Bureaucratic freefall

When former prime minister Ted Heath led the UK into what was then the European Community in 1973, insurance brokers probably did not expect to finally feel the full ramifications more than 30 years later. But, thanks to the UK's adoption of the EU's Insurance Mediation Directive, statutory regulation of insurance brokers this year is causing fundamental change across vast swathes of the insurance community.

However, despite the enormous impact of this change, the EU's influence in the UK insurance industry is far from over for the time being. For a start, there is the looming anti-discrimination directive, which would see an end to gender-specific underwriting for motor insurance. And, on a smaller scale - but equally fundamental for those involved in the sector - has been the introduction of new minimum insurance requirements for aviation insurance as of 30 April.

The new regulations (see box, p36) essentially introduce minimum insurance requirements across the EU in the area of aviation for the first time.

According to the Civil Aviation Authority, as UK commercial airlines are already required to have such insurance, it will be mainly private flyers who will be affected, as there has been no previous mandatory requirement for them to hold any type of insurance. This means that a significant number of light aircraft across the country are affected by the new regulations.

Currently, there are more than 6000 registered private aircraft, excluding gliders, in the UK, with a further 5000 not certificated by the CAA.

The introduction of the new regime has been far from smooth, however, and has caused considerable problems for brokers, underwriters and light-aircraft operators in much the same way that the introduction of statutory regulation by the Financial Services Authority has caused its own raft of problems. "The general public practising aviation haven't a clue what is going on," says Lynda Michel, director of specialist light-aircraft broker Bartlett. "A lot of them see the new regulations as an excuse for insurers to make more money."

Cost comes as a shock

And indeed cost is at the core of the issue here. The sudden cut-off date at the end of last month for non-commercial operators to have cover in place has unfortunately come as something of a shock to many operators and pilots. They are now faced with the sudden imposition of a premium that was not previously extant, or are else faced with substantial increases in premium, which have been calculated to correspond to the new limits.

Greg Hill, director of broker Traffords, another specialist in this niche area, elaborates on the raft of difficulties that his business is currently facing, suggesting that the EU has introduced these regulations without really thinking about their full consequences: "They have introduced a lot of work for us, as we are all having to do a lot of overtime. Yes, most people have been purchasing some form of liability cover, but some bureaucrats in the EU have established insurance bands without regard to light aircraft - they have really been introduced with regard to commercial airlines. However, some of the limits are a bit stupid, as £85,000 per passenger does not really go that far."

He adds that brokers have really been in the firing line in recent weeks: "It has caused dissatisfaction for clients and it is always the messenger that gets shot. A lot of people agree that it was time that some form of minimum insurance was introduced, but the premium hikes have been quite difficult for some people. So there have been premium increases from £500,000 to £3m, which is quite a big hike and it is causing problems on the broking side and problems for policyholders."

John Lumley, managing director of broker Global Aviation Insurance Network, agrees that one of the unintended consequences of the EU's new regulations has been to hit the light aircraft sector hard, explaining that many are at the mercy of the market cycle: "The regulations mean hefty hikes for the small players out there," he comments.

"If they have a price that is set already and have to increase that mid-term, then they are in the hands of the insurer and are at a huge disadvantage, as the underwriters have the ability to change terms and conditions. But underwriters should not be blamed, as they are merely reflecting their increased exposure."

European bureacracy

Lumley lays much of the blame for the current mess squarely at the door of the European bureaucrats: "As is often the case with the EU, they have a grand scheme and it is a one-size-fits-all approach. The regulations were intended to create a common standard for the larger commercial operators that, quite frankly, exceeded it anyway. What it means in practice is that, for the smaller operators, the transition will be painful. They have brought the regulations in a sellers' market, whereas, if it had been phased-in, it would have been easier."

According to Michel, many of the problems currently being experienced by brokers are attributable not to the insurance industry but to the legislators - in particular the government, which she feels has not helped the situation by deciding very late in the day exactly how it wanted to interpret the EU requirements.

