The aviation insurance industry continues to suffer from pressures that keep premiums low and profitability virtually nonexistent while claims costs continue to rise. That was a pervasive lament of speakers at last month’s Aviation Insurance Association (AIA) conference in Colorado Springs.
“When you’re talking about insurance these days, you cannot ignore the fact that there is a ton of capacity and a ton of capital,” said Joseph Trotti, president and CEO Global Marine & Aerospace at AIG. “All aspects of aviation insurance have been impacted by this over-supply of capital.”
According to Trotti, low interest rates and poor bond yields are steering investors toward opportunities with higher returns, resulting in “a lot of capital moving into the insurance industry…Combine this with a benign loss picture–there hasn’t been a major windstorm since Sandy 2012–[and] the environment is pretty ripe for people coming in and investing.” Statistics gathered by Aon Benfield Analytics indicate global insurer capital rose to $4.2 trillion last year from $4 trillion in 2013, with reinsurer capital at $575 billion. “Many commentators now suggest that even a U.S. [event] with the magnitude of Hurricane Katrina [$50 billion] would not be market-changing,” said Trotti.
But while the new capital and low loss rates lead to high profits for many non-aviation property and casualty insurers, the picture is markedly different for aviation insurers, who continue to see losses and higher claims costs. In the airline market, three of the past five years generated claims that cost more than the income from each year’s written premiums, and over a 10-year period the written premium collected barely matched total claims cost across the industry before discounts and expenses were deducted.
“Safety rates are improving, but costs are still increasing,” said Trotti. “We’re seeing an uptick in awards, an escalation in costs, and that’s adding pressure. One of the sobering realities in the airline market is that we’re not seeing enough capital to cover claims. Current premium levels are about the same as they were in 2001 (before 9/11), while the average fleet value and passenger numbers have doubled, significantly increasing the risk exposure without a match in premiums. This is not sustainable, and capital is migrating into other lines of business.”
Some of the new capital moving out of airline insurance has found its way into the business aviation insurance market. According to Trotti, the general aviation insurance market worldwide generates income estimated to be $2.5 billion, with $1.5 billion of that from the U.S. and $1 billion from the rest of the world. This makes general aviation a substantially larger insurance segment than the airlines (with $1.5 billion in premiums written worldwide last year), and certain GA territories/product lines continue to offer returns better than those expected from the airlines.
However, as capacity has moved into GA, competition has been fierce. In 2005 there were nine aviation insurance underwriters serving the U.S. general aviation market; this year there are 16. New capital means new companies begin writing insurance in an already crowded aviation insurance market, driving down premiums and keeping them low. While this is good news for aircraft owners and operators, the combination of low premiums and rising claims costs puts the industry in an unprofitable and unsustainable position.
“Overall we’re seeing a picture that’s financially not healthy, and it’s debatable how long we can continue to operate in this manner,” said Trotti. “It’s something that the underwriters need to think about.”
Reducing Losses through Upset Training
With premiums at all-time lows and no indication that they’ll be rising soon, insurers are looking at loss prevention with even keener eyes than ever before. If your insurance broker hasn’t already recommended upset prevention and recovery training (UPRT) for your corporate pilots, he or she may soon. There are murmurs among aviation insurance underwriters that requirements for pilots to complete upset training, perhaps performed biennially and alternating with traditional simulator training, might be the wave of the future to help reduce loss of control in flight (LOC-I) accidents. Just a week before the EASA and the International Air Transport Association (IATA) published new UPRT requirements for airline pilots in Europe, multiple AIA conference speakers mentioned UPRT as a means to reduce LOC-I accidents and losses.
“When the aircraft gets into an unusual attitude, a pilot’s natural instinct will cause him to do the wrong thing,” said William Korner, chairman and CEO of Flight Research. During his AIA presentation, Korner attributed an increase in LOC-I accidents over the past 10 years in part to the heavy reliance on simulator training. He described the Buffalo Colgan Q400 crash in forecast icing conditions in which the captain responded to the stick shaker–and then the stick pusher–with increasing amount of back force, fully stalling the aircraft.
“The captain had been taught in simulator training to recover from a stall using power and to maintain altitude at all costs. In other words, to fly out of a stall,” said Korner. “But the aircraft didn’t respond the way the simulator responded, and they lost everybody on board.”
Speaking to a room full of aviation insurance underwriters, brokers and other professionals, Korner recommended that the aviation insurance industry start requiring UPRT for corporate and commercial pilots, perhaps alternating upset and simulator training every other year. Korner emphasized that upset training in a real aircraft is critical because it exposes pilots to the emotions triggered by a sudden unusual attitude.
