A series of aviation-related judgments each awarding $100 million to a single individual and the departure of several large reinsurance companies from the aviation sector have together shaken the aircraft insurance industry out of its soft market, according to various insurance experts. Aircraft operators should expect insurance premium increases of between 10 and 25 percent in 2019 as insurers try to refill coffers that were already depleted from a decade of artificially low premiums.
“We started out this year seeing five to seven percent increases as the norm,” said Steve Johns, president at LL Johns and Associates. “Then the last few months, it was 10 percent. Now we’re seeing up to 25 percent increases, especially for operators that are higher risk or have had a history of losses.”
Various factors enticed new insurance companies to enter the aviation market starting in about 2006, fueling intense competition that drove premium prices to pre-2000 levels. The total aviation premiums declined from $2.16 billion in 2005 to $1.65 billion in 2014, even though the number of commercial aircraft delivered increased each year during that time period.
Since 2010, there have been at least five years where total aviation premiums collected were less than total claims paid out, but premiums stayed low as the new insurers continued to bring capital to the market, creating a glut of capital available to cover claims. However, as individual companies failed to make a profit over time, those newcomers—including some of the reinsurance companies that essentially insure the insurers—began to leave the market just as payouts of claims in excess of $100 million for a single individual have begun to hit the industry.
“Twenty years ago, you expected a maximum award of $1 million per person,” said Ernest DeSpain, senior v-p at W. Brown and Associates Insurance Services. “The airlines’ current budget for liability exposure is about $3 million per person. The $100 million per person judgments have been shocking, and set a whole new standard—that basically the entire policy limit may be awarded to just one person.”
According to DeSpain, part of the recent increase in premiums can be traced to reinsurers getting out of the unprofitable aviation market, forcing the others to raise rates to cover losses.
“Six reinsurers have recently pulled out of the aviation market,” said DeSpain. “The rest have been increasing their rates 10 to 15 percent. There’s still a lot of capacity available, but the reinsurers need to start seeing profits and they may need a 15 to 25 percent increase to do that. That will accelerate premium increases because the insurance companies will pass that cost on as well.”