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From Rock Bottom to Sky High: Aviation Rates Finally Turn Around

After a particularly devastating set of blows for an insurance market that hasn’t turned a profit in over a decade, your average aviation insured should brace for a 10-30% rate increase this year.
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In summer 2015, an ambulance helicopter crashed on take-off from a mountain town outside Denver. The chopper burst into flames on impact, killing the pilot and badly injuring the two flight nurses on board, one of whom suffered burns over 90% of his body.

That survivor filed a lawsuit against the helicopter’s French manufacturer, Airbus Helicopters SAS, for failing to equip the chopper with a crash-resistant fuel system—and early last year, he received a record $100-million cash settlement in what remains the largest U.S. pretrial settlement ever reached in an individual personal injury civil claim.

“That was unprecedented,” says Travis French, aviation practice leader at Arlington/Roe. “A single individual collecting a $100-million judgment—that type of payout is a game-changer.”

It’s also part of a larger trend of higher payouts to individuals. On the heels of significant aviation losses over the last few years, from the recent Boeing 737 Max crashes to several helicopter crashes around the U.S., “there have been some horrific single-person judgments in the last year and half that we have not seen historically, particularly in the general aviation space,” says Doug Johnson, president of JSL Aviation Insurance, a Marsh & McLennan Agency, LLC company.

“You’re expecting a judgment of $3 million, maybe $5 million, and the jury comes along and says, ‘No, it’s going to be $100 million,’” Johnson points out. “The industry cannot sustain those kinds of losses. It’s not big enough.”

The two Boeing crashes alone were $130-150 million apiece, “and that’s not liability—that’s cash money right now,” Johnson points out. “That’s a big, big hit, and it’s just gasoline on the fire. These big liability claims have been happening for two or three years. By and large, the liability is driving it, but the attritional hull losses have been eating all the money. When you add the liability claims on top of that, there’s not any money left to pay them.”

A Brief History

It's been a particularly devastating set of blows for an insurance market that hasn’t turned a profit in over a decade. After 9/11, aviation pricing “spiked and stayed there for a few years,” French says. Then, in 2005-2006, “you saw all this capacity flood into the market, and premiums started to fall. They fell for a long time, then leveled off at the bottom.”

Back in 2005, “before all this craziness started,” Johnson says, the U.S. had nine regular retail aviation markets. “Now we’ve got 18-19, and that’s fallen from a high of 22,” Johnson says. “And the population of airplanes does not really expand. The total number of airplanes out there is pretty static and has been for the last 25-30 years. When you expand the number of people fighting over a static market, it’s going to drop the price down, which it did.”

Over a decade later, “the market has finally turned,” Johnson says. But whereas “historically, there’s usually been a single major catastrophic event that everybody pointed to and said, ‘There’s the thing that made the market turn,’ that has not been the case this time. It seemed to be sort of organic, where one market and then another said, ‘You know, we’re not having near as much fun as we thought we were.’”

French points to the 2017 hurricane season as one possible culprit—although there were hardly any direct aviation losses, “reinsurance companies were paying out billions of dollars in flood losses, so those companies with their hands in multiple coffers in terms of property-casualty lines, they’ve got to get their money back somehow,” he explains. “Aviation was an obvious choice for an area where rates needed to go up.”

On the reinsurance side, Johnson cites several exits from the aviation space, as well as consolidations—“and that’s generally where it starts, because reinsurance drives what happens on the retail side,” he explains.

“A lot of reinsurers exited aviation in 2017-2018,” French agrees—and as a result, aviation insurers “are dealing with either more expenses or harder-to-find reinsurance. It’s all tied together.”

There are still plenty of reinsurers, French notes. But “when you go to them for pricing, it’s now 15-20-35% higher than it was previously, and there’s no other option for it. Those increased costs pass right through to the end buyer.”

“It’s a perfect storm happening all at once here,” French adds. “We knew it was coming, but that doesn’t make it any less painful.”

Up, Up and Away

At the very beginning of 2018, “you started to see a trend where initially, carriers were looking to increase rates by 3, 5, 7 or maybe 10% for a tricky account or one with loss history,” French says. “That lasted six to nine months, give or take, and then you started to see a little bit of an uptick, where 5-10% was the initial norm, and then suddenly 10-15% became the norm. That gradually became 10-20%, and that became 15-30%.”

While “it’s not necessarily consistent across every risk and across every line in aviation,” French says, “your average insured at renewal in 2019 can probably expect anywhere from a 10-30% increase.”

Larger commercial operators with six figures or more in premium aren’t getting hit as hard as smaller operators, accounts with loss histories and those in higher-risk segments, French points out: “Insurers are willing to shed some accounts, but they obviously they want to hold on to the large, profitable ones.”

But in some cases, “you’ve got a pro-flown turboprop or jet aircraft risk that was priced artificially low for a decade plus, and those guys are seeing 20-25-30% increases—not because they’re in a high-risk scenario, but just because their premiums were so low for so long that even a 25% increase on a $10,000 policy that really should be fetching $30,000 is still going to put you well below risk-reward ratios for the company,” French explains.

The only area of aviation insurance that’s not experiencing steady, substantial increases is clean property risks. “Those are increasing, but on the single-digit low end of the spectrum,” French says. “I’ve quoted some renewals that are flat, some 1-2%. If there have been losses, especially larger ones, now you’re more in the 10-15-20% range.”

How long should insureds expect these market conditions to last? This is just the beginning, Johnson warns. “The pendulum generally swings too far in each direction until it comes back and finds its center, and that’s what we’re seeing right now,” he says. “It was way too far in one direction, and now we’re swinging back to where they’re making it more restrictive than it probably should be in some cases. It’s only likely to get tighter and tighter for the foreseeable future.”

“I don’t think this market is going to last as long as the last soft market did—I just don’t think it can, especially at the rate we’re seeing increases go up now,” predicts French, who’s pegged the timeline at five to seven years. “Normal is somewhere. We passed it after 9/11 on the way up, and we passed it again on the way down.”

For the time being, though, “the trends only point up,” French says. “There’s no sign of anything going down, because we’ve still got so far to go to get out of that artificially low state we’ve been in. There are going to be larger increases. I think they will level off, but it’s not going to be today.”

“Eventually, it will find its center,” Johnson agrees. “The cycle has typically been around seven years, but we’ve been in this down market for over 10, so this correction is way overdue. It will absolutely balance out, and it would be delightful if it would actually stay there for a while. But it probably won’t.”

Jacquelyn Connelly is IA senior editor.