Brace yourself for higher insurance rates

If the experts are right, business aviation insurance rates could be on the rise soon. A recent spate of accidents will inevitably drive rates higher for airlines, according to a report by insurance broker AON. Because business aviation insurance rates have traditionally tracked those for airlines fairly closely, price hikes are likely.

Granted, that hasn't been the case lately because of the recession and increased competition as more insurance underwriters offer coverage. "Airline rates are on the rise," said Chris Jones, president and CEO of Aerospace Insurance Managers in Dallas. "However, general aviation has yet to see the same kind of movement. New markets, abundant capital, and the global financial market condition make this cycle unlike any we have witnessed."

But now, added Jones, "rates have become depressed to levels that are simply not sustainable. Generally, there is a three-year lag time between the onset of a soft [insurance] market and the realization that loss ratios are exceeding 100 percent. Competition notwithstanding, the stakeholders that make the market possible will be looking to see a positive return on their investments.

It's economics 101: if those stakeholders cannot realize a return on their investments, their capital will be withdrawn and used elsewhere."

Todd McCredie, president of the Aviation Insurance Association, commented that today's "rates are some of the lowest I've seen in my 16 years [in the industry], especially on corporate-flown aircraft." Added McCredie, who serves as sales manager for Piper-McCredie Insurance Agency in Flint, Mich.: "With new insurance [companies] coming into the arena, it'll be interesting to see if rates continue to go down or stabilize. Some of the rates are getting so low that it could really impact these companies if there are claims."

Tom Adderhold, president of Preferred Insurance Underwriters of Duluth, Ga., further explained the problems facing the insurance industry by noting that insurers earn income by investing premiums received from customers. They hope returns on those investments will help pay for losses and eventually deliver profits. "What's happening," Adderhold said, "is there is no investment income being generated." Losses from this year's devastating airline accidents combined with the recession-caused reductions in investment income mean that insurers will have to raise premiums to maintain required reserves.

These reserves must be available not only to cover accident claims but also the possibility of a worse-than-expected hurricane season, for example, which could lay waste to aircraft hangars and their expensive contents. Adderhold's company specializes in property and casualty insurance, covering airport hangars and other facilities. "We dodged a bullet the last two or three years," he said, because hurricane seasons have been relatively mild. "How long is that going to last?"

Rates will rise after the first of the year, Adderhold predicted, because that's when reinsurance treaties come due and these will reflect the previous year's excessive airline losses. At the same time, many business aircraft operators are trying to cut expenses, either by parking airplanes and cutting insurance to less costly ground-only coverage or risking higher deductibles in exchange for lower rates. Combine that pressure with the recession's effect on investment income and low stock prices of money-losing insurers, "and it's a triple whammy," he said.

Another factor hitting insurers is that aircraft owners are reevaluating and adjusting hull values downward as aircraft prices have dropped by an average of 20 to 25 percent, said Will Lovett, managing director of New York-based underwriter Allianz Aviation Managers. If an operator is flying less, it makes sense to discuss lower rates based on fewer flying hours, Lovett said. The result is less revenue for the insurer.

"The question is not whether rates and premiums will increase—it's by how much and how soon," said Jones at Aerospace Insurance Managers. "The winds of change are already in the air. Several market players have begun to raise premiums on the low- to middle-value segment of the market, so the higher-end corporate [aircraft] market will not be far behind. At this point, the date for significant premium increases is anyone's guess. Even money says look to early 2010."