Aviation Insurance

 - June 30, 2009, 7:26 AM

In an economy that has ravaged aviation, one stable segment is the insurance industry, but change is coming. “Nobody knows what [the future is] going to look like,” an industry expert told AIN.

This year’s Aviation Insurance Association (AIA) annual conference, held in San Francisco from April 25 to 28, was the organization’s third largest, hosting more than 500 attendees, according to outgoing AIA president Paul Leonard. The association’s membership continues to grow, an indication that even when flight activity drops, there remains an ongoing need for insurance coverage for aircraft owners and operators, service providers such as maintenance companies and FBOs, and manufacturers, not only for new products but also for those for which they still carry liability.

This year, former AIA vice president Todd McCredie took over as president of the association. McCredie is sales manager of Piper-McCredie Insurance Agency in Flint, Mich.

One major issue that surprisingly didn’t get much attention at the AIA conference is that for about the last eight years, the aviation insurance industry has not been particularly profitable, according to one insurance expert who asked not to be identified, due to so much competition among underwriters.

He explained, “We all feel that consolidation is imminent. There are 20 companies in the U.S. fighting for the same insureds. Consolidation is going to take place.”

It should be noted that the AIA and conference attendees were careful to avoid discussing issues that could raise anti-trust issues. Given the fact that insurance companies are an important part of the financial landscape, such a conference is probably not a place where any type of public airing should take place of consolidation possibilities and how that might affect insurance prices, which have been fairly low for many years.

Cessna Keynote
A highlight of the conference included the keynote speech by Cessna chairman, CEO and president Jack Pelton, who reiterated his call to action to defend the use of general aviation aircraft for business travel. Pelton also announced Cessna’s new flight instructor safety standdown, designed to use new technology to enhance safety. The first instructor standdown is scheduled for October.

Given the insurance background of the AIA conference attendees, Pelton summarized Cessna’s efforts when accidents and incidents occur. “Every month,” he said, “a cross-functional team comes together to review all aspects of each accident and claim. This group includes customer service, the accident investigation team, engineering, legal, risk management and our insurers. We are proud of the field experience and safety record of our aircraft, but every day we continue to monitor the operation of our current and legacy aircraft to ensure our field information is complete, accurate and up-to-date. [And] not only do we monitor what’s going on in the field, we are proactive about addressing any recurring issues.”

Pelton also sounded a cautionary note, signaling that Cessna is not immune to
the state of the economy, its annual revenue having dropped from $6 billion to about $3.5 billion.

Pelton made his keynote speech two days before Cessna announced plans to suspend development of the large-cabin Citation Columbus, and during a question and answer session after the speech, he warned AIA attendees, “We’re going to have to look at how we defer programs, and where that spending occurs.” He further explained that Cessna is refocusing on its strengths. “One of the things we won’t let our eye off the ball on is our current core markets that we serve today, the single-engine markets and the light and midsize business jet markets.”

Of more immediate concern to the insurance industry audience was Pelton’s update on the Cessna 162 SkyCatcher light sport aircraft (LSA) program, which has suffered two spin-related accidents during prototype flight testing. With orders for more than 1,000 SkyCatchers, Cessna is hoping to spur growth in the number of new pilots. “Our vision is that the SkyCatcher will spur a rejuvenation of the GA industry by making learning to fly affordable and fun,” said Pelton. Flight testing is modeled after FAA Part 23 certification requirements, even though as a light sport aircraft the SkyCatcher isn’t required to meet those rules but only the standards set by ASTM International. “We are testing to a high standard, well beyond what is required by ASTM standards,” he said. “We test all our aircraft well beyond the limits of what is expected in normal operation, and the SkyCatcher is no exception.”

Cessna has worked closely with insurance underwriters, Pelton explained, “to ensure the SkyCatcher is an affordable aircraft to insure.” Cessna will keep its costs in check by building SkyCatcher airframes in China and shipping them to the U.S. for final assembly. “Cessna has a team on the ground in China working with Shenyang’s [Shenyang Aircraft’s] work force. Make no mistake, this is a Cessna aircraft. We are also working in tandem with our Cessna Pilot Centers to develop a robust flight-training program unmatched by any other LSA manufacturer.”

Helicopter EMS Safety
Matthew Zuccaro, president of the Helicopter Association International, was the second AIA keynote speaker, and his speech covered helicopter emergency medical services (HEMS) safety, a subject of critical importance to insurance companies. A spate of nine accidents with 35 fatalities during a recent one-year period has generated an intense focus on the HEMS segment from government authorities, the general media, the public and the insurers, which shoulder much of the financial burden when accidents happen.

Zuccaro began by summarizing efforts by the International Helicopter Safety Team, which he co-chairs, to lower the helicopter accident rate by 80 percent during the decade since the team began its work. “We’re not ducking the issue,” he said, “we’re tackling it head-on.” But Zuccaro wants to work toward a higher goal than the 80-percent reduction in helicopter accidents. “If we buy into 80 percent,” he said, “we’re saying 20 percent is acceptable. It should be zero; that’s what we’re going to be focused on now.”

