Aviation Insurance: Times Have Changed
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 underwriting companies to approximately 19. As capacity increased, prices dropped and the softening cycle continually for more than a decade. As a result, a year ago, rates on many aircraft and general aviation risks were one third of what they were in 2006. In addition to lower rates, aircraft policies for owner-flown aircraft, for example, have been broader than ever before and include coverages that were once reserved for only the best, professionally flown aircraft risks. It’s been a classic supply vs. demand model. The soft 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. Those losses resulted from the devastating hurricanes in Houston, Florida and Puerto Rico as well as wild fires. Although insurance companies maintain reserves that contemplate catastrophic (CAT) losses, 2017 was one of the worst loss years in history. The insurance industry also experienced heavy losses in 2018 due to Hurricane Florence and Michael as well as one of the worst fire seasons in recorded history in California.
So, who pays for those losses? The insurance companies? Yes, however, that ultimately means consumers pay increased premiums to replenish the insurance company’s loss reserves. Additionally, carriers tighten underwriting rules to mitigate their risk.
So what do hurricanes and fires and 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, periods of poor loss experience the magnitude of 2017 and 2018 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 of a return on investments for the past number of years from passive investments, it appears that the interest rate increases last year were enough to allow investment capital to see a modest risk-free return. As a result, insurance companies are moving some of their investment capital out of the very volatile underwriting market and into the quiet and secure world of treasury notes and government and municipal bonds.
Some of the changes we saw in 2018 included three companies leaving the aviation insurance market. We also saw rate increases that averaged between 3% and 10% even on the best risks that the carriers determined were priced too low for the market. Today, were seeing rate increases from 10% to 25% and in some cases as high as 40%. In addition, the carriers are looking closely at risks that 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. Many carriers are no longer quoting owner flown risks with hull values above $5 Million. They are 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. The underwriters are under pressure to re- underwrite risks and increase premium rates to levels the carriers and reinsurers deem adequate for the risk. As the market continues to harden, you will see less cooperation from your underwriters including but not limited to: increased pricing, additional premium for endorsements that they once included at no charge, 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 some options. Our number one mission at CS&A Aviation Insurance is to negotiate the best deal possible for our clients.
To speak with someone who can help with insurance coverage for your airplane, helicopter, commercial drone, or other aviation asset feel free to contact us. Our qualified agents can help you shop the best rate while at the same time, making sure you get the best coverage possible for your insurance needs.