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Rock Bottom: Aviation Insurance Pricing Can’t Get Any Lower

When two major insurers said goodbye to their aviation insurance books late last year, things seemed to be looking up for pricing in the niche. But bafflingly, other insurers are still clinging tight to aviation business—driving rates so low that something’s gotta give, and soon.
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When two major aviation carriers said goodbye to their aviation insurance books late last year, things seemed to be looking up for pricing in the niche.

But bafflingly, other insurers are still clinging tight to aviation business—driving rates so low that something’s gotta give, and soon.

“The point we’ve gotten to is unsustainable,” says Travis French, aviation practice leader at Arlington/Roe. “I honestly am shocked that it’s gone on this long—that more companies haven’t pulled out. If you’re going to write insurance and you’re going to write it to make money, there’s got to be more profitable areas than aviation right now. The margins are just so, so thin.”

Down, Down, Down

Over the last 10-12 years, “we’ve seen steadily decreasing rates across the board” for aviation insurance, says Jim Pinegar, vice president of insurance services at the Aircraft Owners and Pilots Association. “That started to stop mid-last year—we thought we were seeing a small bump in the market—but then that was quickly eroded.”

“If we’re talking about corporate aircraft, pro pilots, turbines, jets, things like that—pricing in that area was the first to get soft and it is still by far and away the softest,” French agrees. “The market has found the bottom in terms of pricing for industrial aid aircraft risks.”

The same goes for smaller aircraft in the pleasure and business space; product liability, too, remains “hypercompetitive,” French says. Five years ago, companies like Berkeley, Old Republic and QBE didn’t offer coverage solutions in aviation product liability, but now, “they’re all aggressively writing aircraft products, especially the non-flight critical parts,” French points out.

If you look at the market piece by piece, French says some areas of aviation pricing are slightly harder than others—workers comp, agricultural aircraft, both fixed- and rotor-wing, for example. French also observes a “significant change in market appetite” when it comes to turbine and jet aircraft operated by owner pilots.

“For a while, it almost seemed like we started to treat owner pilots as if they were pros,” French says. “But the premiums they built up over the years weren’t nearly adequate enough to cover the losses we’re now seeing. I’m seeing a lot of pullback there—markets that have been in that sector for a long time, they’ll still write the risks, but they won’t be nearly as aggressive in terms of pricing.”

On the whole, however, the aviation insurance market is a tough place to be in 2017. “Barring some catastrophic event, pricing will continue to be flat,” says Doug Johnson, president of JSL Aviation Insurance. “And I’m not talking about floods in California or whatever, but something that directly impacts aviation on a massive scale. There is so much capacity to provide insurance for airplanes that we don’t foresee anything changing. It’s hard to imagine how they can continue to maintain the rate structure we currently see, but they seem to keep doing it.”

“We don’t expect the overcapacity in the market to substantially shift,” agrees Henning Haagen, global head of aviation and Northeast zone executive at Allianz. “And it would probably be naïve to expect differently. We all need to do our homework and live in this environment—it’s true not only true for aviation but for a wide variety of lines of business.”

In the meantime, there’s not much you can do besides “pray,” Johnson jokes. “Just hope the new Administration is able to grow the economy based on their projections. If the economy grows, hopefully airplane sales will grow, and that will allow us to grow our business. If other opportunities for investment open up as we have been told they are going to, then that could change everything.”

What It Means

The good news: Aviation insurance is an undeniable buyer’s market. “At this point, the underwriters are so eager to write business that it’s difficult to find something you can’t get done,” Johnson says. “There was a time when you had to ask for everything—the policy started out pretty basic, and if you wanted to dress it up, you had to start asking for this and that and the other thing, which cost money.”

Now, there’s little that differentiates one aviation insurer’s product from another’s. “We’ve all got a pretty broad product we are selling,” Haagen says. “In the end, it’s an all-risk policy which covers a pretty wide range of perils in both hull and liability.”

“Until you see any stabilization of rates, you won’t see a whole lot of new coverage in the marketplace,” Pinegar agrees. “Absent drones, there’s not a whole lot of innovation regarding products.”

Instead, insurers are focusing on digitization and automation in order to meet evolving consumer expectations. “Change is coming not so much on the product side, but rather how we administer the business—how it’s sold, how the policies are issued, how claims are handled, how you service your clients and how to get a handle on efficiency,” Haagen explains.

Moving forward, French hopes underwriters will face less pressure to base rates simply on what will allow them to write more business, rather than the merits of the risk. This kind of “target underwriting” is “not a good long-term practice,” he says. “When the market hardens, hopefully they’ll have to go back to underwriting in order to generate an underwriting profit.”

Shouldn’t that “when” be an “if”? French is optimistic. “It feels like change is beginning,” he says. “Like any other significant change, it will take time, but money is starting to speak again and dictate the way this is going to take shape over the next five to 10 years.”

Until then, French encourages agents to point out the “availability of a lot of coverage for not a lot of money.”

“There’s a huge amount of capacity in the market for writing high limits, upwards of $1 billion plus, just depending on how you want to stack it,” French points out. “That’s one thing insurance buyers should be taking advantage of right now. People are buying these $6-, 7-, 8-million jets, and then they’re debating whether they want to spend $3,800 or $4,800 for their liability coverage on the policy. Don’t skimp. At the end of the day, if you shop right now, you’ll probably save money.”

Jacquelyn Connelly is IA senior editor.

The other elephant in the aviation room: drones. Get the scoop on FAA regulations, drone coverage developments and more in upcoming editions of IA’s Markets Pulse e-newsletter.

Friday, September 23, 2022