Helicopters save hundreds of thousands of lives, Zuccaro said, and not all segments of the helicopter industry are suffering from high accident rates. “We’re going to zero right in on what the issues are facing us today and how we’re handling them.”

HEMS operations are unique, however. “We’re off airport,” he said, “[in a] low-level environment, at remote locations, we don’t have any normal infrastructure, we operate in hostile environments, and at times we’re the first aviation vehicle to land at a site.”

Zuccaro asked the insurance industry to get involved in solutions for improving HEMS safety. “We have a problem, we know how to fix it, and we can’t do it alone,” he said. “We’re trying to engage every element of the industry we can. Certainly the insurance industry is critical to us and we’re constantly on the mission to make sure that we keep you updated and assist in any way we can to help you better understand what we’re doing. And we also look for answers and solutions from your industry segment to help us.”

Insurance Answers
Will Lovett, managing director of underwriter Allianz Aviation Managers, offered some insights into the current state of the aviation insurance business and how it is affecting the industry, especially operators, during the recession. Allianz has been involved in aviation for more than 80 years, Lovett said, but started targeting growth in the U.S. market during the past three years. “We have an appetite for all aviation risks–airlines, airports, product manufacturers, industrial aid, agricultural operations, the gamut of aviation. And we’ve hired tech underwriters in all those areas to have the experience necessary to do that,” he said. In the U.S., Allianz employs more than 70 people in eight locations.

Alllianz shares the industry’s concern about the high number of HEMS accidents. “We’re involved with worldwide operators,” Lovett said. “We’re all seeking to find
a way to prevent some of the losses that have taken place.”

The company’s strategy is to “look at each account and structure a way for the risk to be rewarded for good service,” he said. “We are working with industry to make sure we can supply consistency for safety and loss control. Affordability is important. We [also] want to make sure that injured parties are taken care of. I hope we are leaders in bringing products to the EMS and helicopter markets.”

While, according to Lovett, “the market is saturated with insurance companies,” Allianz is trying to increase its market share. “We intend to provide quality product and reasonably priced quality service,” he said, and that includes claims services, helping clients with safety issues and loss control. Allianz insures some clients on
a 100-percent coverage basis. With larger clients it provides capacity along with other insurers, spreading the risk among multiple providers.

Loss control is increasingly a focus of insurance providers such as Allianz, which do more than just provide insurance coverage. “Given the competitive industry we’re in,” said Lovett, “we’re all looking for risks that are implementing their own safety [and] loss control [programs].” At the request of the insured, he explained, Allianz will help manage loss control by implementing safety management systems (SMS), training and other safety programs. Getting insurance coverage is not just about a company’s loss record, he said, but also its commitment to training and safety and convincing the insurance underwriter that the operator is exceeding minimum regulatory requirements.

The recession has not had a significant effect on the aviation insurance business, and the industry has been relatively stable for the past two years, according to Lovett. What is having a bigger effect are losses in the airline segment. “Airline insurance is the benchmark for our industry,” he explained. “When airline rates change, typically general aviation is not too far behind. What we have seen are accidents occurring not only in the U.S. but around the world, which would indicate that things would change. [Although] we haven’t seen that yet, everyone in this industry understands that the cycle is going to happen, but no one can predict when.”

Even though insurance rates have been stable, operators are affected by how the recession has reduced aircraft values and diminished business at service providers such as FBOs and maintenance companies. Allianz and the like have seen aircraft owners reevaluating and adjusting hull values as aircraft prices have dropped, sometimes as much as 50 percent, but on average 20 to 25 percent. If an operator is flying less, then it also makes sense to discuss lower rates based on less utilization, Lovett said.

At FBOs and maintenance shops, business continues to decline, he noted, which means less insurance revenue for underwriters. But at the same time, less flying and maintenance means that the amount of damage caused by moving aircraft in and out of hangars has diminished, so there are fewer hangar-rash claims.

Aviation companies, however, have to be careful because many are not replacing departing personnel and are adding to remaining workers’ loads. “This could increase the demands on existing employees,” Lovett warned, and the potential for increased claims.

Economic Effects

As the economy struggles out of the current recession, aviation companies seeking insurance should expect changes from what has been a relatively cost-effective insurance market for many years. “Aviation has had quite a boom over the last five or six years,” Lovett said, “with a lot of new aircraft, buyers, pilots and tremendous growth in the opportunity to insure aircraft. With that have come losses. For the last eight years, every year has become more and more competitive. At some point when losses exceed premiums there has to be a decision to make a change.”

Insurance rates, said incoming AIA president Todd McCredie, “are some of the lowest in my 16 years in this business, especially on corporate aircraft.” New companies continue to enter the aviation insurance industry, he added. “It will be interesting to see if rates continue to go down or stabilize. Some of the rates are getting so low that it could really impact some of these companies if there are claims.”

One effect of the recession McCredie has seen in his agency is that there are fewer aircraft transactions taking place. Some owners are holding on to their airplanes, he explained, but others are selling their aircraft and not buying a replacement. Another trend he is seeing is that owners of non-financed aircraft are buying liability insurance but not hull coverage, essentially self-insuring for possible damage to the aircraft. “If they fly the aircraft,” he said, “they know that if they damage it, there’s no coverage. That’s becoming more common.”