ARSA Liability Insurance Project--Questions and Answers

Now that formation of the ARSA Liability Insurance Project is underway, here are some questions and answers to help interested parties understand more about the venture.

If the information listed below does not answer your questions, please feel free to contact Paul Hawthorne, ARSA VP-Quality, via e-mail or by phone (703 739 9543).

WHAT IS THE ARSA LIABILITY INSURANCE PROJECT? The ARSA Liability Insurance Project is a risk retention group that will provide ARSA members an opportunity to take control and ownership of their liability insurance. The RRG 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 shouldn’t be the case. Come to the ARSA Repair Symposium in March and learn what else this data reveals and why you have been paying...many times over...too much for your liability insurance.

WHAT IS THE STATUS OF ARSA LIABILITY INSURANCE PROJECT? To obtain an insurance license, the Project must gain sufficient commitment to secure reinsurance support. The Project is currently in the formation stage, it has secured lead reinsurance support and is gathering commitments from ARSA members to join the RRG when it becomes licensed.

WHAT IS REINSURANCE AND WHY IS IT NEEDED? Put simply, reinsurance is insurance for an insurance company. As an insurer, the RRG plans to retain exposure for a certain dollar amount of every claim, say the first $500K.* It would then “sell off” the balance of any claims in excess of $500K up to the policy limits. Reinsurance companies would accept this risk in return for a portion of RRG’s gross premiums.

DO I HAVE TO BE A MEMBER OF ARSA TO JOIN ARSA LIABILITY INSURANCE PROJECT? The opportunity to participate in the Project 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 regular member before joining the Project. Please refer to ARSA’s Web site or contact ARSA at 703 739 9543 to determine what level of membership best suits your company.

WHAT LINES OF INSURANCE WILL THE ARSA LIABILITY PROJECT OFFER? The RRG will insure general and completed operations liability, including products and hangar keeper’s liability. In the future, the RRG may offer other lines of insurance.

WHAT ARE THE COSTS OF JOINING THE ARSA LIABILITY INSURANCE PROJECT? Membership has two cost components:

Capitalization: The members of a 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.

ARE THERE ANY OTHER POTENTIAL COSTS? For the ARSA Liability Insurance Project to be a success, every member must prepare for some additional costs. These costs could include inspection fees and assessments.

Assessment: 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. Alternatively, 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 RRG were to write $5,000,000 in annual premium:

Gross Premium $5,000,000
Cost of Reinsurance ($1,500,000) – estimated* at 30% of Gross Premium
Other operating expenses ($ 875,000) – estimated* at 17.5% of Gross Premium
Loss Fund $2,625,000 – 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 $2,625,000, 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. 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 THE ARSA LIABILITY INSURANCE PROJECT? As a member of the RRG, 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 THE ARSA LIABILITY INSURANCE PROJECT? 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 THE ARSA LIABILITY INSURANCE PROJECT PROVIDE? The RRG aims to provide limits of $1M/$3M and up to $10M/$510M 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 ARSA Liability Insurance Project Board of Directors has determined that the RRG will write insurance on a direct basis. One of the central goals of a RRG 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 the RRG’s bottom line. You can still utilize your broker for all of your other insurance needs and coverage.

WHO WILL OWN AND CONTROL the RRG? The RRG will be a unique corporation, owned solely by its member insureds and controlled by its own board of directors.

HOW DO I COMMIT TO THE ARSA LIABILITY INSURANCE PROJECT? Complete this Pre-Membership Commitment Form (.pdf) and return it to ARSA as instructed.

WHY SHOULD I COMMIT NOW? Early commitment means additional benefits. Committing now provides for preferential dividends (dividends are not guaranteed). An ARSA Liability Insurance Project member receives a class of shares based on their time of commitment and payment of a commitment fee. Dividend distribution preference is as follows:
• The first 10% of total declared dividends is distributed to Class A shareholders, pro rata.
• The next 5% of total declared dividends is distributed to Class A and Class B shareholders, pro rata.
• The remaining 85% of total declared dividends is distributed to Class A, Class B, and Class C shareholders, pro rata.

WHAT IF I COMMIT LATER? Committing later or committing without a commitment fee still provides long term benefits in the form of Class C shares. As an ARSA Liability Insurance Project member you will share in all cost savings available to all members.

*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.