SPECIAL report Special Report 2018 by Kim Rosenlof Industry players outline challenges, opportunities

Keynote speaker Dr. Doris Höpke, a mem- ber of the Board of Management of Ger- man insurance giant Munich Company (Munich RE) since 2014, painted a cautiously optimistic picture of the U.S. general aviation insurance industry at the 2018 Aviation Insurance Association (AIA) conference held April 29 to May 1 in Austin, Texas. Höpke noted that while profitability remains a challenge in an environment where a judgment in excess of US$100 million can wipe out nearly 10 percent of aggregate annual premiums, new technologies and markets provide

opportunities to return to profitability. JOHN A. MANFREDO “These days we are facing some chal- lenges that…could potentially change insurers can make a living on investment loss premium. This is an exposure show- that everybody adds value beyond capac- the entire business model of what we gains,” said Höpke. “This is in essence a ing that certainly the market cannot stand ity and beyond simply taking risks onto do,” said Höpke, “The biggest challenge misunderstanding of what insurance is on its own and it requires reinsurance to your balance sheet.” for us as a reinsurer is the [low] interest about. Our core is assessing and bearing transfer risk…But if historically the largest rate environment.” risk, and if we are not able to make a loss is 16 percent of the largest policy limit, New Insurance Markets: living on our results, there what about the remaining 84 percent? Cyber, Space, and Drones are many reasons to rethink how this This is capacity that is not needed. We Höpke briefly mentioned cyber and the industry works.” should not raise the appetite for claims internet of things (IoT) as new markets Profitability in the GA insurance indus- by simply making larger limits available if for reinsurers, noting the total size of the try has become challenging in recent they are really not needed.” cyber market is already at $4 billion and Dr. Doris years. According to figures Höpke pre- Despite profitability challenges, avia- expected to grow to $8- to $10 billion Höpke, sented, the U.S. GA insurance market tion remains a good portfolio diversifica- by 2020. She said that cyber provides Board of combined ratio of incurred losses (claims) tion market because of its low systemic opportunities in risk management and Management plus expenses was approximately 105 and accumulation risk, compared to other Munich RE percent of earned premiums in 2016. insurance markets, Höpke said. But even that figure was obtained by “I can hardly imagine any [other] insur- These days we spreading out large (greater than US$50 ance segment that has so much data are facing some million) single-judgment losses over a available,” said Höpke. “Other business 10-year period rather than the years the lines can only envy this. We can make Scott Ross, challenges that…could losses actually occurred. The U.S. GA better informed decisions...And the entire vice potentially change the insurance market is hit with a liability loss aviation industry is really geared to safety, president, entire business model greater than $50 million every 1.2 years whether it is governing bodies, manufactur- Global and greater than $100 million every 2.2 ers, pilots, as well as insurers. So the efforts Aerospace of what we do.” years. Currently the highest single policy in loss prevention of all of these parties are Low interest rates present multiple chal- loss so far is approximately $120 million, highly aligned with insurers and reinsurers. The highest lenges to the aviation insurance industry or nearly 10 percent of the GA insur- Information available is second to none and density of space by preventing insurers and reinsurers from ance industry’s $1.3 billion gross written alignment interest is also very positive.” offsetting operating losses with interest premium. With the current profitability Höpke encouraged insurers, reinsurers, debris is in low earth gains, and by inviting investors seeking challenges, Höpke questioned the need and brokers to differentiate themselves orbit, and with the higher returns to infuse more capital for exceedingly high liability limits, sug- with bespoke products and to take into the aviation insurance market. The gesting that writing higher liability limits advantage of technology, such as digita- forecast growth in low increased capital comes with increased encourages courts to award increasingly lization, to offer more than just “capacity earth orbit nanosat competition, driving down premiums and larger judgments. at a cheap price.” constellations, the making profitability even more challenging. “Reinsurance provides the backbone “If we compete only on price, it comes “If I can find something positive in [low for the U.S. GA market,” said Höpke. “The to a dead end very quickly when cost cut- congestion issue will interest rates], it’s that it provides a wel- largest policy limit in the market [at $750 ting and risk selection is optimized,” said continue to be an area come pause for those who believe that million] can cost 58 percent of the total Höpke. “We believe it’s on us to ensure of concern.”

