Inflation Latest Issue in Difficult Insurance Market

Aviation brokers and underwriters have a new villain to blame for the continued increases in insurance premiums since 2019: inflation. Aircraft owners, pilots, operators, and supporting aviation businesses have reportedly seen insurance premiums increase up to 30 percent year over year since 2019.

In addition, certain pilot and operator segments are finding it increasingly difficult to even obtain insurance. Brokers are resorting to complex quota share and vertical placement agreements previously used mainly in the airline segment to cover risks that no single carrier wants to cover on its own.

However, there are signs that premium prices are stabilizing in certain segments of the aviation market, including general aviation, with additional capacity and new carriers providing competition in certain subclasses.

Inflation Just Another Reason Premiums Continue to Increase

According to Garrett Hanrahan, global head of aviation and aerospace for Marsh Specialty, as reported in the company’s second-quarter 2023 Aviation Insurance Market Overview published in August, “Inflation—in terms of insured values, rising repair costs, increasing liability claims settlements (in some regions), and historical loss development—continues to influence insurer underwriting and pricing, and is likely to contribute to an increasing cost of risk for clients.”

The report provided statistics for premium increases over the past four quarters for airlines, aviation entities, and general aviation. Air navigation service providers and airports (grouped together) showed the highest increase with second-quarter 2023 premiums rising an average of nearly 40 percent and a mean average increase over the past four quarters of 17.8 percent. One reason for this is that social inflation—where claims costs rise higher than general economic inflation due to societal attitudes that lead to juries awarding higher settlements than expected—has greatly inflated airport “slip and trip” claims.

MRO facilities fared nearly as badly but had their largest increase earlier with a 40 percent average jump in the fourth quarter of 2022 and a 15.97 percent rolling four-quarter increase. Component part manufacturers showed a 25 percent mean average increase in Q2 2023 and a 7.88 percent rolling average increase. OEM premiums showed an 18 percent increase in the second quarter of last year, but they have been decreasing ever since to end with less than a one percent increase in the four-quarter rolling average.

Surprisingly, while general aviation showed a 9.65 percent average increase over the past four quarters, the Marsh report showed a 2.16 percent decrease for general aviation hull and liability premiums in the second quarter of 2023. The report suggests that this decrease could be a result of new entrants into the general aviation insurance market that are infusing new capital and increasing capacity and competition. If this decrease is truly the start of a trend and not a statistical anomaly, it would signal welcome relief for general aviation operators.

“We’ve been seeing an 8 to 12 percent increase year over year since 2019 for the same level of coverage,” said Jad Donaldson, senior director of aviation for a Fortune 100 company in White Plains, New York, managing two Gulfstreams and a Challenger. “We’re not having a hard time insuring the aircraft, but we are dealing with an inflated market.”

“We’ve been in a rising market since 2019,” confirmed Eric Barfield, president of AssuredPartners Aerospace insurance agency based in Plano, Texas. “Currently, we’re seeing rate increases of anywhere from zero to 30 percent with the typical increase at 5 to 15 percent.”

Barfield said operators receiving the best rates today tended to be large corporate flight departments with “clean” operations and unblemished loss records. The outliers with bigger increases typically have poor loss records or are in certain segments of the aviation market, such as airports, FBOs, and commercial helicopter operations with high loss histories.

USAIG president and CEO John Brogan gave three major contributing factors to the continuing hard market: the increasing cost of liability claims due to high verdicts and settlements, increases in cost to fix or replace airplanes, and the overall loss history of the industry.

“There are certain operations that are inherently more risky (such as rotorcraft), while other operations have seen a cost of claims increase at a higher rate due to the price of parts, labor, shipping, et cetera,” said Brogan. “Determining premium is different for every risk. Limit is one factor, but the risk profile is much more important. The analysis of all ingredients (limit, critical versus non-critical parts, mission, loss history, training) determines the premium. Operators with higher insurance limits generally also face higher rate increases.”

