Rates on the Rise

Big losses and spotty competition have brought back a hard market. Modest singles are the winners, twins and turbines the losers.

If the party is all but over on Wall Street, the crowd may soon be thinning noticeably in the aviation insurance biz.

After more than a decade of competitive rates for aircraft owners, nearly everyone in the insurance business is talking about the latest hard market. What that means, simply, is that premiums are rising and you’ll have to jump through more hoops to get the coverage you want.

Why? Complex reasons, really, but a leading factor is that underwriters have been suffering significant losses and many havent seen much if any profits. Further, the big underwriters are consolidating into fewer yet bigger companies, something that doesnt bode we’ll for competition.

Its not quite time to bail out of your Bonanza or delay an upgrade. But if you want to reduce the insurance bite, get more training, so you’ll at least be a more attractive risk.

Big Losses
Industry insiders seem to agree that underwriters havent made healthy profits since the last hard market, around 1988. For 1999, the most recent year for which results are available, aerospace insurance losses, including GA, airline, manufacturers and satellites, topped $3 billion against worldwide premiums of about $1.8 billion. With general aviation accident rates varying only slightly from year to year, how could all of these clever financial guys lose so much money? The answer may be hard to pin down, but here are the biggies:

The cost of bodily injury lawsuits has increased dramatically. Following the USAirways 737 accident in Pittsburgh, death cases costing about $3 million became a reality. One of the early cases from the American Airlines accident at Little Rock last summer is reported to have settled for $11 million. But these vary greatly case to case and airlines have much greater liability.

According to USAIG senior vice president of claims Tim McSwain, The increase in liability awards is real, its just not the whole story. McSwain cites the increasing cost of repairing damaged airplanes and the consequential damages that often go with it. More and more, when an airplane is damaged by a third party, the insurers of the offending party pay more for loss of use and loss of value than they do to fix the airplane.

At the same time, premiums for most of general aviation have been declining. Its been a buyers market. Some segments of GA-FBOs, shops and owners stepping up or requiring high liability limits-have seen increases for the past two or three years. Nearly everyone else has seen declining rates.

These rate decreases have been partially masked by the steadily increasing value of the aging U.S. fleet. Many airplanes are worth twice what they were 10 years ago, partly due to upgrades, and partly due to appreciation.

Prosperity has a role, too. Insurance markets require large sums of cash and there has been no shortage of it in recent years. Not for the first time, aviation insurance became an investment opportunity and to use the inflow of capital, insurers had to put more business on the books. That led to competition and favorable prices for owners.

Corporate airplane physical damage rates, for example, are one third what they were 15 years ago. Light airplane rates havent changed quite so much, but for most types, theyre lower than a decade ago.

The Liability Crunch
The first sign of trouble surfaced three years ago when companies began to aggressively restrict liability limits, which was unusual at a time when capital was abundant. But losses were also mounting.

Are the insurance companies crying wolf just so they can jack up rates? Not likely, according to many brokers, who are by nature a skeptical group. In the past year alone, three carriers have abandoned the business completely, one went into bankruptcy.

Great American Insurance announced that it would cease writing new aviation policies after December 1, 2000. Associated Aviation Underwriters, one of the oldest and most respected of the U.S. carriers, was sold by its owners to a British firm. During the past two years, companies have also cut back on their involvement in certain segments of the aviation business. HCC Aviation has stopped covering fixed-wing airplanes used for instruction and rental. HCCs AVEMCO subsidiary has quit writing commercial business entirely.

So now the planets are correctly aligned, and the companies are getting serious about upping premiums. Welcome to the new hard market. Sort of. How much it changes your life depends upon who you are and what kind of airplane you fly. Heres what our survey of brokers revealed:

Brokers Say…
According to Eric Barfield of Hope Aviation Insurance in Columbia, South Carolina, rates for light airplanes with low limits of liability are rising little, if at all. Barfield sees continued competition among a large number of insurers for this business.

You have AAU, very competitive, the ACE program, very competitive, AIGs LAD (Light Aircraft Division) very competitive, and USAIG and Phoenix, also competing so they don’t lose their business. For the standard airplanes with good pilots who want low limits, its still real competitive, says Barfield.

Nicole Casey, a broker with AvQuest Aviation Service in Gold River, California, says that the greatest competition between insurers is for the fixed-gear, four-seat low horsepower airplanes whose owners are happy with low liability limits. Casey reports that rates for airplanes such as Cessna 182s and up are creeping higher. In most cases, the increases are modest, between 5 percent and 10 percent, a view shared by most brokers we interviewed.

We also spoke to Thomas Hollinger who heads ACE USAs (formerly CIGNA) Pleasure and Business Aircraft program. Pleasure and business generally refers to non-commercially used, owner-flown light airplanes.

The ACE program is available through an exclusive number of agents and is the first internet-based program which can be accessed by brokers for direct quotes and policy issuance. USAIG and AIG are preparing to launch similar programs for the pleasure and business segment of the market.

Hollinger told us that he wasnt immediately pursuing an across-the-board increase on his renewals, but rather adjusting rates in specific areas where prices have been too low in relation to exposure and loss experience. This squares with what weve seen on our own ACE renewals.

Steve Knowle, of Phoenix Aviation Managers, acknowledged that while rates were going up for commercial operators, the market for pleasure and business airplanes is still soft. This is primarily due to lots of companies competing for this type of business. At least for now.

Uneven Increases
Its clear that not everybody is getting the benefit of this competition, however. Turbine owners are feeling the effects of the hard market. Sharon Brown of Alexander Aviation Associates, Apopka, Florida, told us shes definitely seeing higher prices for her turbine customers.