20 Aviation International News \ June 2018 \ ainonline.com mitigation services, “but it also comes continue to be an area of concern.” pilot certification requirements, or other including the AI, then liability coverage is with a very big challenge in accumula- Drones or unmanned aerial systems operational considerations under Part 107. generally precluded to all insureds under tion control...the next outage is something (UAS) make up the third relatively new the CGL policy, potentially excluding we cannot control with insurance means insurance market. Gerald Deneen, vice Don’t Be Too Quick certain of the coverages that the third and we need to make sure that cyber president at Swiss Re Management, To Be Added as party may have been seeking by asking becomes more insurable.” focused mainly on the small UAS market an Additional Insured to become an additional insured. Scott Ross, vice president at aviation of drones weighing less than 55 pounds While your aircraft is undergoing its annual “It can be beneficial in the aviation insurance company Global Aerospace, with payload and discussed both recre- inspection at the local FBO, a storm blows context to skip that automatic additional shared his insights on insurance for com- ational and commercial uses. through and collapses part of the hangar, insured reflex and just rely on the contrac- mercial space operations, a growing mar- damaging your aircraft. Whose insurance tual indemnity provision to transfer risk ket with the introduction of relatively new pays: the FBO’s or yours? instead,” said Vallach. “The ‘any insured’ launch vehicles and companies launch- It may be obvious that the FBO’s language means that simply adding an ing dozens of small nano-satellites for commercial general liability (CGL) pol- additional insured onto the policy can communications, earth observation, and icy should pay for the damage to your trigger the exclusion because the addi- future broadband purposes. Gerald aircraft. But according to Glenn Vallach, tional insured becomes ‘any insured.’” Ross noted that the 1984 Commercial Deneen, vice claims attorney for United States Aircraft Vallach says that Exclusion G essen- Space Launch Act (CSLA) tasked the president Insurance Group (USAIG), aircraft owners tially means there may not be GL cov- FAA to license all launch vehicles, sat- Swiss Re can get tripped up by exclusions in CGL erage behind hangar owners who add ellites, and launch sites under one pro- Management policies if the aircraft owner or operator customer aircraft owners onto their CGL gram, requiring the launch provider to demands to be added as an additional policies as AIs. “This stinks for the aircraft be responsible for all third-party liability The big question insured (AI) on the CGL policy. owner. They want to make a claim against insurance. A 1988 CSLA amendment set A standard exclusion on nearly any the hangar owner, but more important, up a three-tier system for third-party lia- is should insurers commercial GL policy, Exclusion G “Air- they want money for the claim. So it’s bility insurance with the first tier requiring provide drone craft, Auto or Watercraft” generally not ideal for them if the hangar owner is insurance up to $500 million based on a insurance, including excludes coverage of such vehicles uninsured. And of course it’s even more maximum probable loss (MPL) calcula- owned or rented by insureds of the policy. important for the hangar owner, because tion for the commercial launch provider, coverage for all Exclusion G is meant to separate aircraft GL is probably the only protection they or $100 million for government property. trespasses and exposure from building exposure, mean- have against this type of aircraft [prop- Above this tier the U.S. government pro- invasion of privacy?” ing that hull coverage on aircraft owned erty damage] claim.” vides a layer of $1.5 billion (in 1988 dol- or rented by the FBO should be provided lars or $3.5 billion today) if approved by “Property and casualty companies pro- under an aircraft policy, not under the Congress before liability once again falls viding homeowners insurance are really CGL. Vallach said that third parties some- to the launch provider, being the third tier. struggling with drones,” Deneen said. “The times get caught by Exclusion G when The FAA Office of Commercial Space big question is should insurers provide they become AIs. Transportation makes the MPL calculation drone insurance, including coverage for all “This specific aspect of Exclusion G can based on launch vehicle power, location of trespasses and invasion of privacy? Peo- be so broad in certain circumstances that Glenn Vallach, launch, and trajectory and what damage ple don’t like being photographed or being it can change the ‘tried and true’ ground claims to persons and property could occur in the filmed by someone they don’t know. There rule of risk management that entities attorney for event of a launch vehicle failure. Ross said are a lot of lawmakers who are opposed should