Insurance rates to stabilize as availability shrinks
Corporate aviation operators at all levels received good and bad news from insurance representatives at the 26th annual Aviation Insurance Association conference held in Kansas City, Mo., on April 29 and 30. Reports that rates have seemed to stabilize and may even drop in the next year mingled with assertions that the availability of insurance is no longer guaranteed because of the more select nature of the market and because fewer companies are underwriting aviation insurance.
Before September 11, said Alan Beacock, aviation insurance treaty reinsurance team director for Swiss Reinsurance Co. of Zurich, Switzerland, aviation disasters tended to be seen as individual events affecting mostly only the direct carriers of the aviation-related insurance. “Now aviation losses have been seen to accumulate with other lines of business to a far greater degree than we ever would have imagined. Aviation is now seen as adding volatility to the insurer’s portfolio. You cannot protect infinite losses with finite resources.”
Because of this negative view of nearly any aviation entity by the reinsurance industry, fewer insurers are willing to underwrite aviation insurance, reducing availability–especially for those operators that are just a little outside what are considered “normal” corporate or general aviation operations.
“Reinsurers are reevaluating aviation business that had been accepted at less than technically adequate rates,” Beacock said, inferring that some of these “risky” policies might be dropped. “Relationship considerations will no longer outweigh the underwriting analysis.” Beacock also believes that the pool of aviation insurance resources will shrink further as specialists from other insurance fields stop writing aviation policies. “Specialists looking to expand their portfolios will now think harder before they dabble in aviation.”
Reinsurers are also no longer accepting business just because their underwriters have written the policies, according to Ian Wrigglesworth, managing director of the aviation reinsurance division of London-based Marsh Ltd. “In the past, the underwriters have said to the reinsurers, ‘Please accept this policy as part of our portfolio.’ And we have generally accepted them. Adding new policies will no longer be as simple.”
Wrigglesworth implied that reinsurers will be reviewing more policies written by their underwriters and will, in some cases, reject already written policies if the risk is deemed too great. In these cases the underwriting companies would have to determine if they were willing to assume the risk. If not, an operator that thought it had its insurance set may find itself without an adequate policy.
Bob Karl, senior vice president of Aon Aviation in Houston, also warned that operators will find it increasingly difficult to maintain insurance coverage due to this shift in the attitude of insurers toward aviation as a whole. “Small general aviation operators,” he said, “were not associated with the events of September 11, but they got lumped in with the airlines as far as insurance was concerned.”
Karl noted that in the post-September 11 world, as underwriters become increasingly more selective about the business they write, anything out of the ordinary, including single-ship helicopter operators and “mom ’n’ pop” FBOs, is being carefully scrutinized with intense probing into daily operations. Many of these operators are seeing their insurance options shrink dramatically. “A bad risk is a bad risk,” he said. “No amount of premium makes a bad risk a good risk. For small and single-ship operators, I can’t see a viable solution.”
Corporate Aviation Not Necessarily in the Cross Hairs
Those educated in the operations of most business aviation entities, however, don’t usually apply the “bad risk” label to corporate aviation. Pat Bailey, a trial lawyer and managing partner of Bailey and Associates of Santa Monica, Calif., placed fractional and corporate aviation into the “minimal risk category,” in terms of the type of loss that occurred on September 11. He praised the corporate aviation industry for “staying one step ahead of insurance requirements,” citing the example of NetJets, which has incorporated biometric information such as fingerprint IDs into its crew cards.
“The likelihood of having someone not associated with the flight get on board a corporate aircraft is minimal,” Bailey said. “Corporate aviation is good at self regulation, and it needs to continue to do this to keep the FAA and insurance companies from over-regulating the industry.”
He did note one area of vulnerability in corporate aviation that either the industry or the insurers will need to address: the sale of “deadhead” seats on some Part 135 aircraft. “This additional revenue is generally provided through an Internet transaction,” Bailey said. “The only thing done to screen the passenger is to clear his credit card, which does not offer the same level of security as other corporate operations where the crews and the passengers generally know each other.”