“Simulators are great for switch memorization, normal and emergency procedure training, and practicing approaches,” Korner said. “But no simulator can replicate an aircraft upset in flight…Everyone thinks they are going to have a good day. Suddenly, the aircraft unexpectedly goes into an unusual attitude. This causes panic and confusion in the crew, and it should. They don’t understand what’s going on. They’re not trained to deal with it. You never get scared in a simulator.”
Bruce Landsberg, former president of the Aircraft Owners and Pilots Association (AOPA) Foundation and Air Safety Institute, also acknowledged the LOC-I problem in his AIA conference remarks.
“The leading cause of aircraft accidents is loss of control in flight,” Landsberg said. “Over the last 10 years there have been 939 stall accidents, about two per week...Only two percent of accidents occurred during stall training. Ninety-eight percent of stall accidents do not occur in training. Why? Were you taught stalls in your primary training? Of course, but that’s not how stalls happen. In training, you’re watching carefully for when the stall breaks. What’s missing? Distraction. In looking at the recent air carrier accidents–Air France [Flight 447] and Colgan [Air Flight 3407]–distraction was prevalent.”
Dr. Tony Kern, CEO of Convergent Performance–a Colorado Springs-based company that offers upset training among other services–and author of seven books on human performance, offered UPRT as a way to reduce LOC-I accidents by training pilots “beyond minimum standards to bring them closer to their full potential.”
“Ninety-nine percent of our pilots are compliant and complacent,” said Dr. Kern, who served as a U.S. Air Force command pilot and flight examiner in the B-1B bomber. “We have an entire industry centered around making sure our pilots stay recurrent to minimum standards. There’s a lot of room for performance that lives above the [minimum standards] bar, and someday you may need that performance above the bar just to survive. Mother nature and the challenges that we face as pilots are not bound by FAA standards.”
While it’s not surprising that executives of companies offering upset training recommend UPRT for corporate and commercial pilots, some in the insurance industry are on the same page. In 2013, Swiss Re Corporate Solutions began offering premium discounts of up to $25,000 to corporate flight departments whose pilots completed upset prevention and recovery training at one of two qualifying training centers. An informal survey of brokers at the AIA conference revealed that while some had never heard of upset training as an insurance requirement, others acknowledged that their underwriters were offering discounts or incentives for pilots to complete this training at least once in their training regimen.
“I don’t think it will ever be a requirement, but certainly there are incentives for operators to complete upset training,” said Eric Barfield, director of operations at Hope Aviation Insurance. A commercial, multi-engine instrument-rated pilot who regularly flies a Cessna 182, Barfield has himself been through UPRT at Aviation Performance Solutions in Mesa, Ariz. “There’s nothing like being upside down in the cockpit and hearing the wind whistling past the airplane to really cement what an upset feels like and what you have to do.”
While the insurance industry’s profitability dilemma will not be solved any time soon, one piece of news delivered by General Aviation Manufacturers Association (GAMA) president and CEO Pete Bunce brought a positive note to the conference. Data gathered by GAMA for its 2014 General Aviation Statistical Databook shows deliveries of new piston aircraft and business jets rose by 9.6 percent and 6.5 percent respectively last year, while deliveries of turboprop aircraft fell by 6.5 percent.
“The turboprop market has been interesting to watch, especially in the last months of 2014,” said Bunce. “While the data shows a declining number of turboprops out there, most of that decrease was attributable to agricultural aircraft, a lot of production in 2013, and Piaggio’s blip in production while shutting down one factory in Italy to open up a new one. So we actually see turboprops as fairly stable.”
Cyber Liability in Aviation
A relatively new area of concern for aviation insurers is covering cyber liability for their clients. According to Hal Hunt, assistant program manager of the National Hangar Insurance Program (NHIP), while the recent data privacy breaches at major retailers like Target, The Home Depot and PF Chang’s are making the biggest news, most cyber attacks are against small and midsize companies such as flight schools, parts brokers and charter firms.
“If you have a computer hooked to the Internet, and you are keeping employee or customer data on that computer, then you have exposure to personally identifiable information,” said Hal Hunt, assistant program manager of the National Hangar Insurance Program (NHIP). “It doesn’t have to be credit-card data. Name, driver’s license, phone number, address; you can be held liable for this exposure.”
Hunt defined cyber liability as a company’s liability if personally identifiable information in its computers is breached, noting that 47 U.S. states now have regulations (supported by fines) in place to protect the information. Hunt presented data showing that 3,000 small to midsize U.S. businesses were hacked in 2013. Last year, there was a 27.5-percent rise in the number of data breaches, with 86.5 million records compromised; half of the businesses breached had fewer than 250 employees.
“Threats to cyber security include spyware/malware, bot net operators, foreign nations, phishers, international corporate spies, terrorists, hackers, insiders and criminal groups,” said Hunt. “The vast majority of cyber breaches are internal, often caused by the employee who clicks on [a malicious] email. Most of the small companies also have weak defenses, but the biggest culprit is cloud computing: data available on the cloud for access by smartphones, tablets and self-service portals.”