Brogan also included recent large close-call events as having an impact on premiums, such as an Allegiant Airbus A320 and a Gulfstream IV both taking evasive action near Fort Lauderdale after both aircraft received TCAS warnings in July 2023.

The aviation insurance industry is also still trying to recover from the historic $3 billion in total claims from the 737 Max crashes (exceeding the $2.5 billion Twin Towers claims from 9/11). A current $3.5 billion lawsuit over Russia’s confiscation of nearly $10 billion in aircraft could drain the industry’s coffers even more, putting additional pressure on rates to increase. In addition, claims are being processed from more than 40 military and civilian aircraft destroyed in April 2023 as part of the Sudan War.

These and other recent losses have driven up the cost of hull war insurance and its supplemental cousin, AVN52, which provides passenger and third-party coverage for liability risks from hijacking or acts of war.

“Many operators ask why they need war coverage,” said Lisa Ouellette, president and co-founder of JCL Aviation Services in Bluffton, South Carolina. “Besides the malicious mischief (i.e., vandalism) coverage, war risk covers sabotage, hijackings, strikes, riots, civil commotion, and confiscation. We’re seeing U.S. and European-registered aircraft confiscated in North Africa and the Caribbean on drug smuggling charges. In the Caribbean, it usually stems from a guest with recreational drugs on board.”

Insurance is Almost Always Available…If You’re Willing to Pay 

While Congress seeks to mitigate the current pilot shortage by raising the mandatory retirement age from 65 to 67, the FAA is going the opposite direction by allowing Part 135 and Part 91K operators to voluntarily institute a pilot retirement age of 70 years.

“I believe the impending age 70 rule is being driven at least in part by insurance,” said Donaldson. “Seventy’s been a kind of cutoff. If you’re an owner-operator and you’re 70 years old, you’re paying a huge premium.”

“About 80 percent of aircraft hull and liability underwriting focuses on pilot credentials, with pilot age being one of many elements underwriters use to evaluate risk,” said Barfield. “Age becomes a more prominent factor at 65 with many underwriters thinking about the excellent airline safety record and their mandatory age 65 retirement for pilots. This is true of both corporate/professional pilots and recreational pilots, though corporate pilots see less of an impact because of their typical ongoing formal training and second-class medical requirements.”

“Age 70 and above does become an even bigger underwriting factor,” Barfield continued. “This is where you find underwriters doing more ‘risk engineering’ to make that risk tolerable to them by curtailing the complexity of aircraft operated (e.g., will quote flying a Cessna 182 but more hesitant or flat-out "no" in a Cessna 421); underwriting the nature of the operations (e.g., single-pilot jet pilot now must fly with co-pilot); or augmenting pilot credentials (e.g., most underwriters are fine with BasicMed up until age 70, but after age 70, they often require an annual third-class medical).”

Pilot experience is also a factor, especially with the shortage pulling experienced corporate pilots into airline cockpits and leaving less experienced SICs. If the SIC (or perhaps an owner-operator moving into a new aircraft) needs to build experience in the aircraft to meet underwriting criteria, the underwriter may write a “split limit” coverage. In a split limit situation, when the experienced pilot is flying, the liability limits are greater; if the SIC is flying, the liability limits are set much lower.

“Nobody likes [split limits] because obviously the operator wants a certain liability limit—say $20 million—for a reason, and during the transition training the carrier might cut it from $20 million down to $2 million when the pilot building experience is flying,” said Barfield. “It might be the only way we can get the coverage done, but underwriters don’t like it because it can be hard to defend in court.”

Another tool in the insurance broker’s toolbox is to write a reinsurance quota share (aka vertical placement) agreement. Quota share allows multiple insurers/reinsurers to share both premiums and claims according to a fixed percentage, ensuring that no one carrier is responsible for the entire risk. For example, if a carrier is underwriting 100 percent of a Citation CJ4 and suddenly it becomes a bad risk (perhaps due to a recent loss by the pilot or operator on another aircraft), that carrier might only be willing to underwrite 25 percent of the risk. Other carriers must now be found to underwrite the rest to get to 100 percent coverage. Often this leads to higher premiums for the client as each carrier wants its “pound of flesh.”

