In the months since September 11, the insurance industry has taken a beating. Some estimates–and they are still just estimates–put the total losses in excess of $100 billion.
Within days of the terrorist attacks, it was apparent that efforts by insurers to cope with the disaster would translate to higher costs and changes in coverage limits. So far, this is being proved out.
As last year came to a close, aircraft owners and operators were already beginning to feel the pinch. As anticipated, war-risk liability renewal rates were running about 20 percent above those of standard liability rates. And renewal premiums for war-risk hull were about 15 cents to 25 cents per $100 of aircraft value.
A few owners and operators whose standard insurance contracts came up for renewal before the end of the year are already reporting increases. But not until completion of end-of-year treaty renewals between insurers and underwriters and their reinsurers will owners and operators get an accurate long-term look at the new rate structures. Some estimates suggest a 50-percent increase in premiums for all classes of exposure.
While the war-risk insurance premium increases are obviously propelled by a perception of increased risk, the increases in standard liability and hull insurance are prompted both by the higher level of risk and the industry need to recover from the tremendous losses resulting from September 11.
Less Coverage for More Money
Further fallout from September 11 comes in coverage limits. One major shock being absorbed by owners and operators is a government-mandated $50 million cap on war-risk insurance payouts for third parties. While this may not sound like a hardship, it is also “policy aggregate,” meaning that that sum is shared by all of the third parties making claims based on a single event. Further, it is limited to a single event per year.
Perhaps no less disturbing to some are indications that, in an effort to reduce their overall risk, insurers are taking a greater interest than ever in their clients’ daily operations, from safety programs to training policies. Corporate aircraft operators are already complaining that insurers “may as well be running the department.”
Scott Rose, a corporate jet captain, told AIN that his insurer had informed the flight department that it must send a “frequently used and experienced” contract pilot to simulator training for the company’s Hawker or stop using him. This, said Rose, even though he “exceeds all requirements of operations.
“The insurance company’s decision in this case will affect our ability to meet our company needs when short-notice changes occur that exceed our ability to respond,” he concluded.
From an insurer’s perspective, Willis Group Holdings published a 2002 aerospace market overview in late November that offered an interesting broad-brush insider’s view. The global insurance broker said enterprises in the aerospace sector seeking insurance this year will experience substantially reduced market capacity and coverage for their risks, and overall aviation premium increases in excess of 100 percent, with war-risk hull rate hikes averaging 700 percent.
Willis also speculated that as insurers review in greater detail the risks they are assuming, “the process of annual renewal will become increasingly protracted.” Two to three months might not be unusual.
Even as insurers and underwriters grapple with all these issues, the first insurance industry casualty of September 11 came in late November with the announcement that Taisei Fire and Marine, the 12th largest reinsurer in Japan, and liable for more than $604.1 million for its exposure to the U.S. attacks, filed for court protection from creditors. The filing sent shockwaves through the insurance industry, and insiders expect that Taisei Fire and Marine will not be the only casualty.
For business aircraft owners and operators, the real picture of rates and coverage for renewal will not begin to come into focus until spring approaches this year. Meanwhile, steps can be taken to minimize the increases:
• Reconsider liability limits and deductible levels.
• Revise safety and security programs to meet or exceed minimal expectations of insurers.
• Ensure that training requirements are met
or exceeded.
• Ask your insurance broker for a review and reassessment of coverage.
• Consider placing an aircraft in a management program to take advantage of lower fleet rates available to aircraft management companies.