Aviation Insurance is Changing

"Let the good times roll" may have been an appropriate mantra for aviation-insurance consumers during the past 10 to 12 years, but the party might finally be over.

While the total cost of aircraft ownership — i.e. hangar leases, fuel, maintenance costs, FBO fees and so on — have gone up substantially for the past decade, insurance rates have been in decline. During this same period (2007-2019) the consumer price index, an indication of inflationary pressure, has increased by more than 25 percent despite a period of stagnation around the time of the Great Recession of 2007 to 2009.

If you wonder what has driven this extended “soft market” of declining insurance rates when nearly all other aircraft ownership costs were increasing, the answer is capacity and competition. With interest rates at all-time lows over the past decade, private-equity investors have found the insurance industry a good place to park money, particularly in reinsurance markets.

The consequent increase in reinsurance capacity has allowed new primary insurers to enter the market, more than doubling the number of aviation insurers during this time period. Increased competition for an aviation market which has been relatively static in terms of total number of registered aircraft and aviation-related businesses in recent years was bound to exert downward pricing pressure as insurers engaged in a “race to the bottom” to gain and/or maintain their market share.

Winds of change started to blow at the end of 2017, which proved to be a particularly bad year globally for the insurance industry. Severe hurricanes, wildfires and other catastrophic natural disasters in 2017 resulted in more than $130 billion in insured losses. Many reinsurers operate across multiple industries, so even those whose aviation books were minimally affected by these natural events were likely to have suffered losses in other sectors. As reinsurance contracts came up for renewal and renegotiation in 2018, many aviation insurers were faced with more restrictive terms and/or higher premiums to pay their reinsurers.

These higher reinsurance costs unfortunately came at a time when loss ratios for many aviation insurers were increasing, leading to a lack of profits. This extended period of declining rates had brought premiums to a point where there wasn’t enough money to cover even the attritional losses bound to occur — small, non-catastrophic losses that happen at high frequency such as hangar rash and prop strikes. Throw in a few severe crashes involving fatalities from expensive owner-flown turbine equipment and commercial helicopters, and it’s easy to see why many aviation insurers found themselves in a precarious position.

Fortunately, most insurers recognized the need to right the ship before things became dire. Thus far the industry has suffered only one major insurer withdrawing from the North American aviation insurance market. Generally, insurers have taken the approach of gradually increasing rates (5-10 percent) to get premiums and loss ratios moving in the right direction. In addition, most insurers have tightened underwriting guidelines and are now declining risks they would have quoted in the past. Today, aircraft owners will find that there is less flexibility on recurrent-training requirements, more reluctance to over-insure hull values and offer high liability limits, and less interest from underwriters when there is any loss history on an account.

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For the aviation-insurance consumer, it can be difficult to accept these higher rates coupled with more stringent underwriting after the good times of the past decade. It’s important, however, for aircraft owners and operators to keep in mind that the long-term health of the aviation-insurance industry is at stake and maintaining a viable market for insurers is in everyone’s best interests.

If the market doesn’t accept these changes, we will surely see more carriers exiting the aviation-insurance space, because there is simply not enough premium volume from the 200,000 registered aircraft in the United States — compared to 268 million cars — to make aviation appealing to insurers if it isn’t generating a reasonable profit. A market with less competition will mean rate increases could go from gradual to severe, and some people on the higher end of the risk continuum might find themselves without the ability to obtain coverage at all.

What then is the aircraft owner or operator to do? Talk to your insurance broker, and if you have been with the same company for a while and have a clean claims history be sure they are advocating for you so that you obtain a rate below the average premium increase for that carrier on a percentage basis. However, be prepared and willing to accept some sort of rate increase for the reasons mentioned above. The best recommendation is to remain with a long-term insurer unless there is a compelling reason to switch.

While during this initial market disruption you might be able to find another insurer who can write your coverage for a slightly lower premium, if rate increases become more severe in subsequent years you’ll be in a better position to negotiate favorable treatment with a long-term underwriter relationship. And the insurer you left might not take you back if tides change with a new carrier.

While the past decade saw a buyers’ market with declining insurance rates and flexible underwriting that’s benefited aircraft owners and operators, be prepared to pay more in the future. The good news is that, even with the modest increases we are seeing this year, and which are likely to continue through 2019, most people will still be paying less than they did for the same insurance five to 10 years ago. How many things in aviation, or in life for that matter, can we say that about? Viewed from this perspective, aviation insurance remains a good value when compared to historical insurance costs.

Though the winds of change are blowing with rates rising and more restrictive underwriting and coverage terms, we can all do our part to support a reasonable market adjustment now to prevent a sudden shock in the future.