Insurance rates continue to soar

 - May 5, 2008, 11:28 AM

Following last September 11, aircraft owners and operators began bracing for massive hikes in insurance coverage and changes in the limits of that coverage. Now, a year later, their fears are being realized. But while rates have risen, sometimes triple those before September 11, the increases are not without some justification. The question is, just how much is justified?

Bill Behan, president of AirSure, one of the nation’s largest aviation insurance brokers, told AIN that in the past 10 years aviation insurers have incurred a total of $20 billion in losses vs $14 billion in premiums. “And that doesn’t include the losses resulting from the World Trade Center,” said Behan.

This is due at least in part to two factors. In past years the total number of business aviation accidents each year has not grown excessively, but the value of those aircraft involved has. And at the same time the amounts awarded by courts and in settlements has also grown. In fact, according to analysts, payouts by the insurance industry have exceeded income from premiums in all but two of the past 10 years.

The March 2001 crash of a Gulfstream III while on approach to Colorado’s Aspen-Pitkin County Airport is an example of a worst-case scenario. All 18 people aboard were killed, including 15 passengers described as high-net-worth individuals. As a result, said Howard Hamilton, v-p of the commercial department for Addison, Texas broker Aero Insurance, in terms of insurance losses the crash may be the most expensive charter accident in history. With the deaths of the 15 high-profile passengers, liability losses are expected to far exceed the hull loss of slightly more than $10 million.

What’s more, say insiders, rates in the past decade were artificially low. And with competition fierce, many Part 91 and Part 135 operators can recall underwriters offering war-risk and allied perils coverage as a no-cost incentive.

Last September, with underwriters and their reinsurers reeling from losses related to the terrorist attacks, insurers and insured alike began looking forward to the coming year with apprehension. There was little doubt that insurance premiums would go up. Unfortunately, at that point there were more questions than answers. And the answers depended, for the most part, on a final assessment of the losses from September 11, and the results of annual year-end contract renegotiations between underwriters and reinsurers. Even before the end of last year, it was obvious that premiums would soar.

According to Behan, the increase in premiums in the first several months after September 11 was substantial. And then it got even worse. Before September 11, liability ($300 million limit) and hull insurance annual premiums combined for a Falcon 900 (professionally flown under Part 91 and with simulator-based crew recurrency training at least annually) were in the $63,000 range. In the first three months after September they rose to $81,000 a year. Today, the total is about $164,000 and still rising, and adding war-risk and allied peril premiums might bring it closer to the $200,000 mark. As for a Falcon 900 operated under Part 135 for charter, the liability cost would be about 10 percent higher than current premiums for Part 91 liability coverage.

A Conquest II operator was also hard hit by an immediate jump in premiums. The company’s flight department had an open-pilot policy for its single-pilot aircraft. When it renewed its policy in December last year, the underwriter required recurrent training at FlightSafety every 12 months, and the cost of coverage jumped an additional $23,000 a year for a single-pilot operation.

Now, with most of the year since September 11 gone by, business aircraft owners and operators are seeing rates stabilize somewhat, and while they are at levels higher than some had hoped, it is also less than they had feared.

The chief pilot for a Part 91 operator of another Conquest II saw rates at renewal this summer climb to $18,940 from $10,788 last year, based on a hull value of $1.4 million and an upper liability limit of $10 million. It’s a substantial hike, but he notes that another quote from a different underwriter was for $29,000.

Behan isn’t surprised. “The aircraft taking the worst hit are anything piston, and particularly piston aircraft used in air charter.”

Behan said with regard to turbine aircraft, corporate operators are looking at increases in overall premiums of “around 70 to 75 percent,” with little difference between Part 135 and Part 91. “Hull has doubled and liability is anywhere from two to three times what it was before September 11.”

Underwriters have also lowered liability coverage limits, placing some piston-aircraft charter operators in a fiscally impossible position. Behan explained that before the
economic slump and the terrorist attacks, a Beech Baron charter operator could expect to pay $3,000 a year per aircraft in liability premiums for as much as $20 million in liability coverage. “Now they’re paying as much as $20,000 a year,” he said. “If you can get as much as $5 million in liability coverage, you’ve just pulled a huge rabbit out of a very small hat.”

