual requests on renewal accounts than they would on the same account being presented as new business. That’s because a risk which has established itself with a favorable underwriting performance over a number of years is viewed by most underwriters as a “known quantity” and as such, enjoys a familiarity unmatched in most new accounts. Perhaps the broker, underwriter and client have even had the opportunity to meet at a function or at an on-site visit at the insured’s facility. This only adds to the confidence level shared by all parties.

Few of us would recommend to a friend that they change jobs each year in return for only a few extra dollars.

And most employers don’t look favorably on a multipage resume consisting of 1-2 year tenures at a dozen jobs. Certainly there can be sound reasons for frequent job changes. Likewise there can be sound reasons for “hopping” between carriers or brokers. But just as the astute job interviewer will question the reasons behind frequent job moves, so will most Underwriters question frequent movement between markets. In these situations brokers will serve their clients best with a clear narrative explaining the reasons behind frequent moves.

Finally, while perhaps to a slightly lesser degree than in past years, there are still a relatively large number of insurance carriers and brokers to assist the aviation clientele. As such, insureds continue to have an array of companies and products to choose from. Pricing and terms can vary widely in the market so it is prudent for them to survey their options carefully, weighing not only pricing, but all the factors important in their insurance buying decision. As aviation insurance professionals it is incumbent on us to do our best to not only demonstrate our individual competitive advantages, but to help our customers understand the benefits which long-term trading relationships can provide.

References: https://www.forbes.com/sites/realspin/2014/08/18/a-penny-saved-was-never-a-pennyearned/#66a7aaf32e88 https://www.faa.gov/data_research/aviation_data_ statistics/civil_airmen_statistics/2018

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REINSURER’S REPORT

The market has been soft for over a decade

why did it start to turn

now?

Walter Voigts-VonForster. - MUNICH RE

F

rom early 2018 onwards the aviation insurance market has seen a the start of a shift in the pricing of aviation policies, turning from at least a dozen years of year-on-year rate reductions to increasing premiums.

This article highlights the factors driving this change in direction for the US general aviation insurance market.

In a free market one could assume that such a change in market dynamics could have been triggered by a shift in the balance of supply and demand. This was only partially the case. Demand for aviation insurance is fairly stable and can be easily be catered for by the industry, so not a factor. Supply of insurance offering by the insurers reduced only slightly in terms of the number of insurers offering this product. Reinsurance capacity for the

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segments didn’t reduce either. But capacity offered to the market did shrink somewhat artificially by aviation underwriters no longer offering their lines to the same extent, or by restricting it for specific segments.

For an underlying client base that appreciates a certain predictability of insurance pricing, it’s probably for the better that the forces of supply and demand didn’t exert their full power, but that – in general – a gradual, digestible change was implemented.

To see why insurers started to ask for more premium and selectively to restrict their capacity, we’ll look at what happened on both sides of the equation: incoming premium and outgoing cost.

1

Rates have gone down for a very long time

Quite evidently, this is the main reason for why they are going up now. Increased competition caused the market to enter into a downward trend during the latter half of the last decade. Around the time several new insurers entered the market there was still a margin to be made, so the incumbents didn’t sacrifice market share and protected their portfolio whilst the new entrants undercut them to gain market share. This dynamic lead to continuous rate reductions, and continued past the point where there was still a margin in the market, spiralling to a low rating level where underwriters as a whole are losing money.

As aviation underwriters struggled to create a turning market on their own, other strategies were employed like shifting portfolio composition: attempting to reduce exposure to loss-making business and growing into areas perceived to be more profitable. Staying away from risks perceived as difficult to insure is still a seen as an effective measure, whereas growth into new segments has been shown to not yield any better results.

3

Losses in other lines of business

Underwriters were unable to effectively hit the brakes in that dynamic of year-on-year rate reductions on their own. The hurricanes of 2017 (Harvey, Irma, Maria) created the opportunity to break out of this spiral. The losses of insurance companies overall in 2017 highlighted the fact that an underperforming aviation segment could not be cross-subsidized any longer by the larger P&C lines.

4

Reserving buffers used up

Insurance companies carry some buffer from past years through prudent reserving of losses.

In the soft market this helped a while to hide deteriorating underwriting results in a financial year view by releasing some of that buffer again (and only building up a slimmer new buffer). Once that stream was used up, there was less possibility to cover the lack of profitability.

