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Aviation History
1984
1984 - 0012.PDF
PRIVATE FLIGHT GA insurance: a good risk? Last week aviation under writer John Hayton suggested that general- aviation must stand on its own in the insurance market, rather than be subsidised by insurers' profits from other aviation business. Concluding his analysis, he discusses the elements which contribute to the cost of GA premiums. Brokers have tried to stream line general-aviation insur ance business to reduce costs by what are known as "line slips". These are like treaties, in that they are placed in the market by the broker only once per year. Business is declared to them by the broker; each participating underwriter is automatically ceded his proportion of each risk so declared. The differ ence is that each risk is rated by the leading underwriters, but is not negotiated with all the participating insurers. The GA insurance market in London is quite small, particularly for UK-based private light aircraft. This is precisely the type of risk for which line slips are attractive, because there is little premium per risk relative to workload for both broker and insurer. A disadvantage is that the underwriter can be in the embarrassing position of competing against himself, if he quotes direct on an account, only to find it "won" by a line slip to which he subscribes but does not lead. It is possible for an insured to look at a policy schedule and find the names of insurers who have previously declined to quote in the open market, or who might have been more expensive. Without some knowledge of the market, the insured might be forgiven for doubting our ability and efficiency. Why are so few insurers interested in leading GA busi ness? There are several reasons. The time involved in calculating quotations, partic ularly on light aircraft, is disproportionate to premium. There is no guarantee that business for which a quote has been given will turn into a firm order. When it does not, An underwriter who becomes known as a light-aircraft specialist might find that the pressure on his time will upset his portfolio balance. Brokers will not always wait while an underwriter calculates a quote for the Straight and Level Flying Club's "Spam Can". A stable and viable market can be maintained only on the basis of a reasonable financial return, according to John Hayton time has been wasted. An underwriter's "hit" rate on what might be termed the general-aviation account is probably in the region of 30 per cent of risks quoted. This represents a fairly colossal amount of wasted specialist underwriting time. If an underwriter is not quoting for business as a leader, what else would he be doing? He would be accepting business as a following underwriter—busi ness, furthermore, which has in all probability become a firm order, and which there fore guarantees income (pre mium) for effort expended. Specialist market When an underwriter becomes known as a specialist market for quoting light- aircraft business, he will find that unless he is very careful the sheer pressure on his time will completely upset his port folio balance. Underwriters who quote and lead cannot also service other, possibly more attractive, parts of the account. Brokers with easily placeable, high-quality busi ness will not always be prepared to wait while an underwriter calculates a quote for the Straight & Level Flying Club's "Spam Can". A leading underwriter whose quote is unsuccessful is precluded from subsequently subscribing to that risk. Thus, an account might more easily become unbalanced, expen sive, and then unprofitable, followed by the demise of another general-aviation leader. The typical insured party, particularly the individual owner, often resents having increases imposed on clean renewals on the basis that investment income is a substi tute for premium increases. To the underwriter, it can seem that the world believes that major insurers' invest ment funds constitute a bottomless pit from which largesse can be distributed in all directions. Unfortunately, this is not true. I do not think that any underwriter whom I know is allowed to carry investment credits in the underwriting account. Every one is expected to make an underwriting profit. It is true, though, that in times of high interest rates there is a temptation (to which many succumb) to write business so that premiums can be invested, the pious expectation being that premium-plus-interest will exceed incurred losses. Regrettably, this rarely happens because of the effect of inflation on claims, particu larly in a high-interest era. In the stampede to put busi ness—any business—on to the books, underwriting stan dards inevitably suffer; and although the insured may enjoy short-term cheap insur ance, in the long run he will pay the price in the shape of increased premiums, and a destabilised market. We all know that the general trend of interest rates has been downward for some time now. This infers lower investment yields and encour ages insurers to underwrite without the cushion of high interest generating invest ment income. Theoretically, therefore, premium rates should be hardening for all operators, the degree of increase relating to the quality of risk. All underwriters are increasingly conscious that they are guardians of other people's money. Since they are not allowed to print their own, every penny paid out in premiums and claims has to come from somewhere, mostly from premiums. No insured wants to think that his hard- earned premium is being liberally disbursed to any clamorous claimant who chooses to "bend" the truth. Insurers walk a tightrope between speedy servicing of the just claim and trusteeship of premium paid by the insur ing public. There is a fallacy that insurers seek to delay settlement of any claim as a matter of course, in the hope that it will "go away". This is far from the truth. An insurer likes to minimise uncertainty as much as anyone else. Much more preferable is the certainty of a known claim payment which finalises a claim and wipes an entry from the "outstanding claim" columns of the ledger (or, these days, computer screen). Unpaid claims attract interest payments and legal fees and, with due deference to the legal profession, lawyers do well enough without further help from insurers. Reasonable return What of the future? I can only tell what ought to happen. If our aviation indus try in all its forms is to enjoy the support of a domestic market, then premium rates will have not only to harden but to keep pace with the increasing costs which we are experiencing. A stable and viable market can be main tained only on the base of a reasonable financial return for the risks which are under taken. The alternative could be very difficult for everyone. 12 FLIGHT International, 7 January 1984
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