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Reviewing pay-as-you-go insuranceReviewing pay-as-you-go insurance

A few years ago, aviation insurance underwriter Phoenix Aviation Managers did something unusual and introduced an entirely new product to the flight training market. Called pay-by-the-hour, it allows schools to completely change the way they manage their insurance costs.

With traditional insurance products, the customer works with the broker, who in turn works with the underwriter to get the best rate based on fleet size, usage, accident history, and many other factors.

Pay-as-you-go starts with a number. Brokers call it a cap, although that’s misleading. It’s more of a target number. This target number is set between the school owner and the broker, and is meant to be the owner’s best guess as to how many hours the airplane will fly that year. For the purposes of explaining the product, the resulting premium is divided in half. One half is used to pay the not-in-motion coverage, and the other half is used to pay the flight portion.

A standard Cessna 172 is a good example. Let’s say you think you’ll fly the airplane 400 hours this year and you receive a quote for $4,000. Half of that premium ($2,000) is the not-in-motion day rate ($2,000 divided by 365), and half is the flight portion ($2,000 divided by 400 hours). The customer pays the not-in-motion coverage regardless of the aircraft’s use. But the flight portion is only paid when the airplane actually flies.

It’s such an unusual concept to grasp that it’s worth spelling out clearly. If you go under the target, you don’t pay the flight portion, meaning your premium will be less than quoted. Calling it a cap is misleading because if you go over the number, you don’t pay the flight portion. So you’ll never pay more than $4,000. In other words, you pay $4,000 for anything at 400 hours or beyond.

According to customer Jim Parkman from Epix Aviation in Chesapeake and Newport News, Va., the program appeals to leaseback owners because they are protected against bad spells of low rental. So if an airplane is down for maintenance or weather, they don’t pay the flight portion. “It’s a great program for a flight training operation, both from the standpoint of our cash flow and the cash flow of our leaseback owners,” he says.

Parkman says the other benefit is that it allows him to offer aircraft he never would have been otherwise able to keep on the line. In his case that’s a Citabria that rarely flies.

Clay Hoxton of the Hoxton Agency is Parkman’s agent, and a big believer in the program. He estimates 75 percent of his flight school clients are currently using it. “I’ve never had a complaint,” he said. “Flight schools have a lot of leaseback owners, and if the owners are happy, the flight schools are happy.”

There is one downside, however. When the program launched Phoenix partnered with to make billing and management easier. So being on is a requirement to be able to participate. On one hand, it makes it easier because school owners simply push a button and get a bill each month based on the previous month’s usage (which is another plus. No big cash outlay at renewal). The system also allows them to add or delete airplanes without having to work with a broker. But switching school management systems can be a major undertaking.

Parkman says that schools owners should make sure they are comparing apples to apples when shopping this program versus traditional insurance. You may find a lower rate elsewhere, he says. But if you take into account potential downtime that you won’t pay for in the Phoenix program, he says you will most likely end up saving money with them.

Ian J. Twombly

Ian J. Twombly

Ian J. Twombly is senior content producer for AOPA Media.

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