Aviation insurance

 - July 6, 2010, 11:42 AM

Buyers of coverage for aircraft, aviation businesses and property have found a silver lining in the recession: relatively stable prices for insurance. Attendees at this year’s Aviation Insurance Association (AIA) conference confirm the news; too much available insurance capacity means that no underwriter has the power to raise prices. And the expected major consolidation of underwriters, which could result in higher prices, has not yet taken place. So for now, at least, insurance buyers are still benefitting.

This year’s AIA conference was held June 12 to 15 in Vancouver, Canada. “It’s been a challenging year for us because of the economy,” said AIA president Todd McCredie, sales manager of Piper-McCredie Insurance Agency in Flint, Mich. The economy also affected attendance at the AIA conference, which was down from last year. “It has been lighter attendance than we thought,” he said. But another factor is the June time frame, according to McCredie. Many insurers are busy writing new contracts that come due at the beginning of July. And the underwriting community held its own annual conference just before this year’s AIA meeting. Consequently the AIA has moved next year’s conference to May 1 through 5 in Miami Beach, Fla.

Not all the news was negative, however, and the AIA is working a number of initiatives to help the association’s members so they can serve their customers. “It’s amazing the positive steps we’ve taken as an organization,” McCredie said.

Last year, work began on establishing errors and omissions coverage for insurance brokers and agents, and that is now available. At the AIA conference, McCredie announced that the online version of the continuing education program was about a month from launch. Participants will be able to obtain four college credits for the accredited program. And the AIA has developed a new online mediation program, which is a Web site with access to qualified people who can help mediate disputes between claimants. “It’s still in its infant stages,” he said, “but it’s going to be a nice program to add to the AIA.”

Finally, the AIA has started a new reinsurance directorate. The AIA board of directors believes there are enough people involved in the reinsurance business, which provides coverage over and above that available from underwriters, that they should be represented on the association’s board. In another move, the AIA Foundation has stepped up the value of the scholarships granted to an aviation college student, now at $5,000, and the second-place award to a worthy candidate, which was increased to $2,500.

Insurance Issues

“The number-one issue is the economy,” McCredie reiterated to AIN, adding that if the economy remains stable, not much is going to change in the insurance industry. “Our [brokerage] business has remained flat for the last two years,” he said. “We’ve been able to get new business to replace business that we lost.”

The AIA conference’s general session generated keen interest among the attendees by addressing key questions about the state of the aviation insurance industry. The biggest issue, according to Michael Kriebel, chief underwriting officer at underwriter Allianz Aviation Managers, is the possibility that the money backing up the risks covered by insurers becomes unavailable. “The risk capital that they provide to us is key to our ability to do what we do,” he said. “The biggest threat to our industry is the sudden loss or the flight of risk capital that we need to provide the products that we have. The flight of that risk capital in large amounts from the reinsurance [market] would leave us with literally nothing to sell.”

Kriebel revisited the insurance markets of the last few decades, noting that there was a significant loss of risk capital in the 1980s, to the point that some risks could not find coverage at any premium. “That defines a hard market, not being able to complete a risk because of a lack of capacity,” he explained. “And that is the biggest threat our industry faces in the future. The events that caused a loss of capacity and a hard market ultimately led to the reorganization of the Lloyd’s market, the emergence of new capital that replaced the lost capital and helped limit the severity of the hard market. They also led to the development and enhancement of predictive-loss models, trend-analysis models, exposure-analysis tools and pricing tools, which when used correctly would help the insurance industry avoid some of the problems that led to the large loss of risk capital experienced at that time.”

The insurance industry entered a long soft market in the late 1990s, and the insurance consumer enjoyed falling prices. But then there was 9/11. “As an industry, we modeled our max catastrophic exposures on two 737s having a midair over Yankee Stadium,” Kriebel said. “Or a large fire in a hangar full of high-priced aircraft. No one ever imagined 19 hijackers crashing four airliners into various targets in the U.S. Had it not been for an act of Congress and the establishment of a cap on liability claims we would have almost certainly witnessed another dramatic flight risk of capital from the marketplace.”

For the insurance industry, the problem is that the models that allow pricing of risk are unable to consider unforeseen disasters. “It’s the exposures that are impossible to model,” he said, “be they man-made or natural. They will cross all major books of business, as 9/11 did, and that could cause a dramatic loss of risk capital from our industry again.”

