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Aircraft Insurance Market Changes

by Darryl Abbey 1. November 2009 00:00
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The winds of change continue to blow through the aviation insurance industry. While the past eight years have seen premium levels fall to record lows, momentum continues to build toward rate stabilization if not outright hardening of market pricing.

As a result of the tragic events of September 11, 2001, aviation insurance pricing shot up dramatically. Whether you were an airline, a component parts manufacturer, a charter aircraft or a pleasure and business flyer, you no doubt saw premium increases of one hundred percent or more. Although we all understood the reasons that insurance carriers implemented these price increases, we did not like them and most, if not all of us, felt that they were not warranted for the types of operations in which we were engaged.

The good news was that rates started falling within a year (depending on individual losses and types of operations) and have continued to fall since then. This was fueled in 2006 and 2007 when several new companies began underwriting aviation insurance. This increase in capacity, or supply, helped drive down rates so that aviation insurance pricing is significantly lower now than prior to 2001. However, as mentioned in my previous aviation insurance market update, it appears that times are changing and the extraordinarily low rates and premiums which most operators have enjoyed may soon be a thing of the past.

Within the past month, two carriers have announced that they are pulling out of the general aviation insurance market in the US. AXA Corporate Solutions and Travelers Aviation have both announced that they are ceasing their underwriting operations for US general aviation customers. Both of these carriers are experienced aviation insurers although the general aviation underwriting operations which are being closed had only been running since 2007. While neither of these carriers held a dominant share of the general aviation insurance market, none the less, their departure has sent ripples throughout the aviation insurance industry and fueled speculation as to whether there will be additional departures from the US aviation insurance market in the near future.

This constriction of aviation underwriting capacity in the US combined with the high level of aviation losses incurred in the first nine months of this year are spurring some underwriters to look for stabilized rates and, depending on the type of operations to be insured, significant price increases. That is not to say that prices are going up across the board for aircraft operators or manufacturers. Many operators, manufacturers and service facilities are still enjoying the benefits of competition. Even the most experienced US aviation insurers including USAIG, Global Aerospace, Chartis Aerospace (formerly AIG Aviation) and Houston Casualty will still engage in heated competition for the right customer. However, these same carriers are trying, when possible to keep premium levels flat or raise prices if they feel the market will bear this action. If additional carriers do exit the US aviation insurance market, you can bet that underwriters resolve to move their rates up will become more firm.

Having said all that, if an insurer or insurers were to decide that this is a good time to get into the general aviation market in the US and additional capacity became available, prices could drop once more. It would seem that this is a somewhat unlikely event and, given the lack of profitability professed by aviation insurance carriers, reminds us of the old saying: How do you make a small fortune in aviation? Start with a large one.

Since it is possible that there may be additional shifts in carriers and capacity, insurance buyers should look carefully at the carriers with whom they do business and the relationships they have with those carriers. Everyone needs to save money but aggressively marketing your insurance program every year is not a great strategy in the long run. A long term relationship with an insurance carrier does not insulate you from price increases but it can smooth out the spikes of price increases when the market hardens.

Remember, insurance pricing is traditionally cyclical in nature and what has gone down for many years will, eventually, come up. Be prepared.

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