always ask to be an additional USAIG that the process of calculating the MPL is to drones. So if we ever get a catastrophic insured on their contractor’s insurance currently under review as there appears injury or terrorist activity with drones, this policies,” said Vallach. “Sometimes The ‘any insured’ to be a lack of consistency. “For example, whole industry could be grounded.” Exclusion G can operate in such a way language means a [specific] Atlas V launch required $193 Deneen noted that many homeowners, that adding the wrong party as additional million MPL. But a similar launch vehicle, especially in metropolitan areas ringed by insured onto an aviation GL can have that simply adding an SpaceX Falcon Nine, launched from the small airports, may not realize that they really restrictive consequences in terms additional insured same site, carrying the same amount of reside within five miles of an airport and of precluding coverage for both the addi- onto the policy can weight, needed only $45 million.” thus might be flying their drones illegally. tional and named insureds.” Separate from the launch coverage However, just because an act is illegal The key to whether Exclusion G applies trigger the exclusion is coverage of the payload, itself, while doesn’t make it uninsurable. with respect to such a third-party AI is because the additional in space. Currently there are more than “We cover things in the insurance indus- the wording within the exclusion and insured becomes ‘any 1,700 operating satellites in orbit, with try that are illegal, such as covering an the extent to which it applies to the only about 300 insured, according to Ross. insured when he’s driving drunk and kills Hangarkeeper’s coverage of the policy. insured.’” As the number of space objects increase— somebody,” Deneen said. “The question Essentially, if the Exclusion G uses the Vallach noted that Exclusion G can including more than 22,000 trackable is whether this is an insurable exposure. term “the insured,” then the exclusion also trip up owners of managed aircraft pieces of debris larger than 5 cm and From a societal benefit, should we not generally applies only if the specific party if management companies rely on CGL more than 300,000 pieces about the be covering [drone operators] when the seeking coverage (the FBO owner) for coverage rather than purchasing sepa- size of a marble—the chance for satellite drone is flown illegally?” the claim owns or rents the aircraft at rate hull coverage for aircraft they oper- malfunction or loss due to collision with Deneen discussed exclusions that issue. However, this wording is rare for ate or manage. debris increases. In 2009, satellites Irid- insurers may want to consider when the Coverage A (third-party property “It happens often where an aircraft ium 33 and Cosmos 2251 collided at 789 writing commercial drone coverage, damage and bodily injury coverage) manager damages an aircraft in the km above the earth, creating nearly 2,000 suggesting that insurers should refer to exclusion and not even always used as course of the management agreement pieces of cataloged space debris. the Federal Aviation Regulations Part the exclusion relates to Hangarkeeper’s and the aircraft owner wants to make a “It’s getting pretty crowded up there,” 107-Small Unmanned Aircraft Regula- coverage. Commonly, Exclusion G and its claim,” said Vallach. “Exclusion G thinks Ross said. “The highest density of space tions for operating requirements. Insur- Hangarkeeper’s equivalent use the term that this should be an aircraft hull claim debris is in low earth orbit, and with the ers must decide whether they want to “any insured.” Under this language, if the and not a GL liability claim. The equation forecast growth in low earth orbit nanosat cover drones that do not meet the phys- aircraft at issue in the claim is owned here is the same: ownership, maintenance, constellations, the congestion issue will ical parameters (weight, speed, lighting), or rented by any insured on the policy, continues on next page

ainonline.com \ June 2018 \ Aviation International News 21 SPECIAL report

Astronaut Mark Kelly — The Power of Having a Goal and a Plan

Dressed in his blue NASA flight jacket She became one of the first female police adorned with patches from all four space officers in that part of New Jersey.” shuttle missions that he flew as pilot or Kelly says that his mother’s hard commander, astronaut Mark Kelly kept work inspired him to work toward a the AIA audience enthralled with stories lofty goal of his own: to be the first per- of his first carrier deck landing as a U.S. son to walk on Mars. “I believed that if Navy pilot (“the first thing my instruc- I worked hard enough, took the right tor pilot said to me when I got back to steps and maybe got lucky along the the naval air station that night was, ‘Are way, I could make it to Mars. Well, I left you sure this career is for you?’”), his NASA several years ago without ever first combat mission during Gulf War in making