Insurers warn aviation of massive rate hikes
Before September 11, insurance occupied no more than an afterthought in the minds of most in the aviation industry. For years, premiums had remained relatively stable, even reasonable, and standards of coverage conformed to the level of threat, perceived as minimal. In the years ahead, the aviation industry will look back at those as “the good old days.”
Before September 11 war-risk hull insurance annual premiums came to as little as three cents per $100 in hull value, and Gulfstream IV-SP owners were contentedly forking over about $7,000 for war-risk hull coverage.
In cases where aircraft were insured for war-risk liability, rates were in an affordable $12,000-a-year range for $100 million in coverage. The possibility of claims as a result of war seemed so remote that a few insurers even included “war-risk and allied perils insurance” at no additional cost. Some owners and operators simply chose not to buy war-risk insurance. Others bought war-risk liability but chose to self-insure for war-risk hull. Now, insurers and insured alike are scrambling to make some sense of it all.
According to Bill Behan, president of AirSure Ltd., one of the nation’s largest aviation insurance brokers, at the heart of the chaos in aviation insurance is the fact that “the industry has sustained losses far worse than anything it had ever imagined.
“I’ve been in the business for 28 years,” said Behan, “and I’ve never seen anything like it. Not in the lifetime of anyone in the industry have we had to deal with a disaster of this magnitude.”
Faced with a potential claims payout of about $3 for every dollar taken in, insurers, reinsurers and their investors were suddenly looking at the atrocity of September 11 from the bottom of a deep, dark financial abyss. In mid-October, insider estimates were putting the total losses at $30 billion to $40 billion. Some even suggested the losses might exceed $100 billion.
London insurers were the first to react. In the early hours following the terrorist attacks, they began issuing notices to clients of cancellation of their war-risk insurance, giving them 10 days written notice (seven days plus three days for mailing). Most insurers offered their clients a buy-back option, but at a higher rate and with reduced coverage.
On the ground, FBOs and other providers of services to business aviation also found their war-risk insurance canceled, and in some cases without the option of buying back coverage at any price. Airports also saw their insurance canceled, as did flight schools, air-tour and on-demand charter companies and aircraft management providers.
Signature Flight Support, with a chain of 46 FBOs worldwide, was among those notified of the cancellation of war-risk insurance and found itself confronted by angry customers. Aware that its war-risk insurance would be canceled, parent company BBA Group had spent the better part of a week trying to determine its options. On September 24, the day the company’s war-risk insurance would expire, individual Signature FBOs began demanding customers sign an “indemnification agreement for acts of war and terrorism” before receiving service. BBA Group finally reacquired war-risk insurance on September 27, but by that time, it had on two separate days obliged Signature customers to sign the “hold harmless” forms. Signature Flight Support subsequently apologized and informed its customers that, if requested, it would return the signed forms.
If business aircraft policyholders were surprised to find their war-risk insurance canceled, it was nothing compared to the shock induced by the buy-back price.
One business jet operator saw his total annual war-risk insurance premium for a Falcon 900 increase by $50,100 (based on coverage of $300 million in liability and a $33 million hull). Total war-risk coverage for a Hawker 700A at the same flight department jumped by $5,750 (based on coverage of $100 million in liability and a $3.5 million hull). Another Falcon 900 operator saw his insurance premiums increase from $4,000 to $36,000 after it bought war-risk coverage. The 900-percent increase, he allowed, “sure seems to be way out of line for two or three annual trips to Europe.”
Fractional-ownership programs apparently had little trouble buying back insurance, but as one company source noted, without offering details, “It definitely costs a lot more than it used to cost.”
It is typical of fractional-ownership agreements that insurance is included in the monthly management fee. There appears little doubt that the cost of this insurance will go up. The question is who will pay and how much.
“Our owners are responsible people and we’ll work something out,” said Richard Smith, executive v-p of the NetJets fractional program’s parent company, Executive Jet.
On the other hand, Steve Phillips, director of marketing for Bombardier’s fractional program, told AIN that while Flexjet also saw an increase in the cost of war-risk insurance, “We have no plan to increase the current monthly management fee.”
There was at least one single ray of sunshine in the dark days after the attack. According to AirSure president Behan, it came in a decision by the majority of insurers not to use “act of war” as a reason to deny claims resulting from the September 11 terrorist attacks. But at the same time, insurers, reinsurers and their investors were hoping to minimize their losses.
Government-sponsored financial relief was one possible avenue. But most insurance insiders agree that it is highly unlikely. As one put it, “considering the public perception of the insurance industry, offering a bill that would provide any kind of relief would be political suicide.” The only real solution, say insurance insiders, will be found in an across-the-board increase in insurance premiums in virtually every category from aviation to automobiles.
According to Behan, costs and levels of coverage are not likely to stabilize before the end of the year, “and that’s if we don’t have any further terrorist activity affecting aviation.” At this point, he said, insurers are struggling to determine the current and future threat of war and how that translates to premium payments and levels of coverage. And he noted that two or three of the smaller U.S. insurers may close their doors, “primarily the result of a loss of reinsurers who look to share the risk.”
