“"Not everything can fly. We will not install a swimming pool or a fireplace. That is not possible."”
Aviation Insurance 2011
When BJT's 2010 Buyers' Guide appeared a year ago, all signs suggested a shift toward an aviation insurance market characterized by increasing premiums, restricted coverage availability and more rigid underwriting criteria. After three straight years of historically low premiums and greatly expanded coverage offerings, the struggle among insurers to gain or hold market share had begun taking its toll. In 2009, the industry experienced one of its worst years for claims since 2001, and 2010 continued the trend. In addition, three insurance companies–AXA, Inter-Aero and Travelers–decided to cease writing aviation policies.
With the exception of the April 2 Gulfstream G650 fatal accident during flight testing, the aviation loss picture has improved in 2011. The market seems to have stabilized, with most aircraft owners witnessing little or no premium increase. Reinsurers persist in investing their capital in the aviation-insurance line, providing excess capacity that keeps competition among insurers fierce–a positive outcome for consumers. The tsunami in Japan and earthquake in New Zealand–although not game changers from a reinsurance perspective like the events of 9/11–have sharpened insurers' focus on where best to place their capital. The renewal of reinsurance treaties (insurance purchased by insurance companies) on January 1 was painless for most aviation insurance companies. One industry insider said this may not be the case at the next renewal.
Two insurers are in the process of adding aviation policies to their product line. Australia-based QBE will headquarter a U.S. operation in Atlanta. Swiss Re, which has been a major player for years in aviation reinsurance, has decided to try its hand at the retail level and at this writing was rumored to have opened an office in New York City. A third firm, Meadowbrook Insurance, began operating in the fall of 2010. These three companies will effectively replace the capacity lost by the withdrawal of AXA, Inter-Aero and Travelers.
The newcomers face a daunting task. To succeed, they need to obtain licenses and file their policy forms in each state, a time-consuming process. Finding and hiring talented aviation underwriters represents a major challenge. And with premiums and underwriting standards at historic lows, the timing of their entrance could not make it any harder to compete. The margins are extremely thin.
This is good news for the consumer in the short term. The three new entrants will be working hard to capture market share. Since many insurance consumers have demonstrated that their primary motivation to change carriers is cost savings, you can expect aggressively priced policies from these companies. When I spoke recently with the president of one of the larger legacy insurers, he told me the market would be flat with possible small increases for accounts that require higher hull and liability limits, a segment the new markets will probably leave alone, at least initially.
In an attempt to differentiate themselves from their competition, some insurers have added safety components to their policies. Global Aerospace, for example, has introduced the SM4 initiative, a program that supports four safety-management components: prevention, planning, response and recovery. USAIG, meanwhile, has launched Z-Coach, a fatigue-management program. Other insurers are offering similar safety initiatives to individual clients as well as regional seminars open to all. Although no premium discounts are awarded to clients who take advantage of these programs, you can be certain that participants will be identified as the most desirable risks and will receive the most aggressive rating discounts. Many of the top accounts earn a no-claims bonus, calculated as a percentage of the hull premium, to reward them for a loss-free year.
In the long term, the current aviation insurance market appears unsustainable. Premiums now are below the "burn rate," a term insurers use to describe the break-even point. Losses have outpaced earned premiums in the last four years, while the battle for market share in the aviation line has raged on. Reinsurers are rumored to be unhappy with results and are said to be one catastrophic loss away from tightening their underwriting standards and raising rates to the retail insurance companies. A saving grace has been the resurgence of the stock market, which has enhanced the investment component for the insurance companies. As we are all too aware, this can change quickly.
It's not a question of whether a shift will come but when. So what should you do now? Three things:
1. 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 caught unprepared.
2. Shop around. Make sure your broker is surveying the market at renewal time 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.
3. 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.