it to Mars, but I got close and 1991 avoiding surface to air missiles over made it into space four times.” southern Iraq (“You know what’s worse Left to right: Mark Pestana, Raymond Mariani, and Priscilla Kehoe led a panel than seeing the first missile? Seeing the discussion on safety management systems outlining the need to balance second one!”), nearly being downed by safety—and acceptable risk—with profits. friendly fire (“Do not shoot down the moron in Iranian airspace!”), and land- continued from preceding page and levels of profitability where SMS can ing the shuttle on the 15,000-foot run- or use of an aircraft operated by any help manage to acceptable levels of risk. way at the Kennedy Space Center (“You insured. So property damage liability It shows a thoughtful organization that may have noticed that on both sides of exposure [to an aircraft owned by an goes through a process of assessing risks, this runway is water, and what’s in water AI but managed by the policy holder] is deciding what they can accept, and what in Florida? Alligators! I think NASA put definitely excluded from Coverage A by they can and cannot mitigate.” that there as added motivation to land Exclusion G here. And for a lot of avia- Priscilla Kehoe, group senior director the $2 billion ship on the runway.”). tion GL policies, Exclusion G applies to for safety insurance and risk at BBA Avia- But the core theme of his talk was Hangarkeeper’s [language] word for tion, discussed using the risk assessment the power of having a goal and a plan. The power of a goal was also a key fac- word. Finally, even if the policy has the portion of the SMS process to help deter- He says that he saw it first as a kid in tor in the remarkable recovery of Kelly’s less restrictive Hangarkeeper’s aircraft mine corporate insurance requirements. New Jersey when his 5-foot-1-inch-tall wife, Congresswoman Gabrielle Gif- exclusion with ‘the insured’ in it, you may “We have risk registers that we review mother decided to become a police fords, who, after being shot in the head not even get to the ‘the insured’ vs. ‘any and update on a biannual basis,” said officer and trained for months in the at close range in January 2011, returned insured’ issue because ‘the insured’ is Kehoe. “Identifying risk is absolutely vital backyard to climb a 7-foot-2-inch wall to the House floor in August 2011 to cast the aircraft manager, and they very well to determining your acceptable level of as part of her physical fitness test. “I a vote in favor of raising the debt ceiling. may be deemed to have leased or rented risk and then insuring against that. You watched my mother go out there after “My wife, Gabby, entered Congress the aircraft for purposes of the claim. So determine what level of internal control dinner every night to try to get over for the first time in 2007,” Kelly said. “I there’s probably not going to be GL cov- you’re going to keep over those policies the wall, and initially she couldn’t even thought I had the risky job. I’d flown 39 erage for this PD claim. It really should by having a high program, cap- reach the top,” Kelly said. “But after combat missions and by that point in be a hull claim.” tive, or put that level of risk on an insur- months of practicing, when she finally my career at NASA, I’d also flown my ance program.” faced the test, instead of getting over in first two flights on the space shuttle. SMS Effect on Insurance Kehoe described BBA Aviation as a the required nine seconds, she got over But as it turned out, my wife Gabby is Two different panel discussions high- “very diverse group of companies” with in four and a half seconds, which was the one who nearly lost her life serving lighted the benefits of safety manage- global reach, including 189 Signature much faster than almost all of the men. our country.” n ment systems (SMS) and their overall Flight Support FBOs worldwide, Ontic effect on insurance. Raymond Mariani, aerospace parts manufacturing, and sev- a New York-based attorney for Murray, eral engine repair and overhaul compa- At first it was a difficult concept because organization. When I did it, my boss was Morin, & Herman, led a panel discussion nies. The BBA Aviation leadership began employees thought they would be rep- safety, not the chief pilot, and I’d meet on current uses of SMS, noting the March discussing formalizing an SMS across the rimanded. Over the last several years, monthly with our center director. Now 8, 2018 deadline for Part 121 air carriers to entire group in 2014 that could incorpo- we’ve made them realize that they have there’s no attribution for reporting; you implement an SMS per FAA Advisory Cir- rate the different risks incurred by the the right to stop any type of activity or can report incidences in confidence.” cular 120-92B. Mariani described the goal varied operations: FBO operations and operation that may lead to an accident.” The panel determined that companies of SMS as balancing the tension between fuel farms, hangar space rental, main- Col. Mark