“Historically, vertical placements have been used on airlines and OEMs, but now we’re seeing these agreements trickle down to areas that are hard to insure such as commercial helicopter operations, especially if they need a larger limit of liability,” said Ouellette.

“The rise of the quota share started in 2019 as these agreements go deeper into the U.S. marketplace,” said Barfield. “Underwriters have been saying that they need to take the volatility out of our portfolio. One good way to do that is to bring in multiple insurers to spread risk, thus reducing a given market’s maximum exposure. We’re seeing more quota shares in the last four years go to risks that historically had always been written 100 percent with a single carrier.”

Sometimes coverage can be found but might be too expensive for the operator to stomach. “We have a startup client that offers flight training [in a third party’s aircraft] looking for $1 million in errors and omissions coverage,” said Ouellette. “Normally a small operator would pay $3,000 to $5,000 for this coverage. Their quote was declined by over 10 insurers, and when we finally got them a quote, the premium was $26,000. So that’s what’s happening: you can get a quote, but can the insured afford the price?”

With quota share becoming more of the “new normal,” new capacity has come into the market to help fill gaps in hard-to-insure markets. In June, Aspera Insurance Services announced “new excess and quota share air operations solutions” targeted toward older pilots, rotorcraft, single-pilot turbine aircraft, older aircraft, aircraft with retractable gear, and experimental aircraft.

Insureds May Have Some Control over Insurance Premiums

Over the past few years, convenient online quotes and binding insurance apps have popped up in many aviation markets including Australia’s SkyWatch service for aircraft owners and renters, Starr Gate providing on-demand aviation rental insurance, and Avemco’s online quoting tool. While there is some upfront cost to build these contactless insurance apps, the streamlined system generally reduces costs for the insurer and the insured.

These apps are generally geared toward general aviation pilots with clean records in low-risk operations. Since there is no human asking for details, pilots with claims within the past three years—regardless of fault—are generally shut out entirely when trying to use these apps. Pilots and operators with loss records or in hard-to-ensure segments need to befriend their broker and get to know their underwriter(s) to get the best rates possible.

“Make sure you have a good story to tell and that your story is properly conveyed to the marketplace,” said Barfield. “One of the biggest things an operator can do to try to improve their insurance program is to tell their story to their broker or underwriter. The value of an operator participating cannot be overstated. The insurers appreciate the opportunity to visit with the operators directly and engage their commitment to the risk and the exposure being advocated. If you had a loss the previous year, discuss what you’re doing to mitigate it ever happening again…Underwriters see hundreds of applications and it’s hard for them to know exactly what’s going on from an application.”

Large flight departments that work with an internal corporate insurance team may need to educate their non-aviation colleagues about safety strategies employed to get maximum benefit from their insurers.

“The relationship between your flight department leadership and your insurance carriers needs to be such that there’s a high level of understanding of what the aviation department’s really doing with safety management systems, risk mitigation, risk profiles, and other safety strategies on a daily basis,” said Donaldson. “That doesn’t always translate when you have an insurance team running things that may not know much about aviation at all. We need to educate our people so that they can talk to the insurance carriers about the safety systems that help mitigate insurance expense.”

Insureds can also tweak their premiums by adjusting deductibles or even dropping hull coverage if it makes sense to do so. Some insureds—mainly component manufacturers and aviation ground handlers—carry significant self-insurance retention (SIR) accounts. Ground handlers in particular typically generate many small claims (think hangar rash); SIR mitigates the paperwork and premiums associated with these small claims and allows the insurer to focus on major claims.

“Clients are pushing back to the point where they’ll just threaten to self-insure,” said Ouellette. “They’re fed up and don’t want to be paying a significant increase in premium for the fourth year in a row. It’s a really difficult market: one in which clients and carriers are at such odds.