He also said the general aviation rental and flight-instruction industry has been “pounded” by both the FAA and insurance companies. “Many general aviation entities will need help from the insurance industry to analyze risk,” Bailey said. “Gone are the days of the flying clubs with the mailbox dispatch.”
War-risk Coverage: Do You Need It?
The universal cancellation of the war and terrorism coverage that occurred shortly after September 11 and the subsequent government-mandated $50 million cap on war-risk insurance payouts for third parties dominated a significant portion of the conference discussion. According to Peter Butler, underwriting executive for Global Aerospace of London, solutions are being found to prevent a recurrence of war-risk coverage cancellation should a similar atrocity occur, and to provide long-term additional coverage above the current $50 million cap.
“The aviation industry has been suffering from anxiety that operators can only count on the next seven days of insurance,” Butler said, referring to the seven-day notice written in the standard war-risk cancellation clause. “Believe me, the seriousness of giving notice of cancellation was well understood, which is why there was a six-day interval before the cancellation notice took place. Although it would be reasonable and understandable for this type of cancellation to be done again in similar events, this does not mean it will necessarily happen again, especially with the $50 million exposure limit on third-party property.”
He noted that $50 million in war-risk third-party property insurance is clearly not enough coverage for most entities, including some corporate aviation operators. While both the U.S. and UK drafted short-term government-backed insurance coverage to allow airline operations to restart, corporate aviation operators were left with few provisions for obtaining additional coverage.
Some insurers, noting market conditions, have begun offering additional coverage for a hefty premium–an additional $190 million has already been generated across the aviation insurance industry in war-risk premiums. Other insurers are offering, for an additional premium, an optional cancellation notice provision that extends the required notice from seven to 30 days.
But for a long-term solution that covers the entire industry, Butler advocates a recent ICAO proposal that would set up a fund to provide coverage in excess of the $50 million cap for all aviation operators, including corporate and general aviation operators, in any ICAO member country. The fund would charge each country 50 cents for each passenger carried and generate an estimated $850 million each year.
“All of the governments involved have said that they don’t want to be in the insurance business,” Butler said. “Passage of this proposal requires a 51-percent approval, but really just the support of the U.S., Europe as a whole and Japan would provide enough impetus for it to take off. One benefit of this plan is that even small nations that are ICAO members would have this type of coverage for every aviation enterprise.”
But although the war-risk coverage is nearly mandatory for airline operations, many corporate operators are unsure if the coverage is worth the premium. Tom Chappell, president of CS&A Aviation Insurance of Franklin, Tenn., said that many of his corporate aviation clients had been confused by the initial cancellation of the war-risk coverage and still don’t necessarily understand what the coverage provides for them.
“For most corporate aviation operators, before September 11 the war-risk coverage was just a standard item thrown into the policy at no additional cost,” Chappell said. “Most didn’t know this coverage even existed, and then didn’t understand why the coverage was canceled, and many asked if they even needed the war-risk coverage. My advice is, if you needed confiscation and seizure coverage before September 11, you definitely need war-risk coverage now.”
Chappell admitted that the terminology in today’s policies is confusing, especially to smaller operators that depend on their broker for insurance information and don’t bother to read the fine print. He noted that the standard war-risk coverage does not cover acts of negligence, but then asked the room full of insurance underwriters, “What is the small general aviation operator’s responsibility to security? If they don’t know what they are supposed to do, how can they be negligent?”
Chappell recommended that the war-risk clauses be rewritten to define such terms as negligence and malicious acts. He also noted that since clients are now generally forced to purchase their war-risk coverage, any future cancellations of the policies should be backed with a partial return of premium.
The Good News: Stable Premiums
The best news for corporate operators is that insurance premiums seem to have stabilized. John D’Angelone, executive vice president of Global Aerospace-AAU of Short Hills, N.J., predicted that the insurance market will remain at or near current conditions for the foreseeable future.
“September 11 was just the catalyst for making major changes that had been needed for a long time,” D’Angelone said. “Rates increased, insurers added premium charges for supplementary coverage that used to be thrown in, and the marketplace started distinguishing between high- and low-exposure risks instead of writing everything. Rates won’t continue to go up, but don’t expect them to decrease, either.”