There are fewer carriers going after this business, which is part of the problem. While these operators differ widely, almost all are seeing increased premiums on renewal; as much as 80 percent in one case. Still, there’s huge disparity in these rate hikes.

In many cases, the size of a turbine owners increase is a reflection of how far below the underwriters rate guidelines his policy was the year before. In the words of Steve Johns of L.L. Johns & Associates in Waterford, Michigan, Percentages depend on where you started. This forced march back toward manual rates explains why similarly-qualified pilots are getting such widely different increases.

According to David Rigg of Parrish- ONeill in Mount Vernon, Ohio, owners whove flown a turboprop or jet for a number of years and have stayed with the same insurer are better off than newcomers or owners who have changed carriers frequently. The consensus among brokers is that experienced turbine owners shouldnt have difficulty in renewing, but could see price increases between 15 and 35 percent. Ironically, turbine pilots coming up on their first renewals may see less than this, since they were paying a hefty penalty last year.

For pilots looking to step up into turbine equipment, the trend is not as obvious, since premiums for these step-ups have always been high. Owners who are flying turbine equipment with a pro pilot are seeing more modest increases than the lone diesel eagles.

Neither the ACE nor AAU pleasure and business programs cover twins, so these owners start with two less competitors than their single-engine counterparts. Experienced multi-engine pilots should budget more money this year, probably between 10 and 20 percent.

Insurance for pilots transitioning into twins is still available, but only a few companies are offering it, thus premiums are stiff and limits low. According to Steve Bruss, a former underwriter and VP for Eden Prairie, Minnesota-based Wings Insurance Agency, Underwriters are much more selective now, and transitions require more work. School of some sort is a must.

Most brokers told us that the highest limits usually available for pilots moving up to twins was $1 million, limited to $100,000 for each passenger, versus smooth, which covers each seat at the higher limit. Many owners go with sublimits rather than the more expensive smooth limits.

High Limit Hurt
The owners feeling the brunt of the hard market are those who carry higher limits of liability. As insurers have become more serious about what they call limits management, premiums for higher limits have continued to rise sharply. The increases have been greatest for coverage above $1 million. Owners carrying $5 million have probably seen their liability premiums double or triple in the past two years.

Owners with limits higher than that probably cant find them at any price, at least in piston airplanes. Practically all of the companies have worked to reduce their exposure to large liability suits.

Another agent said that USAIG has long required annual training for its customers with more than $1 million liability and has now lowered that floor to include all of its customers with $1 million smooth and up.

One fairly recent development which has helped ease the liability crunch is the Menger Underwriting Services excess liability program. The Menger program is available to owners carrying at least $1 million liability coverage without sub limits. It allows these people to purchase up to $6 million more liability coverage above the limits on their aircraft policies.

Menger is available through most aviation insurance specialists. The program is not inexpensive, but its solidly backed and is a way for those who feel they need more protection to get it.

There are rumors of one wild card in the market: AAU, now owned by the very large British Aviation Insurance Group, will start 2001 with significant capacity, and will, many say, be looking to increase its market share in areas where it believes it can make a profit.

Some Advice
A prediction and some advice: Based on our research, were convinced that there’s a genuine profitability problem here.

There were 12 major domestic aviation underwriters two years ago; now there are eight. One of those is no longer really a domestic.

Some of this is due to the same sort of consolidation taking place in other businesses and some is due to just plain poor performance. These carriers need to become more profitable to attract needed capital, which otherwise will be invested elsewhere.

No rocket science here. They either need to take in more money or pay out less. Or both. We think prices will go up for everybody in general aviation during the next two or three years. In many segments, prices are returning to where they were 10 years ago.

Underwriters tend to characterize the changes as a correction, a return to rates that make sense and allow them to make money. As with any cycle, there’s bound to be some over correction.

In addition to rates climbing, we agree with Don Grondin, of Pik*West Insurance Agency in Simi Valley, California, who predicts further company consolidation.

I don’t know who it will be, but I am convinced that there will be another merger or acquisition within the next year, says Grondin. Fewer companies means less competition and less diversity.

One broker grumbled, Soon we’ll be like the airlines. There will only be two big ones, and finding insurance for anything other than a Warrior or a Skyhawk will be almost impossible. What happens to the guy who needs [high] limits, or wants to buy a twin, or a jet?

Another told us he liked it better when there was only one phone company and twelve underwriters.

In light of this pessimism, should you put off buying your next airplane until the dust settles? No. But we do recommend that you get your broker to give you an insurance quote before taking the leap. Make sure you can live with the limits available during the transition. And find out what will be available on the other side.

To minimize the effects of the hard market, we recommend that if you use a broker, make sure youre dealing with someone who understands the business and whos willing to go to bat for you. We think that getting more than one broker involved in this market is an even worse idea than in normal times.

You also need to be realistic. Flying little airplanes is expensive. Flying bigger ones is more expensive.

Last, do some training every year, even if your insurer is not requiring it now. Most light airplane owners fly between 50 and 100 hours a year, and without training, its simply not enough to remain proficient. If youve been considering upgrading your certificate, do it now. An underwriter will look favorably on this.

don’t wait until the last minute to return your renewal information. Give your broker time to work on getting you the best possible quote. Be sure to indicate what training you did, as we’ll as any new ratings that you got during the year. These few steps will help to make your next insurance bill as reasonable as possible.

Also With This Article
Click here to view the Rates Checklist.
Click here to view the Appreciation Index.
Click here to view “Liability: The H-bomb of Insurance.”

-by Jon Doolittle
Jon Doolittle operates Sutton James Insurance in Hartford, Connecticut. Hes an Aviation Consumer contributing editor and owns a Mooney 252.