COMR: The insurance issues
Introduction
I am delighted to be here today at the first ever COMR conference and I hope that I will be able, to make a contribution to this event over the next 15 minutes, by sharing with you some of the insurance related issues that my company, Hayward Aviation Limited have come across, in placing these unique risks.
Slide 1 : What are the insurance limits?
Hayward Aviation is a leading UK specialist aviation insurance broker; authorised by the FSA and a registered Lloyds Broker. The company was formed in 1992 and since then we have been fortunate to grow the business to the point where Hayward Aviation can reasonably claim to place the aviation risks for 60-70% of all civilian registered helicopters in the UK. Our business is not, however, limited to solely to helicopter or UK risks only and we act for many aviation clients around the world.
As I was preparing this presentation I tried to recall the first COMR – type risk that my colleagues and I acted as brokers for and, while our memories are a little hazy, I am sure that none of us were involved in placing the aviation insurance policy for the 1912 War Office Aviation Trials on Salisbury Plain.
Slide 2 : The first ever COMR risk?
It is interesting to see that relatively little insurance was provided for the actual aircraft itself and that fire was a major hazard – reflecting perhaps the rather combustible and flimsy nature of aircraft at the time.
Reports from the day say that there were a high number of minor accidents and a couple of total losses but the competition was eventually won by Samuel Franklin Cody. Sam Cody, often confused with Buffalo Bill Cody, had a daring reputation that made him very popular with the public but he was not, perhaps, the most suitable military aircraft contractor – he won flying his aircraft, The Cathedral, just days after he had written off another aircraft when he collided with a cow as he came in to land.
Slide 3: Sam Cody’s Cathredral
Then, as now, the liability to third parties (in his case the farmer) is an issue that has to be clearly resolved in any COMR contract. Cody’s claim, that the cow committed suicide, was rejected by the Judge and the farmer was paid £18 in compensation.
But to bring my presentation a little more up to date it is far to say that military related aviation risks have been commercially insured since the late 1960’s and significantly so since the mid 1990’s with the Private Finance Initiatives / for training, VVIP flights etc, and that several of my colleagues have been closely involved in placing such risks since the late 1960s. Today Hayward Aviation Limited is pleased to be able to count among our clients several COMR contractors.
Slide 4 : The evolution of COMR risks
So, what are the insurance implications of COMR risks? And how has the insurance market responded to these challenges?
The issues, when placing a COMR risk
To the extent that military operations have been insured for many years it can be said that there aren’t any new issues that need to be considered when placing a COMR risk.
However, this comment needs qualification as no two risks are ever exactly the same and risk factors change overtime; so when placing a COMR risk it is essential to apply the classic risk management process of:
· Identification (who is doing it)
· Assessment (what it is)
· Control (how is it being managed)
· Transfer (what risks are being transferred and to whom)
Slide 5 : Insuring a COMR risks
Who is doing what?
Slide 6 : Who is doing what?
The very nature of COMR risks is built on the principle that 2 or more parties are involved and in assessing the insurance needs it is essential for the insurers to have a clear understanding of the contractor’s organisational skills and resources and to know in detail the division of the technical and operational activities being performed by the contractor and/or government personnel.
Assessing the risk
Slide 7 : Understanding the Insurers’ risk philosophy
From the insurer’s viewpoint, their willingness to provide insurance depends heavily on their assessment of the risks. As professional risk takers, insurers make judgements based on their tolerance to risk. In the same way that we as individuals have different attitudes towards risks, so do insurers, based on many factors including:
· Their level of technical expertise
· Their previous experience of similar risk activities
· The financial well-being of their organisation
· Specific circumstances (right time and place)
It is essential, therefore, to clearly explain to insurers what the risks are but also to provide to them details of how these risks are being managed and minimised.
As COMR type activities continue to evolve into new areas of operations, moving away from the more benign operations to more front-line actions, insurers will continue to focus on the issues of who is doing what and the exact nature and extent of the risks to be transferred.
Risk Management
Slide 8 : Risk Management
The management of risks has, fortunately, moved on since the pioneering days when a silk scarf, all-in-one leather flying suit and a leather padded skull-cap was considered to be the extent of safety equipment for a pilot.
Today the technical complexities and Standard Operation Procedures ensure that the management of risk is detailed and clear. This doesn’t mean that aircraft aren’t used outside of their normal operating environments, but insurers do need to have a clear understanding of the operational purposes and the defined limitations of the contract
The final issue that insurers are keen to understand is the extent to which liabilities can be transferred between the parties to the contract.
Risk Transfer
Slide 9 : Transferring the risk
Put simply, the more extensive the scope of government indemnity the lesser the risks that need insuring and the more willing insurers will be to provide cover at an economical price.
It is interesting to note that even in 1912 the aviation insurers specifically excluded from Sam Cody’s policy any losses “whilst the said machine is being used for and on behalf of His Majesty’s Government”
In looking back therefore at the past history of COMR insurance risk programmes, it is clear by keeping insurers fully in the loop regarding the “who, what, where and how” of the COMR contract, then insurers are continue to be willing to provide insurance for these risks. Looking ahead, however, to turn this theory into practice requires a detailed knowledge of the current global aviation insurance market and what market factors may affect the price and scope of insurance on offer at any given time.
