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The Science of Hull Deductibles

by Darryl Abbey 1. October 2009 00:00
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Just like your home-owners or auto insurance, if you own an aircraft and purchase physical damage or Hull insurance, your insurance coverage has a deductible provision.

What is the purpose of that deductible? Well, there are two theoretical purposes in the eyes of insurance carriers: 1) to save the insurance carriers from having to pay for small "nuisance" type losses and 2) to promote safe actions by the insured since it is the insured's money (the deductible amount) which is paid first in any loss. These both sound reasonable and, in the case of promoting safety, a laudable goal.

"But, what's in it for me? Do I save money?" are the questions that most policy holders ask. The answer is simple, at least in theory. Yes, in return for assuming the first portion of any loss (the deductible amount), the Insured does pay a lower premium but only lower than they would if they did not take on this portion of risk. This seems reasonable too and is a good example of the positive side of risk = reward.

Ok, now that we have gotten the theory out of the way, let's move to the practical side of hull deductibles. It is true that all aircraft hull insurance coverage has a deductible provision. However, that does not mean that there is an actual deductible amount or a meaningful deductible amount. Hull deductibles can vary widely depending on aircraft make and model, type of use and even which insurance carrier is issuing the policy. While some types of aircraft operations have significant deductibles (Rotorcraft, amphib, cargo and airlines to name a few), many types of aircraft or operations have little or no deductible at all. Light aircraft used for pleasure and business tend to have low deductibles of $250 each loss or $100 each loss or even $0. The same is true for aircraft at the opposite end of the spectrum. Corporate aircraft, such as Gulfstream, Falcon, Citation and other turbofan equipment, typically have a hull deductible of $0. We all know that, unfortunately, even a small amount of damage to an aircraft can cost thousands of dollars to repair so, with deductibles or $100 or $0, the theory of deductibles preventing the insurance carriers from paying attritional losses seems to fail.

Many insurance carriers have a provision in their insurance policies which requires annual recurrent training in the make and model aircraft which is insured. Even if there is no such requirement in the policy, most responsible pilots receive recurrent training, attend safety seminars or similar events on their own in the interest of keeping their flying skills sharp. So, the idea of using a $100 deductible to promote safety by having the aircraft owners own money at risk really doesn't hold water either.

Now, let's go to the question of whether or not deductibles save money for aircraft owners. The answer is yes and no. If there were no hull deductibles applicable to any type of aircraft operations, the cost of insurance for all aircraft operators would likely increase. (The premium of the many pays for the losses of the few.) So yes, by virtue of the fact that deductibles exist, most aircraft owners are saving money. However, if your total
annual premium is $2,000, you have a $100 deductible and you ask your underwriter how much money you can save if you increase the deductible to $500, the answer is not going to be "Your premium will go down by $400". In fact, you would be lucky to save $100 off the premium. This shows us that, in this case, the risk = reward calculation does not work in favor of the aircraft operator.

Don't get me wrong. I am not suggesting that insurance carriers should impose higher deductibles on all operators. Low deductibles are good. Rather, I am trying to point out that there is very little science and a lot of subjectivity in the use of hull deductibles and that you should ask your underwriter about deductible options and the cost/benefit associated with them. If it is possible to get a $0 hull deductible for the same cost as a $250 deductible or a 5% for the same cost as a 10% deductible, I know which one I would choose. It doesn't hurt to ask.

Do you have additional experience with this topic? Tips, Tricks, or Advice? Please discuss it with us!

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