“What we need to do is always lean into the future. When the world changes around you and when it changes against you—what used to be a tail wind is now a head wind—you have to lean into that and figure out what to do because complaining isn’t a strategy. ”
Aviation Insurance 2010
After three straight years of historically low premiums and greatly expanded coverage offerings, the struggle among aviation insurance companies to gain or hold market share has begun taking its toll. Last year the industry experienced one of its worst for aviation claims since 2001, and 2010 continues the trend.
These factors suggest that higher insurance rates may be looming. And just as you should have an emergency response plan to deal with the unlikely event of an accident involving your aircraft, you'd also be smart to start planning for a negative insurance scenario.
Here's a closer look at why higher rates may be coming-and what you should do now.
At the end of 2005, there were 10 aviation insurance companies in the U.S.; by the end of 2008, there were 20. The increased competition led to a perfect buyer's market but an unsustainable one. Of the 10 insurers that entered the field since 2006, Travelers was the first to cry uncle, announcing last October that it was exiting the aviation sector and would not renew policies that expired after January 1. AXA Insurance Company soon followed suit, saying that it would stop renewing aviation policies after January 8. And in April, International Aerospace Insurance Services was acquired by Starr Aviation and announced it would cease issuing policies on June 1.
None of these companies was in financial trouble; on the contrary, they were and still are strong and stable, but they simply decided this area of insurance was not an attractive place to put their extra capacity. Though none was a major player in aviation, their withdrawal clearly signals that the aviation insurance market is beginning to contract. For jet owners, this suggests that remaining insurers may soon be changing course toward a market characterized by higher premiums, reduced underwriting flexibility and more restrictive coverage. Exactly how quickly that might happen is unclear but signs point to a slow transition over the next two years.
One reason for this transition is the higher claims rate mentioned earlier. Business aviation had a commendable safety record last year, but the same insurers and reinsurers cover both airlines and general aviation aircraft, so poor loss experience by commercial carriers can impact the insurance environment for general aviation. And while the airlines' fatal-accident rate has improved dramatically over the last two decades, with 2009 being one of the safest years yet, insurance claims for that year were the worst ever. Numerous major accidents-including the US Airways A320 landing in the Hudson River, the Air France A330 crash in the South Atlantic, the Yemenia Airways A310 crash near the Comoros Islands and the Colgan Air/Continental Dash 8 crash in Buffalo, N.Y.-combined to hammer the pocketbooks of aviation underwriters. Industry watchers expect 2009 losses to exceed premiums paid by more than $500 million.
Unfortunately, 2010 didn't start much better. In January, an Ethiopian Airlines Boeing 737 crashed into the Mediterranean Sea after takeoff from Beirut, killing all 90 people on board. Then a February storm in the U.S. capital dumped record amounts of snow, causing a hangar collapse at Dulles International Airport that crushed 13 corporate jets. This occurrence could result in one of the largest general aviation insurance claims ever presented.
The extent to which a contracted market and an increase in claims will affect rates won't be known until Jan. 1, 2011, when most of the major reinsurance treaties (insurance that insurance companies purchase) come up for renewal. One major insurer's treaty renewed April 1 and the company has indicated that its reinsurer did not significantly tighten what it could offer for the next 12-month policy period-a sign that excess capacity remains in the market.
In the short term, this is promising news for jet owners, but the return to a hard insurance market seems inevitable. So let's look at strategies to deal with it:
Plan for higher rates. Veteran insurance buyers know the market cycles back and forth from soft to hard and understand the need to plan for rate changes. When a market begins to harden, make sure you ask your insurance broker for a projection of next year's premium so that you aren't hit with a big surprise at renewal. Plan to absorb increases, even major ones, into the aircraft's operating budget and keep in mind that while premiums have dropped dramatically in recent years, they can rise just as quickly. Buyers who purchased their first aircraft in the last few years may have a false sense of comfort and may be rudely awakened if caught unprepared.
Shop around. Make sure your broker is shopping the market at renewal and ask to see what each insurance company quoted on your account. Be careful if you are considering moving your coverage to another insurer based on price, however. Unlike some other lines of insurance, aviation policies are not created equal-some are much broader than others. Before making any decision to move, you should thoroughly examine policy differences and consider how long you have been with the current insurer, as well as the benefits that loyalty may have earned you. Pay particular attention to the claims history and philosophy of competing insurers, as some are known to play hardball on claims while others have earned a reputation for always trying to find a way to pay them.
Focus on safety. Insurance underwriters will continue to fight for the business of premier flight departments that embrace a top-level safety culture. Consider pursuing IS-BAO certification and increasing the frequency of pilot recurrent training to more than the required once per year. This should help make your business attractive to insurers. But since the vast majority of aircraft accidents result from pilot error, you should be implementing these measures regardless of the state of the insurance arena.