Aircraft Insurance is a large ticket item typically handled by a management company. There are a number of important issues and sometimes hidden costs that aircraft owners should be aware of. You need to know that both your broker and management company are providing adequate coverage with complete transparency in terms of cost and process followed in the placement. Among other matters, owners need to be aware of some of the following practices which may be problematic:
Policies are usually underwritten on a per aircraft basis so it is simple to review the coverages and premium specific to your aircraft for the term of the policy. However, what owners may often not realize is that many insurers will offer “no claims credits” and other incentives at the end of the policy period if the insurance placement has been profitable. This can equate to 10-15% return or credit of the original hull insurance premium per year. Similarly, the policy may include a “Lay-Up credit” at the renewal for periods that the aircraft was non operational. Both items are normally returned to the management company as a credit toward the next year’s renewal. Certainly on lay-up credits owners deserve a cost reduction. This may also be arguable with no claims credits depending on their agreement with their management company.
Most businesses run their receivable and payable systems on some type of regular cycle and insurance brokers are no different. Many brokers are on a 30 day cycle. When a policy change or cancellation is made, the credit from the insurance company may not appear on their statement for up to 30 days depending upon when the change occurred. Upon receipt of the credit from the insurance company, the credit may then be placed on the next cycle for payment or return to their customer. It is not unusual for some brokers to extend this turnaround time and intentionally delay the payment cycle for 90 to 120 days or even longer. During much of that time, the broker is generating interest on the return premium funds in a trust account or other investment. The same may also hold true for claim settlement cheques.
Advanced premium payments are standard in the insurance industry and is an acceptable business practice. In many cases however, the insurance company is willing to offer interest free payment plans to the client particularly on large premium accounts. This allows brokers or management companies to maintain use of cash paid by the owners until the next payment is due. Since the broker must also forgo receipt of their annual commission in advance when payment terms are provided, it is not uncommon for those payment terms to be withheld from the customer by the broker or management company.
A contingency or additional commission may be offered or paid by an insurance company to a broker that reaches certain levels of production or production goals. Contingency payments are not uncommon in the insurance industry however they are less common in the aviation specialty markets.
Broker commissions may conflict with determining most favorable terms for owners. Some brokers may favor giving business to less competitive companies or not present more competitive quotes to the client because the broker stands to earn a higher commission in return for production levels.