Aviation Insurance Market Set To Tighten

 - May 13, 2019, 6:07 AM

The soft aviation insurance market that operators have enjoyed for nearly a decade appears to be coming to an end. That was the takeaway from statistics provided at the 2019 Aviation Insurance Association (AIA) conference held May 3-6 in Asheville, North Carolina. According to Benjamin Weber, head of aviation and space for Partner Reinsurance Europe in Zurich, Switzerland, airline per-aircraft insurance premiums flattened out in 2017 and ticked upward in 2018 for the first time since 2009.

Weber produced aggregate data from Partner Re, Flightglobal, and the General Aviation Manufacturers Association (GAMA) that predicts airline growth of 4 to 5 percent per year and 40,000 new aircraft deliveries over the next 20 years, which should result in an increase in the aviation insurance premium base. Total premium revenues rose in 2017 and 2018, with total premium income at $4.25 billion in 2018, but so did losses and expenses. The past five-year average total airline claims have exceeded total airline premiums by approximately $400 million per year, according to figures provided by Weber from JLT (Jardine Lloyd Thompson Group).

“The aviation insurance market is headed into ‘controlled flight into terrain,’” said Weber. “We still maintain an unsustainable rating level while providing increased limits and excessive acquisition costs. The challenging reinsurance market, including increasing costs of repairs and increasing level of liability awards—particularly in the U.S.—has resulted in reinsurers and underwriters exiting the aviation market.”  

Consolidation in the aviation market has reduced capacity, furthering toughening the market and driving up rates. Weber noted several major acquisitions that occurred in the aviation underwriting and reinsurance markets in 2018, including AIG's acquisition of Validus for $5.6 billion in January, AXA’s purchase of XL Group for $15 billion in March, and RenRe’s acquisition of Tokio MillenniumRe for $1.5 billion in October. Large reinsurance brokerage firms were not immune as Marsh acquired JLT for $5.7 billion in September, resulting in JLT Re being fully integrated into Marsh’s Guy Carpenter firm and the JLT brokerage arm sold off to AJ Gallagher in March 2019.

Weber remarked that while global reinsurance capital fell 3 percent in 2018 to $585 billion, there is still plenty of reinsurance capacity. Several key insurers and underwriters pulled out of the aviation insurance market in 2018, however, including Hiscox, Berkley, Aspen, and Brit.

“For 2019 we have only one choice:  we have to work on a product—be it an insurance or reinsurance product—and make that product sustainably profitable,” Weber said. “Underwriting needs to go back to basics: price not only experience but exposure.”

The Future of Aviation Insurance

A panel of aviation insurance professionals discussed the future of aviation insurance, including integrating Millennials into the workforce, the rise of using social media to keep tabs on insureds’ activities, and innovations in providing and securing coverage. 

“Silicon Valley is developing blockchain products for the insurance industry,” said Brendan Mullan of Crowell & Moring during the panel discussion. “Blockchain is a distributed ledger that records transactions in a way that can't be retroactively altered. It provides a transparent and a reliable way to transmit data.”

Mullan cited Nationwide’s use of the RiskBlock blockchain platform rolled out in late 2017 to provide real-time verification of auto insurance. “I would suspect that we’ll start to see more blockchain usage in the insurance industry,” said Mullan. “It’s a great way to securely send and receive data, and if there’s anything that the insurance industry has a lot of, it’s data.”

“The main driver for the adoption of technology has been pressure to reduce cost in an environment with very thin margins,” said Walter Voights von Forster, director of Reinsurance Division from Munich Re, during the panel discussion. “We’ve seen how technology can streamline administrative and supporting tasks for underwriting or claims. What’s going to be really interesting is when you get away from pure cost savings and get to product innovation, offering new types of products and different ways to access products.”

One example of product innovation is the relatively recent introduction of on-demand insurance. For example, Starr Insurance Companies recently expanded its drone insurance program in partnership with SkyWatch to include both a smartphone app and SkyWatch.ai online platform that allow drone operators to purchase on-demand insurance. Launched in 2016, SkyWatch provides pay-by-the-hour liability coverage and monthly liability and hull plans with discounts for operators based on experience and a safety score obtained through flight data sharing.

The online program introduced in May 2019 provides a link on select aviation brokers’ websites to the SkyWatch.ai on-demand purchasing portal. This allows drone operators to continue working with their existing brokers while also taking advantage of SkyWatch’s instantaneous access to coverage. For example, a fixed-wing or helicopter operator that also adds drone operations may keep their yearly aviation operation policy through a particular broker but add the SkyWatch on-demand drone insurance just before each occasional drone flight.

“SkyWatch’s solution is revolutionary in our industry, making it easier for drone operators to access quality insurance at a moment’s notice,” said Jim Anderson, senior vice president of Starr Aviation in Scottsdale, Arizona, who was not on the panel but attended the conference. “This new platform allows qualifying commercial operators to obtain coverage within minutes 24/7.”

Technology such as social media is also making an impact on the aviation industry as insureds increasingly post details and videos of their flight activities online, sometimes resulting in receiving cancellation notices of their insurance.