Hunt said that most third-party cloud storage vendor agreements don’t eliminate the data owner’s obligation to protect personally identifiable data stored in the cloud. “With cloud storage, you lose control. If it’s with a third-party vendor, the third-party vendor could be slow to notify you of any breaches…The average breach takes nine months to identify; that’s a long time for someone to be rooting around in your records. Usually it’s not even someone inside the company who finds the breach.”
Personally identifiable information can apply to pilot, employee and customer data kept by flight schools, corporate flight departments, charter operations, law firms, aircraft and parts sales brokers, aviation insurance firms and other small businesses. When personally identifiable information has been breached, the business responsible for protecting the data can incur costs up to $250 per record. These costs can include legal and defense fees, IT expenses to close the breach, the expense of notifying people whose data has been compromised, and regulatory fines. In addition, many states also require businesses that have exposed personally identifiable information to provide one year of credit monitoring to each person whose data has been breached.
While the threat of exposing personal data is a concern, other types of cyber attack, such as those from computer hackers who infiltrate a business network, can also cost real dollars.
“We had insured a large parts broker who did not have a cyber policy in place and was selling parts all over the world,” Hunt said. “One day their accounting department received an internal email with a purchase requisition for $150,000 attached. The email requested that they send the funds immediately, and they sent the funds. Later they matched up the requisitions and it turned out that it was a fake email with a perfect replica of their company’s purchase requisition form.”
Attorney James Hunt (no relation to speaker Hal Hunt) addressed cyber security concerns related directly to aircraft and the National Airspace System (NAS). While he felt that the current ATC system with its non-Internet connected technology is relatively safe from hackers, he expressed concern that the Internet protocol-connected NextGen ATC system might raise the vulnerability of the entire system to cyber attack, citing information from a January 2015 Government Accountability Office (GAO) report titled “Information Security: FAA Needs to Address Weaknesses in Air Traffic Control Systems, GAO-15-221.”
“During the changeover, the FAA will be using both the current system and the NextGen IP-connected system,” said Hunt. “The GAO says this expands the potential for the legacy system to be compromised. The IP-connected system will be more vulnerable, and the GAO is making recommendations to the FAA to fix this.”
According to Hunt, cyber threats to the NAS include theft/misuse of personal data, disruption of ATC equipment and communication systems, interference with and destruction of equipment, and aircraft Internet connectivity issues. The issue of aircraft Internet connectivity was recently raised when a self-identified cyber security expert Tweeted while on board a United Airlines flight in April, “Find myself on a 737-800, let’s see Box-ife-ice-satcom, ? Shall we start playing with Eicas messages? ‘pass oxygen on’ anyone ? :)” Hunt says that while older airliners kept any passenger entertainment and Internet systems separate and unconnected from the avionics and aircraft control networks, new airliners such as Boeing’s Dreamliner, the Airbus A380 and A350 have one unified system separated by firewalls.
“The firewalls supposedly prevent passengers from getting into the avionics, flight control and the rest of it in the cockpit. But a lot of experts say firewalls can be breached. So it’s a real risk,” said Hunt. “That’s why the GAO felt it was important for the Office of Aviation Safety to get involved. Right now the FAA does not have any standards for cyber security. What they’ve done is issued limited rules called special conditions, so they’ve certified [the systems] but they don’t have standards. It’s mostly the designer coming up with something and getting approval by the FAA, but there are no FARs on it.”
Awards and Recognitions
During its conference this year, the AIA presented its annual Pinnacle Award to Mary D’Alauro of Aviation Insurance Agency in Bedford, Mass. During her 25-year membership in the AIA, D’Alauro has served a variety of organizational roles, including several years as the organization’s treasurer; she was inducted into the AIA’s Eagle Society in 2014. The AIA also inducted 39 members, each of whom have been an AIA member for at least 10 continuous years, into the Eagle Society in 2015.
Eleven insurance representatives who earned the Certified Aviation Insurance Professional (CAIP) or CAIP Gold designation since the 2014 conference were recognized in 2015. The CAIP designation is open to AIA members who have worked in the aviation insurance industry for at least five years and complete a set of five continuing education courses. Michael Connors, John Cunningham, Paul Davis, Kelly Fleischer, Megan Henshaw, Holly Hopkinson, Robert McManus, Jennifer Melvin, Rose Marie Norman and Michael Prahl earned CAIP designation. The CAIP Gold designation signifies participation in the AIA and other industry organizations, enhanced continuing-education efforts and leadership in the aviation insurance industry. Awarded to previous CAIP designees, the CAIP Gold must be re-certified every two years. Jason Hendrix earned CAIP Gold this year.