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Explanation - in a 1000 words or less
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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. |
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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." |
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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. Quote:
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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?) |
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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
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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. |
[quote=Flybuddy2;473662]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?
[quote] 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. |
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