5

Increasing loss adjustment expense

2

Diminishing investment income

Since the economic crisis interest rates have been extremely low, very little margin for underwriters was made on the investments. Thus, this item in the P&L dried up. The booming stock market post the depression didn’t help much, as most insurance companies take little risk on the asset side, but rather invest their income on secure fixed interest rate government or corporate bonds. Interest rates are starting to slowly pick up now again, but are a long way still from subsidizing underwriting profit in a meaningful way.

Since external service providers of the industry such as loss adjusters and lawyers are becoming a little more expensive every year through inflation, it should be quite natural that insurance premiums tick up slightly annually to make up for that increased cost in handling claims. If they don’t, it’s another cost increasing relative to premium.

6

Increasing cost of repair

With aircraft becoming more complex and of composite material, repair costs are going up.

As has been highlighted also in this publication, this is a factor which can’t be ignored. Partial hull losses are simply costing more to repair now than they used to.

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7

Increasing frequency and severity of high liability awards

The awarded payments for injury and fatality cases in the US have a lot of precedence in being comparatively high for smooth-limit policies. However, in recent years there has been a series of liability claims above 10m USD that could not be covered by the available premium base. Some of these losses were headline making and are well known, others were settled without media attention but nevertheless in double-digit million figures. In recent years a handful of injury and fatality cases made up between 10% and 20% of total GA market premium each year, spread across the market.

8

Increasing acquisition cost

The portion of the incoming premium paid to brokers is another factor on the cost side that has been increasing. The increasing acquisition cost as a percentage of premium has pushed up the combined ratio of insurers.

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9

Increasing internal cost

Overall premium income to the market reducing doesn’t mean that the costs of underwriters for their business is reducing in parallel. To the contrary, since the number of policies hasn’t reduced the cost ratios of insurers has been increasing. Underwriters have attempted to mitigate this effect by cutting cost through efficiency gains, automation or outsourcing, but there is only so much that can be done on this.

None of these factors on its own would have driven the market to change, in fact most of these have been around for a long time. But precisely the continued pressure on results by all of these has caused the market to initiate change: either (more) insurance companies would have pulled out of the class of aviation business and thus caused a severe cut in supply of capacity, or underwriters could reverse the trend of reducing rates and charge more for their product again. For the stability of the market place these changes don’t happen overnight in a drastic manner, but the changes need to be maintained over a longer period to ensure that the product offering becomes sustainable again for parties in the value chain.

PRESIDENT PAUL HERBERS Cooling and Herbers pherbers@coolinglaw.com

VICE PRESIDENT JAMES GARDNER The James A. Gardner Company, Inc. Jim.Gardner@jagardner.com

TREASURER JON DOOLITTLE Sutton James, Inc. jdoolittle@suttonjames.com

SECRETARY ERNEST DE SPAIN W. Brown & Associates EDeSpain@wbais.com

DIRECTOR OF CLAIMS DIVISION STEVE TELLER Aviation LS steve.teller@aviationls.com

DIRECTOR OF INTERNATIONAL DIVISION BRUCE CARMAN Hive Aero bruce.carman@hiveaero.com

DIRECTOR, UNDERWRITERS’ DIVISION GREG STERLING

DIRECTOR OF THE AGENT & BROKERS DIVISION CHRISTOPHER ARNOLD,

AIG greg.sterling@aig.com

Sutton James, Inc. carnold@suttonjames.com

DIRECTOR OF REINSURANCE DIVISION WALTER VOIGTS-VONFORSTER

DIRECTOR, ATTORNEYS’ DIVISION NICOLE WOLFE STOUT, ESQ

Munich Re WVoigts-vonForster@munichre.com

Strawinski & Stout, P.C. nws@strawlaw.com

DIRECTOR ELECT, ATTORNEY DIVISION ROBERT J WILLIAMS Schnader Harrison Segal & Lewis LLP rwilliams@schnader.com

DIRECTOR-AT-LARGE CHRISTOPHER MORIN Murray, Morin & Herman cmorin@mmhlaw.com

DIRECTOR-AT-LARGE LUKE UITHOVEN Kimmel Aviation Insurance Agency, Inc luke@kimmelinsurance.com

AIA EXECUTIVE DIRECTOR MANDIE LOROFF Aviation Insurance Association mandie@aiaweb.org

AIA BOARD COUNSEL RAY MARIANI Leader, Berkon, Colao and Silverstein LLP rmariani@leaderberkon.com

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SAVE THE DATE

ASHEVILLE 2019 AIA ANNUAL CONFERENCE MAY 3-6, 2019