“Our whole lives are on social media, and sharing this kind of information obviously has some cons when it comes to insurance,” said Luke Uithoven, vice president of Kimmel Aviation Insurance. “Our customers are putting everything on Instagram, YouTube, Facebook, and underwriters are seeing them flying under power lines or landing where they aren’t supposed to. We’re going to see more cancellations and higher premiums based on what the underwriters can see on social media. Our customers need to understand that.”

Insurance Worker Shortage

While there was talk of the looming pilot shortage during the conference, John Brogan, president and CEO of USAIG, discussed the shrinking talent pool in the aviation insurance market, noting that both generational differences and the increasing need for talent at airlines and other aviation posts has severely decreased the availability of personnel to fill needed insurance roles.

According to Brogan, aviation’s expansive growth in the 1970s and 80s led to hiring booms of the then-young Baby Boomer generation, who were not due to retire until this decade. That meant retirement rates in the 1990s and 2000s were low and relatively little hiring occurred of Generation X into the aviation insurance field.

From 2006 to 2013 the number of insurance companies expanded and hiring ramped up. The new hires, generally from the Millennial generation, began their careers in a steep and long soft insurance market. Brogan noted that unlike Boomers and Gen Xers who lived through various aviation cycles, Millennials may have only seen the soft market through their entire working careers.

“Premiums must be greater than losses plus expenses; this is the primary equation of our industry,” said Brogan. “If the equation does not work, business does not work and that is visible to the employees. Whether you are a broker, claims person, or an underwriter, watching income diminish year after year is demoralizing and doesn’t support a positive environment. It’s hard to see a future in an industry when the financials don’t support your hopes for your career.”

In addition to the soft-market woes, Brogan said that the aviation insurance industry has two “uphill battles” in trying to attract Millennials to its ranks: a large generational gap between Baby Boomers and Millennials, and the fact that many parts of the industry are still behind technologically.

“Across the board, the insurance industry is generally not very tech savvy, but we’re trying to get there,” said Brogan. “So there’s a generational divide. Everybody talks about it and rolls their eyes. You’ve got the Millennials who come in super educated and are motivated and hardworking, but ask very direct questions and want to run the company from a phone app after only a year of experience. On the other side, Baby Boomers are also super educated and very motivated, but they’ve been working all of their careers to get where they are. They’ve earned their spot and are very sales savvy, but the think apps are buffalo wings and mozzarella sticks.”

Brogan says the solution to bringing more Millennials and Generation Z (those born after 1995) onboard is to show young professionals interested in insurance that aviation is “obviously more interesting to talk about than insuring parking lots, buildings, or workers' comp.” An understanding of the differences between the generations’ attitude toward technology, communication preferences, and decision-making tendencies can then help bridge the generation gap in the workplace.

“Baby boomers prefer face-to-face conversation, but will use telephone or email if required,” said Brogan. “GenX prefers text messaging or email, and Millennials prefer online and mobile. There’s a strong preference for each group to communicate the way they want to.”

Brogan noted that the various generations also have their own preferences in how they make decisions. Baby Boomers tend to collaborate amongst their peers, GenXers who grew up as latchkey kids like to gather information but make their own decisions, and Millennials tend to collaborate with elders. So a GenX boss who is used to figuring out solutions himself or herself may be perplexed by a Millennial who wants to constantly converse and collaborate. While these are natural tendencies and present real conflicts in the workplace, Brogan said generational differences can also present natural fits that can work to everyone’s advantage. 

“The key is to know how employees will respond to different types of training, management styles, work environments, and technology being used,” Brogan said. “Training that existed and worked in the past may not work going forward with changing needs, expectations, and resources.”

FAA Administrator Addresses Groundings

FAA acting administrator Dan Elwell began his AIA keynote presentation by addressing the FAA’s groundings of the Boeing 737 Max and Cirrus SF50 Vision Jet fleets, which were grounded within weeks of each other in March and April 2019 respectively, due to similar but unrelated continuous system-commanded nose-down inputs.

“As is often the case, especially with human suffering, there’s a real pull to take immediate action,” said Elwell. “But as we know, that’s not always the best way to address the real cause of the problem. On the 737 Max, the FAA waited until we had the data that linked the Lion Air and Ethiopian Airlines accidents before we grounded the U.S. fleet. And when we had that data, we acted within a few hours.”

Elwell noted that during the five-year certification effort completed in March 2017, FAA safety engineers and test pilots put in 110,000 hours of work and flew or supported 297 test flights on the 737 Max program. “That said, the 737 Max will not fly again in the U.S. until our safety analysis says that it’s safe to do so.”

The FAA grounded the Cirrus SF50 Vision Jet on April 18 due to faulty angle of attack (AoA) sensors providing incorrect readings to Cirrus’s stall warning and protection or Electronic Stability & Protection systems. During three flights between November 2018 and April 2019 onboard systems responded to these faulty inputs by commanding nose-down inputs even when sufficient airspeed and proper actual AoA existed for normal flight. In all three of these incidents, the pilot was able to disconnect the system and land the aircraft safely.  