“The current soft market is a problem,” Kriebel noted, but not as bad as the potential losses due to some major catastrophe that crosses all lines of insurance. The prediction of 23 named hurricanes for this season is a concern,” he said. “And it’s been decades since a Category 4 or 5 hurricane made its way up the East Coast. Think about the close proximity of cities like D.C., Philadelphia, New York, Boston and the property values that have gone up in the last several decades. That catastrophic exposure is real. The threat that I don’t like to think about is the threat of another terrorist attack of a nuclear nature. Imagine instead of 19 hijackers we have 19 terrorists with suitcase nukes who decide to take out 19 different targets in and around New York City. The resulting flight of risk capital would cross all lines of business.”

Insurance broker Larry Matiello of AirSure warned, “We cannot forget that the economic issues are impacting the customers heavily. The economy has taken a big toll on our [entire] customer base, on the shrinkage of the fleet, the grounding of aircraft and bankruptcies. The concerns that Mike Kriebel expressed, it’s really a compounding issue that can have a nuclear impact on our businesses.”

Legislative Issues

“We have to remember we’re a small segment of the [property and casualty] insurance industry,” said Jeff Moitozo, chief North America underwriting officer for Chartis Aerospace, “which is a small segment of financial services overall. What I’m afraid of, and what I think we all should be afraid of, is we’re painted with the same broad brush as some of our financial institutions. At some point when the next bubble bursts, there’s going to be a lot of finger pointing as to who is responsible. I think everyone knows, looking at the financial crisis through the prism of time, it wasn’t the property and casualty market that created the crisis.” Politicians are busy working on laws to address problems that caused the financial meltdown. “What the result is going to be, we don’t know,” he said. “I think there are going to be some changes down the road.”

Another important issue that could help insurance buyers is the concept of a federal insurance charter, which would eliminate the cost and complexity of insurance companies having to deal with rules and filing requirements in 50 states.

Tim Bonnell, vice president of Professional Insurance Management, would like to see such a federal property and casualty insurance charter. “[It would] make it a much more efficient and effective process for us to develop innovative products, to be responsive to customer needs and so on. Having to go through that process with all 50 states where we have to file rates and forms is quite cumbersome and costly. The concept of having a federal charter would allow us to do that once.” Bonnell pointed out that separate state requirements were established for personal lines of insurance to protect consumers from predatory practices. “That really doesn’t apply to an industry like ours.”

The Reinsurance Market

Repeating a theme of the AIA conference, David Sales of UK-based Cooper & Gay said, “There is still too much capacity in the reinsurance market. If you look at 2009, there was the Air France [A330] loss [in the Atlantic Ocean in June] and we had the Colgan Air [accident near Buffalo in February], which together reserved somewhere at around a billion dollars.” While in the entire insurance industry this isn’t a huge sum of money, there is concern about rising levels of passenger compensation. “That’s thrown a lot of reinsurers’ models into confusion,” he said.

Those two accidents did have an impact and led to renewal costs rising about 10 percent for the airline segment, according to Sales.

“Those two accidents have not settled yet,” said Moitozo of Chartis Aerospace. And while the insurance industry is designed to absorb such losses, exposure to future risks is growing. “Average payout per passenger has escalated quickly,” he explained. “A few years ago it was two or three million per passenger; now it’s six or seven. Multiply that by some of the widebody aircraft and it snowballs fairly quickly.”

The Dulles Hangar Collapse

On the general aviation side, Sales cited last winter’s hangar collapse at Dulles International Airport, which damaged a number of expensive business jets. Those jets are still buried in the collapsed building while lawyers and insurers argue about who will pay for the damage. “I don’t know how that is going to play out,” he said, adding that he believes that the reinsurance markets will be affected. “There is a lot of capacity out there,” he said, which will help keep insurance prices from rising.

Moitozo believes that the Dulles situation will have a hardening effect on insurance costs because the insured value of the aircraft in that hangar is more than $400 million. “Reinsurers are looking at that as a catalyst to try to get the market to harden up a bit,” he said. “I think that loss is going to take few years to hammer out. There’s going to be a lot of finger pointing.”

If and when rates do rise, Moitozo expects that to occur first for charter operators. There has been so much competition among underwriters that Part 91 and 135 operators’ rates have been almost the same, but the commercial segment will be the first to rise when the insurance market hardens.

