Insurance Market Stable, But Rates Could Change
Most of us have a love/hate relationship with insurance; we hate paying the premiums but if something goes wrong, we love having someone else who was willing to take the risk resolve many of the headaches. Across the U.S. aviation industry, there are so many insurance companies willing to shoulder the risks that the premiums remain at low levels even for the riskier helicopter segment. In a world of wildly fluctuating fuel prices and increasing personnel expenses, the prolonged soft insurance market and its resulting low premiums provide operators a small measure of stability and relief.
“Our business is all about the supply of capital, and the supply is great at the moment because there aren’t a lot of better investment opportunities,” said Jon Doolittle, founder of Connecticut-based aviation insurance broker Sutton James (Booth No. C1113). “In the wake of 9/11, corporate aircraft insurance rates doubled overnight, so 2002 through 2005 were very profitable years in aviation insurance in a way that they weren’t in other areas. Lots of people started to get involved. Insurance companies that had not had a U.S. general aviation presence started [one]. So you have all these companies putting money into the market, and there really aren’t a lot more aircraft [to insure] than there were five years ago.”
Although no one sees any indications that rates are about to increase, helicopter operators shouldn’t expect the low premiums to continue indefinitely, especially when certain segments–such as EMS–are experiencing substantial losses.
“Investment income is becoming scarce, with interest rates at all-time lows,” said Jason Niemela, president of Berkley Aviation (Booth No. N5408). “Insurers aren’t able to support lines of business that don’t produce an underwriting profit. If the helicopter market continues with the same losses, we will see capital leaving the segment to enter areas that can provide an acceptable profit margin.”
Doolittle agrees. “The difference between fixed-wing and helicopters is that we see a lot less fixed-wing flying than we used to, so the accidents are quite a bit lower too,” he said. “Helicopters are utility vehicles and they are still out there flying–providing training, air-taxi, surveying, hunting, herding, frost-patrolling, long-lining, all the wild stuff that people use them for–and so the accidents are still happening. At some point I expect to see helicopter insurance rates start to come back up. Losses are probably getting very close to exceeding what the insurance companies take in and I think, at some point, there’s going to be a correction.”
Aviation insurance representatives say the soft market means there isn’t much margin for discounting rates based on Safety Management System (SMS) and intensive training programs. Premiums are still tied to an operator’s loss history, the size of its fleet and the loss history of the helicopter marketplace as a group. But even if an SMS doesn’t automatically drop premiums in the current market, an effective SMS should reduce the accidents and losses that could drive up insurance premiums in the future.
“With today’s soft market, you can’t plug an SMS program into your operation and have that translate into a specific amount of premium savings,” said an insurance representative who asked not to be identified. “But a long-term safety record in terms of an individual operator and industry-wide will help keep premiums low. I’ve seen the operators that have really made a cultural shift [with an SMS] and I’ve seen the operators that just have a manual sitting on a shelf to satisfy requirements. And that cultural shift really has to happen for long-term safety to improve.”
One topic often discussed in helicopter forums but not usually addressed as an insurance issue is the shortage of qualified helicopter pilots. As Vietnam-era pilots reach–and often fly well past–retirement age, there are fewer young bloods to take their places. While underwriters generally don’t look just at the age of the pilots but factor in experience and training, the impending pilot shortage will certainly have an impact on operators’ expenses, either through increased premiums as a result of the experience drain or in increased training costs trying to replace experience with intensive training.
“In my opinion, the most critical insurance issue facing U.S. helicopter operators in the foreseeable future is a lack of qualified pilots,” said Matt Drummelsmith, president of Corporate Aviation Insurance Group (Booth No. C2214).“There are numerous operators who are short-staffed when it comes to helicopter pilots. In fact, some air medical operators have had to cut entire shifts due to pilot shortage. This translates to operators hiring less qualified pilots or pilots who may not have the ability to transition, period. As a result, we’ll start to see more claims in this segment. With more claims come higher insurance costs.”
“A lot of times, as a broker, you can make a case for the young and sharp pilots, especially if they are working for whoever brought them up through the business,” said Doolittle. “In the training business, we have people who have come right out of their commercial [certificate] in the helicopter, get their CFI and start teaching for that same school. They’ve been in that school for all of their 250 hours; they know the airspace, the procedures and the standardization stuff that the operator uses. Sure underwriters might charge just a little more than if the pilot is 45 [years old] and has 5,000 of dual given in helicopters, but these kids are learning quickly and they’re well-taught, assuming it is a good school.”
Insurance industry experts recommend that helicopter operators create and maintain a strong relationship with their brokers and/or underwriters to make sure risks are adequately covered at the lowest rates possible.
“A good broker and underwriter will tailor coverage for your specific needs,” said Niemela. “Operators need to be proactive with their brokers and underwriters to get the best program. Every flight you’re gambling with the life of your company. Is it worth saving small amounts of premium for a potential denial of coverage? When the worst happens, you need the support of an underwriter that knows you and your business.”