Pestana (U.S. Air Force, ret.), and organizations with fully implemented safety and profitability to achieve an tenance and repair operations. Kehoe also commented on employees being SMS can communicate hazards and risk “acceptable” level of risk. indicated that empowering employees able to speak up to facilitate SMS success avoidance more clearly both within the “In the ideal world, everything would to speak up was one key to implementing at NASA’s Armstrong Flight Research organization and to insurance underwrit- work to a point where there’s no chance the SMS globally. Center where he currently serves as a ers. According to Mariani, SMS shows a of accidents, losses, or bodily injury,” “When you’re a global company, research pilot and aerospace consultant. proactive approach to risk management, said Mariani. “But is that really practi- between the different cultural and lan- “We recently adopted a means by which proven ability to reduce losses, and estab- cal? It’s not, and particularly not if you’re guage aspects, it’s very difficult to imple- we can communicate all the way to the lishes an ongoing safety culture that running a private corporation that’s for ment one robust program,” said Kehoe. highest level—to our center director who saves money, avoids injuries, and boosts profit. Obviously many companies that “One of the goals we had as part of our reports to the NASA Administrator—on morale. All of these options should make are highly profitable are also fairly safe SMS was to give our employees the right safety issues. We assigned an individ- companies that implement an SMS more companies, but it’s that middle ground to say ‘stop’ to any type of event that they ual from each office—pilot, flight crew, insurable and even yield rate reductions that’s fought between levels of safety thought was going to be a safety issue. engineering, maintenance—to the safety continues on next page

22 Aviation International News \ June 2018 \ ainonline.com SPECIAL report Bizav security conference Awards and Recognitions explores risk management by Curt Epstein

The threats business aviation flight depart- the company, where all members of the ments face may take many forms, rang- department, from the top down to the ing from physical, to financial, to digital. lowest, know whom to contact first. Exploring how aware operators are of these potential hazards, and what they can Taking It On The Road do to help mitigate them was the goal of When traveling abroad, flight crews and their NBAA’s second annual security conference, passengers must understand the threats they held in May in Dallas. As the presenters face. Most Westerners are considered high- explained, harm to a company’s assets or value targets, subject to anything from street reputation can come from simply leaving crime to kidnapping to data theft. Crucial to a sensitive document on a hotel check-in the success of the trip is a preflight briefing desk, to an overheard conversation in a using information readily available from a bar, to an intruder getting into a hangar variety of sources both public and private, and damaging an aircraft, to a flight crew presented to both the passengers and the Camille Knight accepts CAIP Award from AIA president Paul Herbers. and passengers put in peril from an unex- crew. They should be kept informed of any She was one of six recipients of the award. pected geopolitical event. developing situations so they can respond One of the underlying themes of the to them if necessary during the mission. The AIA annually recognizes several of consecutive AIA membership and conference is that security is everyone’s Sullivan recommends that the crew set an members for their recent or lifelong have made substantial contributions to responsibility, from the scheduler who emergency rallying point away from their contributions to the aviation insurance the aviation industry or demonstrated selects the hotels, to the crewmember or hotel, where they can gather and head to industry. The 2018 Pinnacle Award went achievement in their aviation career. passenger who is aware of possible danger, the airport, and they should also make sure to F. Thomas Bradshaw, president at The 2018 Eagle Society inductees were to the security coordinator who designs that each passenger understands how to get Halton Hall & Associates. Bradshaw, John Brogan, Jeffrey Bruno, Deborah and implements the security plan at the to the aircraft if necessary. who holds various insurance profes- Elsasser, Jack Harrington, Christopher home base, everyone must buy in to the In troubled areas, flight crewmembers sional designations, joined Halton in Jones, Raymond Mariani, David Sales, program for it to have the best chance of should travel in pairs or groups and keep July 1977 and has co-founded two other Ian Wrigglesworth, John Young, Carla preventing problems. tabs on each other, as the ability for a insurance-based companies: Falcon Zanette, and Christopher Zanette. return flight depends on their well-being. Insurance