Introduction to Aviation Insurance and Risk Management. (Book Reviews).
Reviewer: Louis E. Nunez, Reliance Insurance, Aviation Division
This is the second edition of a text I had read in 1992 and is one of the few devoted to the aviation line of business. The two authors were previously published under the auspices of Broward Community College in Florida. The text likely had its greatest use at Embry-Riddle Aeronautical University, where both professors are now affiliated. The text serves as the primary source of material for the Certified Aviation Insurance Professional (CAIP) designation issued by the Aviation Insurance Association (AIA).
The book's objective is to familiarize the insurance generalist, aviation insurance student, and aviation professional with the fundamentals of insurance, risk management, and (specifically) aviation insurance. The objective aspects of the text are straightforward and as up-to-date as possible considering the volatility of the subject matter. The subjective aspects are kept to a proper minimum, which is laudable for a line of business that is by nature subjective and largely unregulated.
The structure of the book is akin to the Insurance Institute of America (IIA) formula, and there is a subtle hint of admiration for this academic style. This is good for two reasons: (1) the CAIP program encourages pursuit of Institute course work and (2) the authors are demonstrating a desire to offer the reader/student the best possible approach for learning.
The methodology employed proves to be very functional. The material is thorough, concise, and clear on subject matter and support. Although I have spent 17 years of my career within the aviation discipline, I found it refreshing to go over fundamentals again--especially when they are as well written as in this text. The authors stress from the beginning that the book is only a foundation. The outcome of a thorough read-through more than meets this intent.
The main thrust of the book is, of course, aviation, and 50 percent of the text is devoted to the specialty. It starts with a fascinating history of aviation and the insurance industry that grew up alongside it. The best use of this text is for the general aviation industry. The authors do a very good job of peripherally looking at airlines, major manufacturers, and space risks. These areas, though large in premiums and exposures, are actually smaller parts of the aviation insurance universe. Appropriately, greater detail is given to pleasure, corporate, and small commercial risks, as well as rotorwing, airports, and Fixed Based Operations (FBOs). The vast majority of aviation professionals, as well as the average agent, broker, underwriter, and reinsurer, are more concerned with general aviation.
Unfortunately, the section on insurance carriers became outdated the moment it was published. Two of the insurers listed are no longer writing business, and one of the "pools" has been acquired. A look at the 1992 edition will show an even greater scope of change in the market. This is to be expected and is a reflection of events taking place in the overall industry. I suspect one of the purposes of this chapter is to provide aeronautical students with a list of prospective employers, because addresses are included. Insurance professionals, however, would not be using an academic text as a market guide!
The section on Lloyd's of London is quite good and helpful to those trying to understand this market. Additionally, the narratives on selection of agents, brokers, and insurers should be a "must read" for aviation principals. [I was quite happy to see mention of the Chartered Property Casualty Underwriter (CPCU) designation!]
Two recommendations: The authors should avoid any specific carrier commendations. The nature of the industry is such that service, reputation, and capabilities can be adversely affected by economics and market volatility.
Second, more should be said about the excess/surplus lines market and its practices. This segment of our business continues to be a mystery to insurance professionals, yet aviation risks (especially those written off-shore) may be subjected to surplus lines laws and taxes. In addition, nonaviation coverages for aviation enterprises may have to be procured from the E & S market. Writing on a nonadmitted basis may offer flexibility in pricing and coverage. One of the fears associated with the nonadmitted market is the lack of protection from state guaranty funds in the event of insolvency. For aviation, however, this could be a moot point. When a major aviation insurer went insolvent several years ago, many agents and insureds learned (to their horror) that most state guaranty funds exclude aviation and marine risks from protection. This is a valuable insight that the authors should include in their next edition.
The section on aviation insurance contracts is the most thorough ever written on this topic. This should also be required reading for aviation and aviation insurance professionals. Contracts can be boring, but Drs. Wells and Chadbourne present a reader-friendly narrative. Insurance professionals in the casualty line will recognize many of the terms and conditions. [I have often characterized aircraft insurance as automobile "with wings."] The products, airport, and FBO policies are CGL-based with the last one most closely resembling garage / garagekeepers liability.
The "heart" of this book is Chapter 10, which is divided into two parts: Risk Selection and Pricing. The former discipline is the one, I believe, by which the aviation industry lives or dies. The authors correctly point out the catastrophic, limited spread and diversification of aviation risk. It can almost be said that adequate pricing may not be achievable; therefore, risk selection is critical. The power of the declination and modification of the risk is the emphasis of this section.
The narrative on pricing is as noble an effort as anyone can make on this aspect of aviation underwriting. The reality, however, is quite different. As aviation is a judgment rated line, underwriters (and their agents) have been very liberal in their application of rates. An inexperienced underwriter / agent working with an experienced agent / underwriter is a mismatch. Much of the instability experienced over the years has resulted from a wrongheaded emphasis on price. Risk selection offers greater control for underwriting management. The warning to the reader is that undue concentration on pricing alone, within an unregulated and totally "judgment rated" line, is a death knell. The authors clearly steer their text toward the discipline of risk selection, and this is noteworthy.
The balance of the text addresses nonaviation insurance and does a fine job of outlining coverages. The aviation workers compensation market is a unique and difficult area. I would recommend the authors spend more time with workers compensation professionals specifically experienced in aviation and expand on this subject. One source would be the International Air Transport Association (IATA), which has had an extensive program for many years.
In summary, I believe this text is the finest available for aviation insurance and supercedes the one page / chapter treatment found in most texts. I also consider it superior to some of the material out of London and highly recommend it to brokers, underwriters, and reinsurers outside the U.S. whose responsibilities are primarily with North American aviation risks.
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|Author:||Nunez, Louis E.|
|Publication:||Journal of Risk and Insurance|
|Article Type:||Book Review|
|Date:||Sep 1, 2001|
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