This year’s Aviation Insurance Association (AIA) conference, held from April 28 to May 1 in Palm Springs, Calif., convened in the atmosphere of an aircraft insurance market that is putting smiles on the faces of aircraft operators while underwriters and brokers tussle in a highly competitive business environment.
Maurice “Hank” Greenberg, chairman and CEO of the global financial conglomerate C.V. Starr and president and CEO of insurance underwriting firm Starr Aviation with offices in Atlanta and London, offered a long-term strategic view of the global aviation insurance market and the macro-trends that will influence it. He focused his attention on the emerging insurance market in China, the climate for business aviation in Russia, and terrorism’s effects on the insurance industry. In addition, he commented on the continuing need for tort reform and offered a free-market viewpoint on catastrophic losses in the insurance marketplace. [Greenberg, long-time CEO of AIG and successor to the insurance company’s founder, Cornelius Vander Starr (the namesake of C.V. Starr and Starr Aviation), was forced to resign as chairman and CEO of AIG in March 2005, by the board of directors following accusations of fraud by former New York attorney general, now governor, Eliot Spitzer. All criminal charges were later dropped after a subsequent investigation.–Ed.]
Outgoing AIA president J. Thompson “Tom” Thornton was pleased with the event, which attracted a record 700 attendees. “Hank Greenberg and [Eclipse Aviation president and CEO] Vern Raburn were fabulous presenters,” adding, “Those were the highlights. I thought Hank’s coming to Palm Springs put us on the map. This was our 31st conference and we’ve progressively grown over the years. You’ve got to think when you can present a person of his prominence you’ve come of age. And Vern Raburn? His résumé is astounding: Microsoft, Symantec, Lotus, Slate, the Paul Allen Group. He’s been on the cutting edge of technology for years.”
Underwriting Capacity Turnaround
Since January 2006 the number of major aviation insurance underwriting companies has increased from eight to 13, a 62.5-percent increase after years of declining underwriter numbers. Entering the game over the past 18 months have been Allianz, Inter-Aero, Starr Aviation, Travelers and XL Specialties. Still, as Richard Keltner, director of national accounts for NationAir Insurance Agencies, pointed out to AIN, aviation underwriting is “an absolutely tiny community compared to the casualty market.”
This recent increase in the number of aviation insurance underwriters has had a positive effect on premium rates and coverage availability for the insured.
“Whenever you have more capacity in the market, more competition, the price inevitably goes down,” said Keltner. “The entrants create a softening of the market. Increased competition has certainly been good for our clients. But broker workload has increased to some extent by having to create relationships and stay in contact with more underwriters. That’s where AIA comes in as a valuable resource.”
“The real winner is the customer. Right now there is softening across the board–not just aircraft hull and liability but parts manufacturers and vendors, airports, FBOs. There is competition where you used not to see it. If you’re a buyer of aviation insurance right now you’re a very happy person. But it’s a psychological thing.”
Instead of rejoicing at new lower premiums, Keltner said, some operators renewing insurance coverage might lament, “I’ve been paying too much.” He added that many consumers fail to appreciate what brokers do on their behalf and that, in the current highly competitive market, “We brokers are all working twice as hard.
“The market has grown by 62 percent but the [underwriting] talent pool hasn’t changed. In general, you’re seeing the same people. There’s the usual inflow of college graduates…but the experienced talent pool hasn’t changed much.” Keltner said the same is true for insurance company claims departments. “All the experienced people in our industry are being asked to do more. This is another reason AIA is there, to focus on improved technology and communication skills to maintain a level of overall productivity that preserves the quality of client service. It’s about doing more and more with less and less.”
This, of course, is not such good news for the insurers. Keltner commented that increased competition is forcing a trend toward a level of premium that he believes will not allow long-term underwriting profitability. He predicted that the market will find it difficult to make long-term projections of profitability. He noted that the insurance industry is experiencing downward pressure on premium rates for all aircraft, from the largest business jets to piston singles.
“But this is and always has been a cyclical market. It will firm up again.” As an example, he noted that the aviation underwriting market was hardening before 9/11 as the number of underwriters continued a steady decline. “It [9/11] was not a watershed in reduced underwriting capacity. Investors had already been backing out due to foreign air transport shock losses. Then in the 2002- 2003 period we saw significant increases in price. An uptick in interest rates aided profitability and attracted investors, hence the recent increase in underwriting capacity. Also, after Hurricane Katrina and other worldwide catastrophic events such as the Asian tsunami, investors tended to leave the property casualty market for aviation.”
In the short term, stated Keltner, “There is more competition than I’ve ever seen, but who can say for how long. I think right now we’re in a stabilizing soft market, no longer in free-fall. There is still room for more savings to consumers, but it’s getting closer to the bottom. This reflects what we’ve seen happen before.
“At present we see considerable competition over the good accounts. Next year, perhaps not so much when you’ve already driven this thing down as far as it can go. The price of money is what drives the final bottom of the market. You have to stay in for the long haul, so you’ll follow the market down even though you don’t like it.”
