What it means
Aviation risks are unusual for insurers. Claims are infrequent, but when they happen they can be very large, and a single crash may involve the aircraft, passengers, cargo and people on the ground.
A pool allows many insurers to take a slice of each risk, so no single company bears all of a major loss. In a pooling arrangement, a managing company underwrites the business on behalf of the members.
Underwriting means assessing a risk, deciding whether to accept it and setting the price. The member companies take agreed percentages of the premiums and the claims, and the pool can draw on the combined expertise of specialist underwriters and claims staff.
The cover offered by aviation insurers includes hull insurance for physical damage to aircraft, liability insurance for harm to passengers and third parties, and cover for airports, hangars, repair stations and manufacturers. The right mix depends on whether the customer is an airline, a corporate flight department, a flying school or a private owner.
Premiums depend on the type of aircraft, the use, the pilots' experience and the claims history. For a business, the key point is that aviation insurance is a specialist market with its own terms.
Lenders who finance aircraft usually insist on certain cover and on being named on the policy. A company that owns or leases aircraft should work with a broker who understands the market, because standard business policies often exclude aviation risks.
Pools of this kind also carry a concentration risk, because their results depend on one class of business. Reinsurance, which is insurance bought by insurers to lay off part of their risk, is therefore an important part of the structure.
The size of a pool's claims in a bad year can be very different from a quiet year. Because aircraft are expensive, mobile and often financed, the policy wording carries more weight than in many other classes of insurance.
Details such as pilot qualification clauses, geographical limits and the permitted use of the aircraft can decide whether a claim is paid. A safety management system and a good record of maintenance help operators obtain better terms.
In practice
Real-world examples.
Example
A regional airline needs hull and liability cover for a fleet of ten turboprop aircraft. Its broker places the risk with an aviation pool, which spreads it across several member insurers.
Example
A corporate flight department with two business jets requires liability cover of $100,000,000 for the company's directors and guests. The pool underwrites the risk and the aircraft lender is named as a loss payee.
Example
A flying school insures its trainer aircraft and hangar. Underwriters review the instructors' qualifications and the school's safety record before setting the premium.
Formula
Calculation
Member's share of a loss = total loss x member's participation percentage
Suppose a pool collects aviation premiums of $20,000,000 in a year and one member participates with a 4% share. The member's share of premiums is 20,000,000 x 4% = $800,000. A single claim of $5,000,000 arises, and the member's share of the loss is 5,000,000 x 4% = $200,000. The member therefore carries $200,000 of that claim in return for its share of the premium, and the percentages are illustrative.Case study
Seen in the real world.
Skyhaven Charter is an illustrative, fictional operator of six business jets. Its finance director had insured them under a general commercial policy and discovered at renewal that most aviation risks were excluded.
Her broker approached an aviation pool, which asked for details of pilot hours, maintenance records, the aircraft's age and the routes flown. After the review, the pool offered hull cover for $42,000,000 and a liability limit of $200,000,000 at a premium of $620,000.
The lender financing two of the aircraft accepted the programme after being added as an additional insured. The illustrative lesson is that aviation insurance is a separate market, and the quality of safety records and operating data directly affects the price and availability of cover. At the next renewal she also introduced quarterly safety reviews, which gave underwriters more confidence and helped to hold the premium steady.
Watch out
Common mistakes.
- Assuming a general business policy covers aircraft, when aviation risks are normally excluded and need specialist cover.
- Choosing cover on price alone, when exclusions, limits and territorial restrictions matter greatly in a loss.
- Ignoring the lender's insurance requirements, which can put an aircraft loan in default.
Questions
People also ask.
What is an insurance pool?
It is an arrangement in which several insurers share the premiums and losses of a class of business in agreed proportions.
Who can buy aviation insurance?
Airlines, corporate operators, flying schools, airports, manufacturers and private owners can all arrange cover, usually through a specialist broker.
Why is aviation insurance priced differently from car insurance?
Aviation losses are rare but severe, so pricing must reflect the aircraft's value, the liability limits and the specific operating risks.
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