Cirrus had identified the issue and published its own service bulletin on April 16, calling for mandatory replacement of the sensor.

“When we issued the emergency AD [grounding the SF50], it was prompted by reports of a systemic problem with the AoA sensors. These are not the same AoA sensor units on the 737 Max and the situations are unrelated, but this is about taking the correct action at the appropriate time because we have only one agenda. Safety has to be the top priority. The recent groundings of the Boeing 737 Max and the Cirrus [SF]50 have brought safety to the forefront.”

Elwell noted that Cirrus had already developed an FAA-approved corrective action that includes installing new sensors, and also revised the emergency procedures in the flight manual. On April 23, less than a week after the FAA grounding of the SF50 fleet, Cirrus announced that shipments of replacement sensors were already being sent to operators.   

“When we need someone to step up, GA [general aviation] always does,” said Elwell. “General aviation aircraft comprise the majority of the U.S. civil aviation fleet, and the data tells us that GA safety is actually on the upswing. Working with the GA community, we set the goal of reducing the accident rate to no more than one fatal accident in 100,000 flight hours by Fiscal Year 2018. The preliminary data show that we exceeded that goal and that 2018 is going to be closer to 0.8 fatal accidents per 100,000 flight hours.”

FAA and GAMA Work Together for Innovation

Michael Romanowski, director of policy and innovation for the FAA’s Aircraft Certification Service, followed Elwell’s comments with information on certification efforts on new types of aerial vehicles, including electric propulsion aircraft that are already available for the general aviation market and new designs proposed for the urban air mobility market (UAM).

“I believe that we can safely integrate these highly automated aircraft into our system when they can be shown to meet the FAA’s and the public’s expectations for safety,” said Romanowski. “While our regulatory framework was not developed with UAM vehicles in mind, the FAA has a long successful history of bringing new technology into aviation. As we’ve been working with the unmanned market, we’re seeing technologies that we can leverage. As regulators, it’s incumbent on us to come up with policy for these new vehicles, especially as they introduce new technologies with remarkable potential for improving safety.”

Romanowski mentioned the recent FAR Part 23 rewrite as a catalyst for innovation as it consists of performance-based regulations where the FAA sets a standard and allows manufacturers to demonstrate how they will meet (or in many cases, exceed) the standard.

“The Part 23 performance-based regulations set loose an environment for wholesale innovation in the small airplane market,” said Romanowski. “We also implemented another policy change that further fuels innovation: non-required safety-enhancing equipment. This is where we’ve found ways to streamline the certification qualification for those systems that bring safety enhancements to aircraft to provide additional advisory and situation awareness.”   

Romanowski mentioned the work being done by the FAA and Embry-Riddle Aeronautical University to develop a simplified vehicle operations (SVO) aircraft with the aim of making flying an airplane as easy as driving a car. While the rudder-pedalless Ercoupe was designed with exactly the same intentions in 1939, the 21st century EZ Fly demonstrator uses automation to remove or lessen pilot tasks such as responding to weather, air and ground threats, and air traffic control.    

“We’ve been talking about the pilot shortage and the challenges in recruiting young people into the pilot profession,” said Romanowski. “We’ve shown that we can bring the video game generation into the cockpit and have them fully fly the aircraft in a short amount of time in a safely protected environment that brings enthusiasm for flying instead of fear when they’re asked to pilot these vehicles conventionally.”

GAMA president and CEO Pete Bunce also discussed SVO during his address, noting that GAMA is working with the FAA on new pilot certification strategies based on the level of aircraft automation. New pilots in autonomous or optionally piloted aircraft (OPA) might receive a restricted license, and then add endorsements as they train in aircraft with decreasing levels of automation. Instead of starting a student pilot in a Cessna 172 (or similar trainer), students might learn to fly an OPA and would need to gain piloting skills and experience to move “up” to a “more complex” Cessna.

“If you start to break down all of the components of being a pilot, there are quite a few tasks that computers do much better than we humans do,” said Bunce. “If you’re flying an aircraft that essentially consists of programming computers, do you need the same skill as flying a Cirrus SR22 in today’s world? Or do we train to a basic level for flying an autonomous vehicle—because people initially want somebody up front—and then provide endorsements to fly more complex older technology?”

Bunce’s talk also included emerging technologies in general aviation including transformational manufacturing techniques, head-up displays, and hybrid and electric aircraft.

 “The [GA industry] has some good programs that are looking at distributed propulsion on both conventional-looking aircraft and exotic designs,” said Bunce, who showed videos of various prototype hybrid and electric aircraft already flying in various parts of the world. His examples included the Equator electric amphibious aircraft from Norway, Lilium, and Volocopter from Germany, Pipistrel's Alpha Electro from Slovenia, Liaoning electric aircraft from China, and the Airbus Vahana and Kitty Hawk Cora from the U.S.

“Those of us who are old enough to remember the Jetsons are asking if [UAM] is real?” Bunce said. “I’m here to tell you this is real, and it’s happening and there’s more money chasing it than you can imagine.”