The insurance market response.
Traditionally the insurance market and, more specifically Lloyds of London, have always shown a willingness and vision to except new risks. This has certainly been the case in aviation since the days of the Wright brothers, Cody, Sopwith and de Havilland, right to the present day.
Slide 10 : The insurance market response
A report in 1912 commissioned by the Royal Aero Club concluded that:
“general difficulties operate against the success of aviation insurance, as follows:
· want of experience
· lack of sufficient insurances [risks] to let the law of averages work
· lack of profit in the part of aviation insurance companies.”
Even today these three factors continue to affect the aviation insurance market.
“Want of experience”
The every nature of COMR risks and the continuous developments, which immediately places these types of risks at the edge of the insurance envelope means that it is essential that any COMR operation seeks:
· to clearly describes the scope of operational uses that the COMR contract is for and
· provides as much information via your broker, to the insurance market.
The law of averages
Secondly, the lack of sufficient risks is still an issue for aviation insurers worldwide. While those of us involved in the global aviation industry look at aviation operations as part of our normal everyday life, the total number of all types of aircraft worldwide is probably less than the number of cars in London. The global aviation industry is still a very small sector in numerical terms and in terms of global insurance premiums. It is estimated that total worldwide aviation premiums amount to less than 1% of global insurance gross market premiums.
While the law of averages works to an extent, the complexities of different technologies, theatres of operation and uses mean that it remains hard for insurers to calculate meaningful trends and risk probabilities. As a consequence the rating of aviation insurance is less “scientific” than, for example, motor insurance where the mass of data enables sophisticated rating models right down to types of vehicles, age of drivers, whether the driver is a man, woman etc.
Once again, as a COMR operator it is essential that you and your insurance broker provides insurers with as much information as possible, to allay insurers uncertainty, because, put simply, the more risky they perceive a COMR contract, the higher the premium cost. There is an old market adage that says “there is no such thing as a bad risk, merely a bad (high) premium”.
Slide 11 : Mitigating factors
COMR risks, however, do represent a particular niche in the insurance industry and this factor mitigates some of the unique nature of COMR type activities. In simple terms COMR risks are:
· exceptionally well maintained
· operated by highly trained pilots and/or often operated under conditions of high supervision.
As a consequence the incidence of significant COMR – related losses is excellent and better than general civilian – operated activities.
The structure and financial strength of the aviation market
The third key industry driver that affects the aviation insurance sector is the market itself and the overall financial viability of the sector.
The aviation insurance market is a true market place – insurers compete for each risk or part of a risk. It is a truly international market place where insurance is commonly placed across international boundaries. Lloyd of London continues to be a key focal point for the development of aviation related risks and the wider London market has been at the forefront of COMR risks since the 1960’s.
However, while the international aviation insurance market is a dynamic and vibrant one it is also one that is inherently unstable. It remains relatively easy to enter this sector of the insurance market (and, by implication, easy to leave). Market capacity – the percentage amount of a risk that can be insured, exceeds 100% i.e. there are more potential insurers able to insure aviation risk than demand requires, although this does depend on the quality of the individual risk. While this encourages competition and keeps insurance premiums relatively low, it can lead to many insurers entering the market when profits are perceived to be good but leaving equally quickly, when losses go against them. For an aviation client, including – or especially, a COMR – operator, with a 3/5/10 year contract, having a long term relationship is essential both in terms of stable insurance cost but also following a loss, to avoid knee-jerk hikes in premiums that can seriously affect the overall financial viability of a COMR contract.
This brings me to mention a risk that I had not addressed earlier, when discussing the insurance issues that can affect the placement of a risk – the possible financial risk to the Contactor in the event of an unexpected (and sustained) increase in insurance costs, which cannot be passed on to the Government agency. For a 5/10/15 year contract the possibility of an increase in insurance costs over the period of the contract is very likely – either through a deterioration of the individual contractor’s loss experience or due to broader market conditions. A number of solutions for longer-than-12 months insurance policies have been tried to help clients with such potential financial risks.
“Hedging” part of the risk placement on a fixed price 3 – 5 year policy, while insuring the balance of risk on a conventional 12-month policy is one option while there are a constantly developing range of alternative risk financing structures that can be investigated.
In all cases, it is essential, however that because of the long term nature of COMR risks, the insurance is placed with insurers with strong financial resources, technical expertise and a professional claims department.
Summary
To return to the origins, perhaps, of COMR risks, the 1912 War Office Air Trials. The Trials were reported to be, as a one off insurance opportunity, a financial disaster. But in spite of this inauspicious beginnings both the aviation industry and the parallel insurance community learnt important lessons that helped build the industry to where it is today.
Technologically, the First World War pushed the development of aviation forward and so do COMR risks today, combining technical excellence with extreme operational requirements.
Slide 12 : Summary
The aviation insurance industry continues to support this sector as it develops new activities and different risk scenarios. Presently the evolving and expanding range of COMR risks issues are being continuously addressed by the insurance market and while the aviation insurance market has its own unique requirements and market structures, COMR operators will continue to need to use a specialist broker who can match your needs with the right insurer, at the right price.