Company and Menger Under- The association also recognized Security Begins at Home When traveling to areas in turmoil, crews writing Services. six members who earned the Certi- While flight crews may have a sense of should fuel on arrival in case a swift depar- Eleven members were inducted into fied Aviation Insurance Professional familiarity and comfort at their home base, ture is required. the AIA’s Eagle Society. Nominated by (CAIP) designation: Christopher companies must be aware of who might be When the aircraft is on the ground, Sul- the current AIA president with concur- Arnold, Gary Churchill, Jennifer interested in harming either them specifi- livan recommends it be checked at least rence by the board of directors, Eagle Czyrba, Camille Knight, Lisa Ouellette cally, or similar companies, and assess how once every 24 hours and its security sys- Society nominees must have 10 years and Joe Suarez. n tight the security at their facility is. Flight tems engaged to deter any tampering. departments should establish a security It might be surprising, but the number plan for their facility, detailing security one cause of death for Americans abroad continued from preceding page through our SMS, decided that the risk protocols such as who has access to the over the past several years is ground trans- as insurers and underwriters become was too high and we banned those from facility, what access-prevention systems portation. In cases of accidents, many more aware of SMS benefits. our aircraft. We brought our regional air are in place (if there are locks on doors, travelers might not be able to accurately The positive effects of an SMS system operators in and also worked with other are they used all the time?), and are there describe their location. William Archer, in mitigating risk were brought forward airlines when we did that [assessment].” adequate security enhancements such as global security director for L-Brands, during the Lithium Battery Risk at Alti- Toman indicated that the SMS is not proper lighting and video cameras? Those noted that web travel support services tude panel, which discussed in detail used only for risk assessment but also questions are difficult enough if your com- such as iJet Worldcue or International SOS the hazards of lithium-ion (Li-ion) bat- for hazard identification, noting that pany is the sole occupant of the hangar, but allow users to easily send an emergency teries overheating and catching fire in e-cigarette and smart bag (suitcases they multiply if you share your hangar with message from their smartphone with their various situations. Vickie Toman, man- containing built-in Li-ion batteries for another company and need to assess their GPS coordinates. Those same applications ager of Flight SMS for American Airlines, charging devices) risks were both identi- level of security as well. can also be configured so crew and passen- described how the airline’s SMS was fied through the SMS. “As long as a smart According to John Sullivan, managing gers can check in at a specific time each day, used to quickly assess risks of various bag goes into the cabin, no problem,” said partner of the Welsh-Sullivan Group, the and issue an alert if the check-in is missed. lithium-ion carrying products, including Toman. “But what happens if the cabin plan is a living document that should Greg Kulis with L-Brands noted that procedures for complying with the FAA’s overheads are full and you have to check be used to triage and improve lapses in passengers and crew are more vulnerable Emergency Restriction/Prohibition Order your bag? We do not allow anyone to security. Flight departments should con- during their trip from the airport to their on the Samsung Galaxy Note 7 smart- check anything with the lithium battery duct regular safety training, including hotel, as any observers may notice that phone in October 2016. inside of it. So we took that through our tabletop scenarios with all the stakehold- they arrived on a private aircraft and will “The airlines had already put measures SMS, worked with the manufacturers, and ers, to ensure everyone understands the draw their own conclusions about their in place regarding Li-ion batteries before created procedures for our employees to procedures, and he recommends that potential target’s worth. He recommends the FAA [document] came out telling us identify and stop these bags from being they continually assess their plan, refine the use of vetted ground transport and to make sure to use our SMS to deal with loaded as cargo and to have ticket and it, and test it. If a breach of security does cautioned that transportation that isn’t this type of hazard,” Toman said. “A couple gate agents inform passengers how to occur, Sullivan noted there needs to be secure enough for the passengers is not of years ago we ran the hover board risk remove the batteries.” n an incident response procedure within secure enough for the crew either. n

XX24 Aviation International News \ June 2018 \ ainonline.com