While the insurance industry sells customers on covering risks, National Air Transportation president James Coyne said, “We’ve got to segregate our marketing messages so that we say, ‘No, it’s not dangerous. The only thing that’s dangerous is a poorly trained pilot, a careless pilot. A well trained pilot operating a well maintained aircraft is safe.”

Coyne hopes that insurers support the Light Sport segment. “It’s hard to underwrite these new products without a track record,” he said. “We understand whether it’s Light Sport Aircraft [LSA] or Eclipse or some new aircraft, you have to have a bit of history. But I’m hopeful that as the LSA community develops training programs to make sure they are flown safely that the loss ratio becomes better, then the industry will rush to sell the product.”

The Bizav Effect

No matter how hard or soft the insurance market, insurance experts universally recommend that operators set and stick to the highest standards and communicate with their broker and underwriter to demonstrate the operation’s dedication to safety.

“It’s still a competitive marketplace,” said Graham Barden, managing director of aviation at brokerage Lockton. “The more an operator can gain the trust of its insurers, the better it is. Regardless of the fact that it’s
a favorable market today, who knows when the current conditions may come to an end? Transparency is good, and building that relationship so the trust factor is there is important. Pilot training, what happens on the ground, recurrent training, it’s all so important. Now is a good time to build a relationship with your insurer. There will be a point when underwriters will be selecting between good operators and the not so good, and if you’ve got the trust of your insurer, you’re going to be looked on more favorably.”

According to Will Lovett, managing director of underwriter Allianz Aviation Managers, “We look hard at pilot training, recurrent training, maintenance, are they training maintenance personnel, how often? We look at the SMS process, are they IS-BAO certified? These are a good indicator of their dedication to safety and training. That really sets the risk apart in our eyes.” Allianz can help its customers with safety programs, he said. “We have an individual on retainer who does safety consulting.”

At the AIA conference, Lovett delivered a one-hour class on aircraft valuation. “We’ve seen over the last couple of years the pitfalls and perils of over- and underinsuring aircraft.” Business aircraft values have dropped from 25 to 40 percent, he said, and operators need to adjust their hull insurance to match the current value of the aircraft. The underwriter uses pricing services to establish the correct value or will ask the insured to obtain an independent appraisal to substantiate the hull value. “In most cases it’s a common agreement among the broker, the underwriter and the insured,” he said.

“One thing is certain,” concluded Chartis Aerospace’s Moitozo, “the market cycle always comes around. There is uncertainty [about] how long the soft market will last.” But insureds need to consider the benefits of sticking with an established underwriter and not jumping from provider to provider chasing the low-cost policy. “I want to get the best program in place [for the customer],” he said.

Insurers Looking for the Next Generation of Insurers and Pilots

A perennial challenge for the aviation insurance industry is attracting new employees to replace those who are retiring. The state of the economy, however, means that few people are retiring from the business, which leaves few openings for those interested in an insurance career. “If the economy turns around, maybe people will want to retire,” said AIA president Todd McCredie. The industry needs to recruit the next generation, he added, “but we can’t afford to hire yet.”

The association’s nascent online continuing education program (see preceding page) might help because the classes are open to anyone, not just AIA members.
But McCredie acknowledged that most people learn the insurance business on the job, and this isn’t likely to change.

Another big concern among AIA attendees is the decreasing number of new student pilots and the aging of the current pilot population. This not only affects potential future insurance business but also makes it difficult for the insurance industry to find and attract fresh employees.

USAIG president and COO David McKay shares those concerns. “In 2007 there were 60,000 student certificates issued. Thirty years prior 204,000 student certificates were issued. That’s been the case for the last several years and it doesn’t look much brighter.” Avgas sales dropped from 300 million gallons a year in 1999 to 175 million last year, he said.

Although the Light Sport segment has lowered the cost of learning to fly, McKay said, “I’m getting the sense that some of the youngsters today don’t see aviation as a cool thing anymore. It also doesn’t seem to be much of a career choice. We have to engage as an industry to try and make aviation cool again. And what are we doing on airmanship issues and professionalism and personal accountability to make sure that the next several blocks of aviators who are coming up reflect the values that this business demands?”

“The insurance industry,” said keynote speaker Jim Coyne, president of the National Air Transportation Association, “has an important role in helping build confidence in our product and our services. The only two things we want are more pilots, and we want the pilots we have to fly more. Those two things would solve all of our problems economically.” The average pilot is now in his late 50s, he said, “the highest it’s ever been. We can’t build a business on that demographic model.”     –M.T.