Insured Can Look
Forward to Rising Costs
While the insurance industry is looking for answers, aircraft owner and industry associations are lobbying for relief for members faced with a dramatic increase in the cost of coverage. The Aircraft Owners and Pilots Association (AOPA) has asked major insurance companies for a premium credit for grounded general aviation aircraft. Gregg Sterling, v-p of the AOPA Insurance Agency, has proposed granting a one-time credit of 10 percent of the current annual premium to aircraft owners and flight schools currently unable to fly VFR in Class B airspace. As of October 12, Sterling said, “Several companies have already indicated they are looking favorably at the proposal.”
But for the most part, in dealing with the rising costs and reductions in coverage, owners and operators of aviation businesses and aircraft are ultimately responsible.
The increased premiums and reductions in coverage will affect both war-risk and standard insurance. War-risk–liability and hull–are already affected. Still to come are standard aircraft liability and hull insurance.
Insurers have so far shown no indication that they might also cancel insurance outside that of war risk to reduce risk and renegotiate premiums and coverage. If some do, notices are not likely to come before February next year. Most insurers renegotiate their own reinsurance treaties at the end of the year and it is at that point that they will have a clearer idea of risk and costs. Most will likely honor existing contracts for standard liability and hull insurance and wait until their expiration to seek higher premiums and changes in coverage.
With the stabilization of insurance rates, war-risk liability premiums will probably end up at about 20 percent of standard liability premiums. As for war-risk hull insurance, it will range, depending on the aircraft value, from 15 cents to 25 cents per $100 of the aircraft value.
As for standard liability and hull, few insurance insiders are willing to forecast where premiums will stabilize, except to say that the premium increases will be “significant.” One broker noted that as a result of the September 11 attacks, insurers are reluctant to quote on a “placed” policyholder who is considering either renewal or a new policy with another company. “We’re already finding that with clients buying insurance for the first time, everyone is willing to quote, but for those renewing we’re getting automatic declamations from a sizeable number of underwriters.” This reluctance to compete is not good news for the insured, who will see rates go up as a result. But in the long term will help the industry regain its strength.
‘Nowhere Is Safe’
In the past, a pure lienholder has typically required war-risk insurance only for the hull. But in past years, banks acting as owner/lessors have become more aware that as a registered owner they might become a third party in an accident lawsuit and have begun to require liability war-risk insurance as well. In light of September 11, this trend will almost certainly continue.
The premiums for war-risk and standard insurance will be based, as usual, on perceived risk. Individual insurers may, or may not, take into consideration the aircraft mission profile. During the Gulf War in 1991, some insurers, under certain circumstances, issued war-risk riders on a flight-by-flight basis. And some offered lower rates for owners and operators whose aircraft were restricted to domestic U.S. flights. All indications are that that will no longer be the case. As one broker put it, “The entire world is the new battleground and nowhere is safe.”
Aircraft owners and operators accustomed to flying internationally with few, if any, restrictions with regard to insurance are already finding changes. At press time, no fewer than seven countries and one administrative region required war-risk insurance in some form (see sidebar at right). Some countries are already demanding that to ensure the validity of the policy, it must have been in effect after September 17.
Chuck Laible, North America chairman for Willis Global Aviation of New York, noted that such government requirements may appear much closer to home, pointing out that there is a bill being considered by New York legislators that would require war-risk coverage for aircraft operating in that state.
Reducing the Cost of
Business Aircraft Insurance
There are a number of ways an aircraft owner or operator can reduce the cost of insurance. Some aircraft owners and operators may choose to self-insure for the value of the aircraft hull. In a case where the hull insurance annual premium is nearly equivalent to the value of the hull, that might make sense.
The amount of the annual premium for liability will, of course, be governed primarily by the liability limit. A reduction of the limit will automatically reduce the cost. In some cases, where there is a lienholder or lessor listed for the aircraft, both liability and hull insurance may be required. A higher deductible, as usual, will lower the cost of hull insurance.
A few companies, in particular those with a fleet of several aircraft, may be tempted to turn the airplanes over to a management company and benefit from a group insurance plan’s lower premiums. But on the other hand, management companies are certain to pass the new increased cost of insurance along to the owners at some point. So the owner will pay either way, and the savings might not be worth the effort.
In general, the larger the fleet, the less the owner is likely to pay in insurance. Such “fleet rates,” said AirSure v-p Janet Bressler, will become more important in a new “hard” market than they did in the “softer” market that existed before September 11.
Certainly, with insurance premiums expected to increase tenfold in some cases, aircraft owners and operators are advised to look harder at the optional steps they have always taken to reduce insurance costs. These may include the maintenance of higher safety standards, including annual independent safety audits and a higher level of aircrew training. And while such steps might not qualify an applicant for a lower premium, they could make the difference in whether an insurer is even willing to quote a rate. In a hard market, insurers will be less likely even to offer a quote, or even to renew a policy, for insurance applicants who do not meet higher standards of safety and training, or who are deemed high risk.
Looking at the aviation insurance situation in either the short- or long term, there is as yet little substance to most forecasts, except that premiums will rise substantially in coming months, and limits will be lower.
One broker also cautioned that it would be a misrepresentation to paint insurance underwriters in broad strokes as the “bad guys.” The entire industry, he pointed out, has just suffered tremendous losses and most companies are still groping with just how great those losses are and what steps they must take to survive. “In a lot of cases, profits are taking a back seat to the simple matter of survival.”