For those of you who have owned airplanes or have been in the general aviation industry for the past 15 years or more, you saw insurance premium rates skyrocket after the events of September 11, 2001. By 2006, insurance carriers built up significant reserves and profits. As a result of those positive financial returns, the aviation insurance market grew from 8 carriers to approximately 19. As more carriers entered the aviation insurance market, prices dropped continually for more than a decade. It’s been a classic supply vs. demand model. Today, rates on many aircraft and general aviation risks are one third of what they were in 2006. In addition to lower rates, aircraft policies for owner-flown aircraft, for example, are broader than ever before and include coverages that were once reserved for only the best, professionally flown aircraft risks. The aviation insurance market has been great for the consumer!
Unfortunately, times change just like the wind on short final. In 2017, the insurance industry was hit for an estimated $135 billion in losses. These losses resulted from the devastating hurricanes in Houston, Florida and Puerto Rico. California also experienced catastrophic fires. Although insurance companies maintain reserves that contemplate catastrophic (CAT) losses, 2017 was one of the worst loss years in history.
So, who’s going to pay for those losses? The insurance companies? Yes, however, that ultimately means consumers will pay increased premiums to replenish the insurance company’s loss reserves. Additionally, carriers will tighten underwriting rules to mitigate their risk.
So what do hurricanes and fires have to do with aviation insurance? Those are property losses. If you look behind the scenes, you will find that many of the aviation underwriters reinsure with multi-line insurance carriers. The same reinsurers that underwrite aviation also underwrite property and casualty companies. In fact, some of the aviation insurance companies are owned by property and casualty companies. So, when they take heavy losses from hurricanes, fires, and floods, all lines of insurance get to help pay for the losses.
Losses aren’t the only influence on insurance market cycles. All financial markets including the insurance marketplace go through cycles. Financial cycles are driven by many different things. In the insurance world, a period of poor loss experience the magnitude of 2017 can cause the market to tighten and premiums to increase. Rising interest rates can also trigger movement of insurance company investment capital from underwriting to lower risk investments in cash markets or investment grade bonds. Although no one, including insurance companies have been able to get much return on investment for the past number of years from passive investments, it appears that interest rates are on the increase and soon investment capital will be able to see a modest risk-free return. When this happens, insurance companies will move investment capital out of the very volatile underwriting market and into the quiet and secure world of treasury notes and government and municipal bonds.
Although it may still be too early to predict a hard aviation insurance market, the trend is moving in that direction. In the last year, we’ve seen three companies leave the aviation insurance market. Most underwriters have started to increase rates on renewals. For example, one carrier increased its hull rates by 15% and liability rates by 5% across the board effective January 1st. Several other carriers are increasing renewal rates between 3% and 10% even on the best risks that it determines are priced too low for the market. In addition, they are looking closely at risks they deem to have less than desirable underwriting standards. For example: accounts with old airplanes and/or older pilots.
Firming in the market is not limited only to premiums. One carrier is no longer quoting owner flown risks with hull values above $5 Million. It is also limiting owner flown turbine and jet risks to a maximum of $5 Million Combined Single Limit liability. Several carriers are no longer writing pilots transitioning from piston to turbine aircraft. Some will still write transitioning pilots, however, they are increasing the training requirements for pilots, adding deductibles and limiting the broadness of the policy.
Many of you have not experienced a hard market yet. These are some potential early signs. If the market continues to harden, you will see less cooperation from your underwriters including but not limited to: increased pricing, increased training requirements for pilots, a lack of higher liability limits, narrower policies, higher deductibles and fewer markets (if any) for difficult accounts.
Not all is bleak! We still have a lot of capacity in the aviation insurance market today. Capacity still gives consumers options. Our number one mission at CS&A Aviation Insurance is to negotiate the best deal possible for our clients.
Christopher J. Turnbull, CEO
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Many thanks to Beechcraft Heritage Museum, Bob Burns and Thomas Hoff for their beautiful photos.