Quick Takes: The Unsteady Climb of Aviation Insurance Premiums

November 2, 2023 Written by; Aviation Seminars

Aviation Insurance Premiums weighing down Pilots

The aviation sector has been grappling with a steady climb in insurance premiums since 2019, a trend now further exacerbated by inflation. This impact reverberates across the spectrum, affecting aircraft proprietors, pilots, operators, and auxiliary aviation enterprises. Reports indicate a yearly swell in insurance premiums of up to 30 percent starting from 2019.

Additionally, certain categories of pilots and operators are finding it increasingly challenging to secure insurance. In an attempt to circumvent this issue, brokers are employing more intricate quota share and vertical placement agreements. These strategies, historically more common in the airline sector, are now being utilized to spread risks that single carriers are hesitant to cover independently.

On a brighter note, some segments of the aviation market, including general aviation, are witnessing a plateau in premium prices. This stabilization is attributed to the entrance of new carriers and the ensuing competition in specific sub-sectors of the market.

Inflation: A Contributing Factor to Rising Aviation Insurance Premiums

Garrett Hanrahan, who oversees aviation and aerospace at Marsh Specialty, has highlighted how inflation is molding insurer underwriting and pricing strategies, as outlined in the firm’s Q2 2023 Aviation Insurance Market Overview. Inflation is characterized by escalating insured values, repair costs, and liability claims settlements in certain areas, alongside historical loss development. This confluence of factors is expected to augment the cost of risk for clients.

The review also delineates the trajectory of premium augmentation across various sectors within the aviation industry over the last four quarters. Among these sectors, air navigation service providers and airports have been hit the hardest, with a nearly 40 percent average surge in premiums in Q2 2023, and a mean average rise of 17.8 percent over the last four quarters. A significant driver of this uptick is social inflation, which leads to higher claims costs, especially in airport liability claims, due to societal attitudes.

Maintenance, Repair, and Overhaul (MRO) facilities have also felt the pinch but saw their biggest leap earlier with a 40 percent average surge in Q4 2022 and a 15.97 percent average increase over four quarters. Meanwhile, component part manufacturers documented a 25 percent mean average hike in Q2 2023 and a 7.88 percent rolling average hike. Original Equipment Manufacturer (OEM) premiums ascended by 18 percent in Q2 last year but have been on a declining trajectory since, ending with a less than one percent increment in the four-quarter rolling average.

Contrarily, general aviation recorded a 9.65 percent average increase over the previous four quarters. However, the report highlighted a 2.16 percent dip in general aviation hull and liability premiums in Q2 2023. This could be ascribed to the influx of new entrants in the general aviation insurance domain, who are infusing new capital, augmenting capacity, and fostering competition.

Jad Donaldson, a senior director of aviation for a Fortune 100 entity, shared an 8 to 12 percent yearly increment since 2019 for the same coverage levels. While insuring the aircraft hasn’t posed significant challenges, grappling with an inflated market has been the core issue.

Eric Barfield, the head of AssuredPartners Aerospace insurance agency, confirmed that the market has been on an upward trajectory since 2019, with rate hikes ranging from zero to 30 percent, and the typical increment pegged between 5 to 15 percent.

Barfield elucidated that entities recording substantial increments typically have poor loss records or operate in certain aviation market segments like airports, Fixed Base Operators (FBOs), and commercial helicopter operations with high loss histories.

John Brogan, the head of USAIG, identified three major elements fueling the persistent hard market: the rising cost of liability claims due to high verdicts and settlements, the escalating cost to repair or replace airplanes, and the overall loss history of the industry.

Recent near-miss incidents have also impacted premiums, such as the close shave between an Allegiant Airbus A320 and a Gulfstream IV near Fort Lauderdale following TCAS warnings in July 2023.

The aviation insurance sector is also grappling with the fallout from historic claims totaling $3 billion from the 737 Max crashes. Presently, a $3.5 billion lawsuit concerning Russia’s confiscation of nearly $10 billion in aircraft threatens to further deplete the industry’s reserves, exerting more pressure on rate increments. Additionally, claims from over 40 military and civilian aircraft obliterated in April 2023 during the Sudan War are being processed.

Lisa Ouellette, the president and co-founder of JCL Aviation Services, shed light on the necessity of war coverage, especially in the face of rising incidents of U.S. and European-registered aircraft confiscation on drug smuggling charges.

Quota share agreements have emerged as a pivotal tool for insurance brokers, enabling multiple insurers/reinsurers to share both premiums and claims based on a fixed percentage, thus ensuring that no single carrier bears the entire risk. This mechanism is now trickling down to hard-to-insure segments like commercial helicopter operations, especially those requiring a larger limit of liability.

The proliferation of quota share agreements since 2019 has been aimed at curbing the volatility in the insurance portfolio by distributing risk across multiple insurers, thus minimizing a given market’s maximum exposure.

The advent of online quotes and insurance binding apps has brought some convenience to the aviation markets globally. These apps, while reducing costs for both insurers and insured, primarily cater to general aviation pilots with clean records engaged in low-risk operations. However, pilots with claims within the past three years or those in hard-to-insure segments still need to cultivate strong relationships with brokers and underwriters to secure the best possible rates.

In larger flight departments, educating non-aviation insurance teams about safety strategies employed can help garner maximum benefits from insurers. By fostering a deep understanding between flight department leadership and insurance carriers regarding safety management systems, risk mitigation, and other safety strategies, a more favorable insurance expense outlook can be achieved.

In conclusion, the aviation insurance landscape remains a challenging terrain, with various stakeholders navigating a complex array of factors to secure coverage while managing escalating premiums.

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