Business aircraft owners and operators are also looking at a $50 million liability cap for third-party coverage.

Underwriters are also bundling war-risk and allied peril insurance with standard liability insurance coverage. According to insurance brokers, since September 11 underwriters have steadfastly refused to write war-risk separately. As for war-risk hull insurance premiums, they are now running about $500 per $1 million of hull value.

Finally, there are now only three underwriters selling insurance to business aircraft owners and operators–Global AAU, United States Aircraft Insurance Group (USAIG) and AIG Aviation. This is in sharp contrast to the market just seven years ago, when 17 underwriters were competing for business.

Under the Microscope

Richard Keltner, regional manager of NationAir Insurance Agencies, made it clear in a May Flight Safety Foundation publication that in  the post-September 11 world, underwriters would be looking more closely than ever at risk potential. “Increased underwriter scrutiny,” he said, “means that every underwriter is going to take a harder look at every one of your risks. They will be coming to visit you, they will be asking harder questions and they are going to want to see in your paperwork dotted I’s and crossed T’s.

“Underwriters have the potential to be pessimistic at all times, but in a hard market they are often more pessimistic,” he concluded.

Keltner noted that underwriters are also reluctant to provide coverage for:

• single-pilot operations in turbine-powered aircraft
• use of a second-in-command pilot who has limited training
• expensive owner-flown aircraft
• high liability requirements
• aircraft older than 25 years
• unusual uses of aircraft
• pilots transitioning into more sophisticated aircraft
• Part 135 commuter/on-demand operations in piston cabin-class airplanes.

Faced with the inevitability of rising insurance rates, aircraft operators and owners are seeking solutions, and many insurance brokers are advising their clients of steps
they can take to lower their insurance rates:

• Maintain a favorable loss history
• Establish an on-going full-service recurrent training program for pilots
• Maintain a company business unit operations manual for each aviation department
• Store aircraft in a secure hangar
• Maintain membership in NBAA
• Require flight crews to exercise greater supervision of their aircraft while in the care, control and custody of an FBO (require wing-walkers during movement of the aircraft, ensure the correct tow-bar is used and so on)
• Subscribe to an independent safety audit

The rising cost of insurance is already claiming its casualties. Denver-based Ports of Call Travel had been operating a 1966 BAC 1-11 for charter. Fitted with 30 seats, it was a frequent choice of university and professional sports teams and musical groups. According to Ports of Call owner Bob Resling, after September 11 no U.S. underwriter would provide coverage.

Forced to go directly to a London-based underwriter, Resling discovered the cost of coverage for the 30-passenger twinjet would be 200 percent higher than before. The cost of coverage–hull and liability, war-risk and allied peril–was quoted at $300,000, a 163-percent increase over the $114,000 the company paid for the same coverage before last September. Ports of Call placed the aircraft up for sale and is now negotiating to purchase a DC-9, “a newer airplane with more seats and more favorable insurance costs.”

Behan admitted that some of the pricing seems unfair to the consumer. But he points out the obvious–that survival of the underwriters is necessary for the survival of the insured. “If this isn’t any fun for the consumer, it also isn’t any fun for the underwriters, or for anybody else in the insurance business,” Behan said.

But there is some good news. Keltner said he expects insurance rates for corporate operators will stabilize next year.

In the meantime, look for premiums to continue to increase, though not so dramatically as in the first few months after September 11. Aviation insurance analysts projected earlier this year that over an 18-month period from this spring to late next year, average premium increases of 25 percent can be expected. However, more recent forecasts now put that number at about 17 percent, and less than 10 percent after January 2004. Significant factors in the stabilization of rates include the entry of new underwriters, favorable asset reallocation by reinsurers, the attraction of suitable capital investors by rising rates and favorable safety performance on the part of the insured.