WHAT IS AAIRRG?
The Aviation Alliance Insurance Risk Retention Group (AAIRRG) is a risk
retention group that provides Aeronautical Repair Station Association (ARSA) members with an
opportunity to take control and ownership of their liability insurance. AAIRRG will enable
FAA-certificated repair stations to achieve long-term savings on insurance for products and
completed operations.
WHAT IS A RISK RETENTION GROUP (RRG)?
A risk retention group is a homogeneous group of
independent companies, joining together to form and capitalize a licensed captive insurance
company. An RRG operates under the Federal Liability
Risk Retention Act of 1981 (as amended in 1986) to write common commercial liability insurance
for its members. Each insured must be an owner of the RRG and all owners must be insured by the
RRG.
WHY DO WE NEED AN INSURANCE ALTERNATIVE?
The insurance industry views aviation as a
special “high hazard” industry. Consequently, there are few insurers who provide coverage. As a
small subset of the aviation insurance market, when repair stations do find coverage, too often
they encounter premiums that represent an average of all aviation exposures. An examination of FAA
and NTSB statistics on aviation accidents reveals that this should not be the case.
WHAT IS THE STATUS OF AAIRRG?
On Friday, June 18, 2010, AAIRRG received its certificate
of authority (insurance license) from the Montana Department of Insurance (MT DOI). Montana is
AAIRRG’s domicile state. AAIRRG has registered as an RRG with states it chooses to write
business.
WHAT IS REINSURANCE AND WHY IS IT NEEDED?
Put simply, reinsurance is insurance for an
insurance company. As an insurer, AAIRRG will retain exposure for a certain dollar amount of every
claim, up to the first $500K.* It will then “sell off” the balance of any claims in excess of $500K
up to the policy limits. Reinsurance companies accept this risk in return for a portion of RRG’s
gross premiums. AAIRRG’s reinsurance has been placed with the many of the leading top-rated
aviation reinsurers.
DO I HAVE TO BE A MEMBER OF ARSA TO JOIN THE AAIRRG?
The opportunity to participate is
one of the benefits of ARSA membership; therefore, if you are not currently a regular member of
ARSA, you will have to become a member before joining the AAIRRG. Please refer to ARSA’s website at
www.arsa.org or contact ARSA at arsa@arsa.org | 703-739-9543
to determine what level of membership best suits your company.
WHAT LINES OF INSURANCE WILL AAIRRG OFFER?
AAIRRG will insure general and completed
operations liability, including products and hangar keeper’s liability. In the future, the group
may offer other lines of insurance.
WHAT ARE THE COSTS OF JOINING AAIRRG?
Membership has two cost components:
- Capitalization: The members of an RRG are the owners. As with any corporation, ownership
involves a contribution to capital. Government regulations require a minimum level of
capitalization in an RRG. The required RRG capitalization contribution for each member is
projected to be approximately 30% of a typical potential member’s current annual insurance
premium. So, if your current annual premium for liability insurance is $100K*, the up front
capital investment will be approximately $30K*.
- Annual Premium: As with any insurance, there is a premium component. A member’s annual
premium during the first few years is expected to approximate the premium the member would pay to
a competitive insurance broker in the open market.
- AAIRRG has arranged for premium financing and, for those who qualify, your capital can also be
financed.
ARE THERE ANY OTHER POTENTIAL COSTS?
For AAIRRG to be a success, every member must prepare
for some additional costs. These costs could include inspection fees and assessments.
Assessments: If everything goes as planned, an assessment will never be needed. However, if
the RRG ever finds itself in a position where the annual claims exceed the net received premiums
(including reserves) and recoverable reinsurance, the RRG may assess each member up to 100% of
their annual premium to keep the RRG solvent. The RRG could purchase stop-loss reinsurance to
eliminate the need for assessments, though this type of reinsurance can be a more expensive option.
As an example*, if AAIRRG were to write $5,000,000 in annual premium:
- Gross Premium $5,000,000
- Cost of Reinsurance ($2,500,000) – estimated* at 50% of Gross Written Premium
- Other operating expenses ($875,000) – estimated* at 17.5% of Gross Written Premium
- Loss Fund $1,625,000 – dollars left after expenses to pay claims
In the example above, if the RRG pays annual aggregate claims (excluding claims paid by the
reinsurance) in excess of $1,625,000, then the RRG members must make an assessment to replenish the
loss fund. Alternatively, the RRG could purchase aggregate stop loss reinsurance in anticipation of
such a loss; this type of reinsurance is very expensive and would exceed the 50% of Gross Written
Premium. In that case, the stop-loss reinsurance would pay the claims on behalf of the RRG, to a
pre-determined limit.