"Personally, as insurance brokers, we believe it is in the best interests of clients to have liability insurance and to have higher limits, but the delay caused by the government in deciding on passenger liability levels has caused problems," she adds. In particular, she says, the problem has been the government vacillating on whether or not to go with the lower limit of liability, although in the end it has decided to stick with the EU's lower limits.

Michel outlines the extent of the headaches that have been caused by the legislators holding matters up but leaving it so late to decide on the precise interpretation of the requirements: "We have had to write to people twice in three days, so it has not been as well-handled as it could have been by the government, and it has not been helped by the legislation being framed in terms of special drawing rights," (see box below).

It is not only brokers that have faced difficulties in trying to deal with the new regime. Andrew Moore is head of engineering at the Popular Flying Association, which represents about 1800 aircraft in the UK currently flying, with another 1500 in build. He accepts that the liability insurance regulations will mean an increased cost for members and says that underwriters themselves should accept some of the blame for failing to properly assess the risks involved with light aircraft.

"We have seen it coming for a while now, and it is difficult to argue against mandatory insurance," he comments. "The level of insurance required, which is now around £100,000, is more reasonable compared to the risk, but we have found that insurers are not particularly up to speed on the risk and will tend to apply a higher premium than is reasonable."

He says that the answer, as far as the PFA is concerned, has been to enter into a constructive dialogue with the industry, which he feels has been successful, with intermediaries playing a pivotal role: "We have been in touch with brokers to put together a new policy that will provide the minimum cover at a reasonable rate. I am not sure we have the final premium yet but we have provided a lot of data on accidents and safety levels."

Of course, the seriousness of the issue has been voiced by the aviation authorities in the UK, who have made it quite clear that failure by pilots to have adequate cover from now on could result in dire consequences.

Monitoring insurance

Robert Ferris, head of the CAA's Aircraft Registration Section, spells out the body's hard line: "All EU countries have been tasked with inspecting both resident and visiting aircraft. In the UK, the CAA is hoping to minimise the administrative burden by linking the monitoring of insurance to the existing registration process. However, the CAA will also be carrying out spot checks and, if an aircraft is not properly insured, then it can be grounded and the operator prosecuted under the Air Navigation Order."

Does this mean that, in the coming months, some aircraft will be grounded?

If the CAA is serious in its intentions, the answer must be yes. This is because, according to one broker, a number of clients will simply still not have proper cover in place in conformity with the new requirements in time, all because of the last-minute decisions that have been made in this country over the issue, which has given brokers and underwriters very little time to adjust to the new landscape.

So, not for the first time, it seems that well-intentioned EU policy-makers have caused a number of difficulties that, while probably unintentional, are nevertheless causing real - often quite severe - financial problems for many UK pilots. But brokers are confident that matters will resolve them over time. As Michel says: "The regulations make perfect sense and the situation will settle down; the CAA has really worked on it but the whole thing has gone to the wire - it has all been a bit chaotic."

EU AVIATION LIABILITY INSURANCE REQUIREMENTS

The new liability insurance requirements are intended to standardise levels of insurance coverage within the EU. At present, some Member States, such as Germany, already have quite high limits, but other countries have not previously imposed minimum amounts. They apply to operators regardless of whether or not their aircraft are actually registered in an EU Member State. The new third-party liability limits are calculated according to an aircraft's maximum takeoff weight (mtow) and are set by kilograms and special drawing rights (SDRs - the International Monetary Fund's currency unit).

Operators flying within, to, from or over the 25-nation European Union need to check their insurance policies to ensure that they meet the new minimum liability requirements that took effect on 30 April 2005. Failure to do so could result in the prohibition of flights, the withdrawal of operating licences and, potentially, criminal prosecution.

For legal liability covering passengers, the minimum insurance coverage is £210,000 (250,000 SDRs) per passenger. For non-commercial operations, EU Member States can allow lower limits provided the coverage is not less than £85,000 (100,000 SDRs). The insurance needs to cover the maximum number of passenger seats in an aircraft regardless of whether or not they are occupied for any given flight. As an example of how the regulations will work out in practice, the Civil Aviation Authority says that a Cessna 182 operating non-commercially would require cover of approximately £2.5m for third-party insurance in addition to the passenger liability cover.