CJP Insurance

Insurance Market Cycles

by Mark Brown, Falcon Insurance

Since about 2006 and until recently, insurance buyers were able to obtain aviation policies with more coverage, higher limits of liability and lower rates. Unfortunately, near the end of 2018, the pendulum started swinging the other way with increased rates, more conservative underwriting and a tougher stance on policy terms, conditions and coverage.

Normally, hard and soft insurance market conditions will cycle every 3 to 5 years, and not as drastically as this past cycle. So, the recent “soft-market” conditions were very unusual.

How did we get into a “soft market?”

There are many reasons why aviation insurance became so competitive in the mid-2000s and stayed that way for so long, but there are a couple of reasons that stand out.

Advances in general aviation technology really took hold and contributed to aviation safety in many ways, lowering the general aviation aircraft accident rates. This translated to better underwriting results and caught the attention of other insurance companies. These other companies decided to enter the aviation insurance arena with little, if any, aviation experience. In order to capture a share of the aviation insurance market, underwriting standards were lowered, as well as rates. However, they did not have the actuarial history to support adequate thresholds. The existing companies found the need to compete with these new entrants, knowing their results would deteriorate and/or watch their book of business dwindle.

What triggered the “hard market?”

In 2017, damages from natural disasters such as hurricanes, floods, earthquakes and wildfires cost the insurance industry a record payout of over 300 billion dollars in the Western Hemisphere, immediately followed by more than 100 billion dollars in 2018. You might be wondering, “What do natural disasters have to do with my aircraft rates?” Well, all of the aviation insurance companies are actually divisions of larger insurance conglomerates like AIG, Allianz, AXA, Great American, Old Republic, QBE, Starr, etc. These companies also write other lines of insurance, which were impacted by those natural disasters. So, when insurance companies start to lose money overall, they tend to raise rates/premium on all lines, and aviation is no exception.

Another factor is the cost to repair or replace aircraft and their components. Did you ever imagine a four-seat piston-powered single-engine airplane would cost nearly a million dollars? Now think about the relative costs associated with jet aircraft. Most of the accidents that we hear and read about are significant events and are usually a total loss of those aircraft. While total losses are devastating to an insurance company, the attritional losses that don’t make the news are far more frequent and can add up to just as much, if not more, than the sum of all total losses. Some of the most common attritional losses are damages from wind, hail, bird strike, ground handling, FOD/ingestion, etc.

Also, the more severe insurance claims, although usually less frequent, are the third-party property damage and bodily injury claims. And it should come as no surprise that the costs are higher to investigate, defend and compensate others for these claims.

The poor underwriting results have forced at least three insurance companies to withdraw from the aviation market. As for the remaining aviation insurers, their officers, directors, shareholders and reinsurers are all in agreement and confirmed the soft insurance market conditions are not sustainable and they are now demanding rate increases and better risk selection and management. In some cases, the changes in risk selection/management include lower liability limits, insisting on adequate (simulator-based) pilot training and less accommodating of transition pilots and older pilots.

What can we expect and do going forward?

It has been almost a year since the aviation insurance market started to harden and the underwriters are telling us that it would be unrealistic to expect any softening, or decrease in rates in the near future, as they continue to increase rates to develop adequate pricing levels for the coverage and limits provided for each type of aviation risk.

As you ride out this hard-market, I suggest you consult with your aviation insurance broker and do whatever you can to improve your insurability. Pilot experience and training are still the most important consideration of most underwriters. Although you may still see some change in your renewal quote, your affirmative actions will allow you to get the best terms available.

Then as insurance companies start to report improved results, the soft-market conditions will return again as they compete for profitable business.