Insurance rates for most general aviation aircraft are lower than they have been in many years and some industry insiders believe that we are on the brink of a sea change. Even in this wildly cyclical business, old timers agree that this “soft” market is the deepest and longest lasting that theyve ever seen. With prices as low as they are, this is a challenging time for underwriters. Predictions about where the market will go, how far and how quickly run the gamut. Following the 9/11 attacks, rates for many airplanes, especially corporate airplanes, virtually doubled overnight. As a result, aircraft insurance was quite profitable for several years. This profitability did not go unnoticed and within three years, new entrants began to enter the business. By 2006, there were seven more companies insuring aircraft than there had been in 2002. Some of the new entrants were established airline and aerospace insurers seeking a presence in general aviation in the U.S., but some were new to aviation. Recently, rumors have begun to circulate of yet two more possible start-ups. The new companies offered low premiums to get new customers and the old companies were forced to offer low premiums to hold on to their old ones. The financial collapse in 2008 came at a time when many thought that prices would begin to increase, but GA suddenly seemed fragile. Rates continued to fall.
Economic Cycle
Insurance price cycles are more the product of economic conditions than of minute changes in accident rates from year to year. Insurance market swings are not a new thing, but this one is something of an anomaly. Typical soft markets take place in times of economic prosperity when there’s considerable opportunity for insurers to invest money for the time between when they collect premium and the time that they have to pay it out in claims.
Insurers will offer great premiums deals in order to put money in the bank and invest it. This allows them to suffer slight underwriting losses but still remain profitable because of the investment income. The current soft market began in a time of prosperity, but has lasted and deepened through two more years when investment opportunities have become rare.
The explanation may simply be one of supply and demand. In order to sell insurance, companies must bank cash in the form of reserves and surplus to make certain that they can meet the obligations of the policies that they have written. The capital required to back insurance policies is known as capacity. With all of the new companies that have flocked to general aviation, there is considerably more capacity available than is needed.
In addition to downward pressure on premiums, soft markets are also characterized by the easing of underwriting guidelines. Companies may offer higher limits of liability, insure types of airplanes that they didnt before, relax training requirements or add new coverages to their policies, all in order to attract new customers and hang on to existing ones.
The benefit of the current low rates has not been evenly shared across the GA community. Big-ticket, pro-flown corporate airplanes have had the largest reductions. These are also the airplanes that saw the largest increases after 9/11. According to brokers and underwriters that we spoke to, many corporate insurance premiums have dropped to one-third of what they were in 2002. Beginning in 2004, many of these airplanes were forced to purchase higher liability and war risk limits to fly in EU airspace, so the drop is even larger than it looks.
Owner-flown turbine airplanes and helicopters have seen rates decrease substantially, although not on the scale of big-iron corporates. Light airplanes were