WHAT ARE THE BENEFITS OF JOINING AAIRRG?
As a member of AAIRRG, you will take greater
control over your liability insurance. You will participate in an active Risk Management Program,
have more input and control over the Claims Process, and own your share of the Underwriting Profit.
The RRG is a business management tool that will give its members the opportunity to manage their
liability insurance expense rather than accept it as a “tax.”
WHAT ARE THE RISKS OF JOINING AAIRRG?
Up-front capitalization and any ongoing
contributions in the form of assessments are a risk if the program’s claims exceed net premiums
received and recoverable reinsurance. RRGs are also not eligible for state guarantee funds, similar
to insurance obtained in the Excess and Surplus Lines Insurance market.
WHAT LIMITS OF COVERAGE WILL AAIRRG PROVIDE?
The RRG aims to provide limits of $1M/$3M
and up to $10M/$10M on a primary basis for each insured. The RRG will work to provide higher limits
as needed, either individually or on a group basis.
WILL MY REGULAR INSURANCE BROKER BE INVOLVED?
The AAIRRG Board of
Directors has determined that AAIRRG will write insurance on a direct basis. One of the central
goals of AAIRRG is to operate more efficiently with less operating expenses. Writing direct
eliminates the commissions usually paid to your broker. That money will instead go towards
increasing AAIRRG’s bottom line. You can still utilize your broker for all of your other insurance
needs and coverage.
WHO WILL OWN AND CONTROL AAIRRG?
AAIRRG is a unique corporation, owned solely by its
member insureds and controlled by its own Board of Directors.
WHAT ARE FACILITATORS?
The representatives from ARSA and Polaris facilitated the
formation process on behalf of the Association members. The team will formulate and implement risk
management programs as well as conduct onsite inspections. The Polaris Group specializes in
facilitating the formation and management of group captives.
For more information on AAIRRG or the Polaris Group, please visit their website at
www.peg-inc.net or call 415-885-2700.
HOW DO I COMMIT TO JOIN AAIRRG?
Go to
www.aairrg.com/forms and complete the Instant Quote Form. Return it to
rick@peg-inc.net at Polaris.
IF I COMMIT NOW WHAT TYPE OF OWNERSHIP, WILL I HAVE?
Any new company wanting to become
and insured and owner of AAIRRG will be a Class C common shareholder. The levels of ownership are
delineated as follows:
- Class A shares receive a 10% preference on any declared dividend pro rata. The
opportunity to purchase this class of stock expired on July 15, 2009;
- Class B shares along with Class A shares receive the next 5% preference on any dividend
declared of the remaining funds pro rata. The opportunity to purchase this class of stock expired
on July 15, 2009;
- Class C, or common, shares receive any dividend declared pro rata with all shareholders,
after deductions for Class A and B preferential dividends.
- Each share is currently priced at $500.00 each.
WHAT IS THE POTENTIAL OF HAVING TO COME UP WITH ADDITIONAL CAPITAL IF THERE ARE TOO MANY AAIRRG
CLAIMS IN ONE YEAR?
AAIRRG's actuaries examined 15 years of NTSB data and opined that AAIRRG
should expect 2.6 claims per year. Typically, there is a great amount of latency in aircraft
products claims, with claims from year one typically are not reported until at least year three. By
that time AAIRRG's pro forma indicates that AAIRRG will have retained in excess of $10M (net of the
major expense of reinsurance). Since AAIRRG only retains the first $500,000 of exposure to each
claim, the expected financial exposure would be $1,300,000 ($500,000 x 2.6 claims). That equals 13%
of anticipated revenues.
HOW DO I KNOW WHAT "TOO MANY CLAIMS" WOULD BE?
Based upon the math outlined in the
previous answer, it would take more than 20 claims in one year to cause a capital call. That would
be almost a 100% increase from the historical NTSB data. (Please be advised that there are other
possibilities which could alter the outcome).
WHAT LIABILITIES WOULD I HAVE TO ABSORB IF THE GROUP CANNOT COME UP WITH ADDITIONAL REQUIRED
FUNDS?
Each AAIRRG shareholders liability is limited to one times their annual premium.
There is NO joint liability.
WHAT IS THE PERSONAL LIABILITY EXPOSURE IF THE COMPANY CANNOT PAY?
There is no personal
liability.
* All figures cited are hypothetical and are provided to explain
principals through the use of examples. Figures are not predictive of actual costs, returns or
other potential liabilities or assets. |