Greenberg took a different tack, beginning his presentation by noting that last year was a “vintage year” for the domestic aviation casualty insurance industry. “If anyone didn’t make an underwriting profit” they perhaps didn’t belong in the business, he suggested, adding that “the first third of 2007 is looking good also.” Greenberg said insurance underwriters in general are on firmer financial footing, partly because federal charters have higher capital requirements to avoid the need for a guarantee fund “to bail out losers.” Meanwhile, in the wake of Hurricane Katrina, rating agencies have revamped and raised capital requirements as well.
Greenberg views the world economy and the insurance industry’s role in it through the lens of 47 years in global finance.
He began his AIA presentation by chiding the insurance industry for a tendency to “roll over in the face of regulatory excess,” citing the New York State Attorney General’s attack on contingent commissions for insurance brokers, calling them a means of “steering business” to the detriment of clients.
Noting that the practice has long been accepted in the industry, Greenberg said, “It’s that kind of regulation that undermines confidence that is vital to our economy. If you don’t fight back you get what you deserve. This is not the way a courageous industry should behave. Today’s CEOs need two qualities: courage and loyalty. Without either, one cannot survive.”
He noted that private equity companies are on the increase because publicly held companies are subject to such onerous regulation. “We’re suffering as a nation,” Greenberg stated, citing “the vast majority of initial public offerings that have gone offshore. You don’t indict the whole corporate structure,” he continued, because of a few highly publicized Enron-style misdeeds. He added that a hostile and overly complex regulatory climate is causing insurance underwriters to move offshore as well.
Turning to the world scene, he noted the rapid growth of the Chinese and Russian economies and those countries’ need for large numbers of aircraft. “Even Moscow’s airport is loaded with private aircraft,” he observed. “Much of that [insurance] coverage will wind up in the London market.” Russia, Greenberg told a packed conference room, “is currently a one-industry economy–oil and gas. It’s a tough place to do business.”
He added, “China is moving up the technology ladder rapidly,” citing a forecast for 350 million motor vehicles in that nation in 10 years. “China is now the fourth largest economy in the world, and we have a new and difficult competitor [even though] the Chinese view the stock market as a kind of gambling casino [and] their capital market is still embryonic.” The wide disparity in personal incomes between the cosmopolitan coastal cities such as Shanghai and the interior of China constitutes “a ticking time bomb” that Greenberg said might tear the nation apart. “Last year alone there were 87,000 uprisings in China,” he reported.
To a question about the status of Taiwan versus mainland China, Greenberg responded, “There have been some accommodations on both sides. An independent Taiwan is presently off the table. Democracy in China now would produce chaos,” he predicted, adding that “it cannot be imposed externally.”
Summarizing America’s place in a rapidly changing world economy, Greenberg observed, “It’s a hard world, a tough world, but it’s not in our national interest
to hide behind our borders. My greatest fear is that we become a protectionist economy.”
Keltner chimed in with his analysis of the industry’s prospects abroad. “Hank Greenberg continues to impress me with his grand grasp of the international market. He proved that again with his forecast that our industry is going to be more and more focused in the international markets. In the past, the majority of aviation exposure has been in North America, but with globalization we’re seeing more and more in the Middle East, China, Russia, India, Africa and Latin America. It’s the players in our business who are adaptable who will find themselves in the lead over the next two decades.”
Turning to Iraq, Greenberg commented, “I don’t see how the U.S. can bring about a solution to a 1,400-year civil war.”
To another question regarding whether new entrants to the aviation insurance underwriting market, including his own Starr Aviation, have created a rate-cutting environment, Greenberg replied, “Competition is getting keener. In a free market, some companies will cut rates; others won’t. Experience will determine which is right.” Asked about proposed establishment of a federal insurance “catastrophe fund,” he retorted, “I think that’s nuts! Nobody should expect the government to bail you out of every risk there is. We’re in the risk business.” Greenberg said that the insurance industry does not write policies against mass death and destruction caused by terrorist acts. “WMDs are not covered because there’s no sense issuing a policy you can’t respond to.”
He lauded efforts of the U.S. Chamber of Commerce to reform the tort system, which he said “is beginning to pay off, particularly in regard to class action suits.” Will a Democrat Congress or President change the outlook and reverse recent gains? “I’d be a little pessimistic,” he said.
Finally, NationAir’s Keltner noted that policy writing has become more complex as the industry has embraced aircraft management and fractional ownership. “When you have a policy covering a dozen managed aircraft with multiple owners, you must evaluate the risks presented by each aircraft and each owner.”
He added that underwriters have reacted to fractional ownership by creating specific policies tailored to the specific exposures inherent in the fractional program. He cited the case of an aircraft split into 12 or more shares, where each owner has specific exposure–especially liability–based on the individual’s circumstances, requiring protection in the event of loss. Keltner said these policies include group (for the fractional program manager) and individual coverages.