Features Operations
Soaring Insurance Premiums – Can Anything be Done?

Operators throughout the aviation industry will tell you that insurance
rates are finally leveling off. But is ‘leveling off’ enough?

Rates
have been reasonably steady for the past two years, “but they’re still
outrageous,” said Mark Holmes, director of flight operations for
Southern Skies Aviation in Penticton, BC. “I pay a third of the value
of one of my aircraft, and that’s ridiculous,” he said, adding that “it
doesn’t take much investigation” to find out why rates have been so
high. He maintains that insurers have been covering investment losses
by keeping premiums high. “It was the stock market, and they blew it.”
Several other operators across Canada agreed with Holmes’ assessment,
but did not want to go on record for fear of reprisal from the
insurance industry. Many saw their rates jump year after year, despite
a lack of claims or accidents, which insurers often cite as a reason
for raising premiums.

“I don’t think insurers understand the
pressure that’s on small operators,” said Patricia Kennedy, manager of
Pacific Flying Club in Vancouver. “Costs per hour have gone up 400 to
500 per cent in some cases since the late 1990s Everyone’s insurance
has doubled in the past five years.” Kennedy believes that these rate
jumps, along with a dwindling number of hours being spent in the sky,
have become deadly for smaller operators. Operators also feel a lack of
power in their relationship with insurers. “We have no recourse against
their games,” said Dean Mortimer, owner of Cloud Air in Port Carling,
Ontario. “Last year we didn’t get a quote until 20 days after the
renewal date.”

Stu Fairchild of Truro Flying Club in Nova Scotia
said he has had better luck with insurance, although he saw the same
rate climb at the beginning of the decade. “They’ve probably leveled
out, but overall they’re at a higher peak.” Fairchild said that by
keeping their noses clean, his group has avoided skyrocketing premiums.
“Being accident-free, it seems to have gone over the peak and back down
again.” But due to the nature of his business as a flying school,
liability is always going to be an issue in an insurer’s eyes. Along
with raising deductibles, Fairchild said he could keep his premiums
down by “raising the experience level of our pilots, but of course
that’s not applicable here,” as the school has many novices taking its
planes out.

For Gareth Knott, account executive with insurer
Dulude, Taylor Inc. of Montreal, the stock market pitfalls of insurers
are a bit overblown. “Obviously everyone’s read the problems the big
brokers have had, but honestly I don’t think it affected aviation too
much.” Knott said it is difficult to predict what will happen to rates
until the big airlines renew their policies at the end of the year, as
that is where most of the industry’s money comes from, but he did not
see a drop in store.

Bill James, managing director of insurance
brokerage Marsh Canada in Calgary, agreed, noting that “the drivers are
safety and training and losses; the only caveat is if you have major
airline losses, everyone is affected.” James believes it is up to
operators to keep themselves in a good position ratewise, and that the
breaks will follow. “As long as operators are continuing to improve
those standards, it takes care of itself,” he said. “The insurance
market will punish operators who have losses and at the same time they
will try to reward those who do not. If the industry is making money
they tend to reward those doing well.”

Pacific Flying Club’s
Kennedy is skeptical. “The story varies, there isn’t a consistent
answer,” she said. “If you have a good claims record, they blame it on
a hard market tied into the world aviation market, and if you have
losses, they blame it on your record.” Despite her suspicions, Kennedy
noted that her vigilance may have paid off this year, as her group got
some good rate news.

“We’ve been told to expect a small
decrease.” Cloud Air’s Mortimer, on the other hand, noted that his
company hasn’t had a commercial crash in 65 years (and only one in
training), but his options are still limited. “They have a complete
monopoly,” he said. “We have to have insurance.” But the relationship
between operators and insurers isn’t always adversarial. Julie Pomeroy
of Brampton Flight School in Ontario has been working closely with her
brokerage house to bring down rates, and has seen positive results.
“They go out of their way to give us extra service.” Pomeroy said a
risk management assessment was a key in starting to reduce premiums.
“Certainly for us, reducing incidents and breaking a cycle of incidents
in the field” was important. Other factors included operational skills
within the organization, acquiring knowledgeable managers and generally
having “your house in order,” she said.

“I think this is the
time for operators to get all their ducks in a row,” said Paul
Hamilton, aviation VP for PSA Insurance Brokers Ltd., the firm that
handles Pomeroy’s group. Hamilton suggests that operators get “a broker
who can deal on a national basis. Aviators by nature travel long
distances.” Hamilton also pointed to an insurer’s claims policy as a
key thing to look at when selecting a firm. “You want quick and fair
claims payments even if premiums may be higher,” he said, adding that
“the longer it takes to fix an aircraft, the more money that operator
is losing.” Hamilton believes that property and casualty insurance is
important along with the standard aviation insurance. “These guys run
hangars and cars,” he noted.

But many operators complain that
their choices among insurance firms are simply too limited. “Once you
put your contract on the market, you’re shut down,” said Holmes of
Southern Skies, while Truro Flying Club’s Fairchild added that “we all
end up talking to the same two or three companies.” For Marsh’s James,
the problem is a simple case of economics. “Right now it’s a case of
supply and demand,” he said, adding that when the industry is making
money, there will naturally be pressure on terms, rates and conditions.

One
organization that is trying to bridge the gap between operators and
insurers is the Air Transport Association of Canada, which has been
working on several initiatives to improve the aviation industry as a
whole through training and understanding. “The principal concern we
have is the number of repetitive accidents in the general aviation
market,” said Glenn Priestley, vice-president of fixed-wing air taxi
and flight training for ATAC. “Obviously if we don’t crash, we don’t
exceed our premium pool,” he added. Priestley pointed to ATAC’s
best-practices manual as one of the initiatives the group is
spearheading to bring down incidents, and in turn bring down premiums.
The key is getting operators to look at flying procedures from a
different angle. “Just because we’ve done something the same way since
World War II, doesn’t mean it’s the best way to do it.”

Priestley
advised operators to build a relationship with their insurers and not
just go for the lowest price. “We’re always looking for the lowest
costs in this industry,” he noted, adding that “one of the biggest
mistakes is jumping around from broker to broker. You can only go so
low.”

Instead, Priestley suggested that operators go into
meetings with all their numbers on the table, including an up-todate
business plan. Also important is finding an insurer who knows your
specific field of aviation. Priestley noted that it isn’t very helpful
to talk to an airline specialist if you are in general aviation.
Similarly, Hamilton of PSA noted that “if you’re a float operator, you
want an insurer with experience in float operations;” operators should
find an insurer with “a proven appetite for your type of business.”

In
the end, Priestley said, he is optimistic about the future of premiums.
“Insurance is a cyclical business,” he said. “We seem to be going into
a period where there’s more liquidity in the market, so things should
be going down.” Whether they go down enough for Canadian operators,
however, is the big question.