Posted by: Chris Davis | January 20, 2010

Riding the Waves of Light Aircraft Insurance

The world of single engine and piston twins is commonly referred to as light aircraft in the insurance world.  This is the world that I work in, play in, and, according to my wife, live in as well.  So what is happening in my world?  A lot …

Insurance rates run in cycles, with many factors dictating the changes.  Without getting into the nuts and bolts too deeply, let’s think of the rates as waves on the ocean.  If you look at the insurance rates on a chart over the last 20 years, you will notice highs and lows with five to seven-year ranges between the crests and troughs.  As we ride down the backside of a wave and the rates get lower, the market is referred to as softening. Conversely, as we climb to the crest of the wave, the rates get higher and the market is referred to as hardening.

Over the last few years, we have been enjoying a soft market in the light aircraft world.  While the market has been soft, we have enjoyed lower rates, availability of higher liability, and lenient underwriters in the areas of pilot approval, training requirements, and claims penalties.  It seems that the current soft market wave, although only three and one half years in duration, has gone deeper than many can remember in recent history.  What seems to be a short, deep cycle may give way to the next crest.

In recent months, we have noticed a hardening in the European commercial airline markets, which (if history repeats itself) is indicative of things to come in the general aviation markets here in the United States.  What does this mean to us in the light aircraft world?  In the short term, not a whole lot, but it does give a glimpse into things to come.  We are starting to see some of the signs that the market is beginning to hit the bottom of the trough on this wave.

Over the past few years, we have been able to count on renewal rates being lower than the previous year, or, at a minimum, the renewal rate being “as expiring.” It has been an uncommon case when the renewal rates have gone up from the previous year, even in the event of an accident or claim on the previous policy.  Underwriters have been very cooperative on pilot requirements and have been transitioning pilots into more complex aircraft more easily than in previous years.  Liability limits in excess of $1 million have once again become available on policies that had been denied these limits in the past.  This is all beginning to change.  Although we continue to see a few small premium reductions at renewal time, these are very few.  The underwriters have become less generous and are frequently pushing for increases on marginal accounts.  The insurance rates simply cannot drop any lower and still allow the underwriting companies to remain profitable.  Currently, most of the renewals are “as expiring”.  This is another way of saying flat with no increase or decrease in premium.  The good news for those of us in the light aircraft world is that we will be the last and slowest to climb the wave; the non conventional aircraft, flight schools, and single pilot turbine and jet accounts will be hit the hardest and fastest.

So what can we expect in the coming year?  With the exception of another tragic loss such as Sept. 11, it is probably a safe bet that we will slowly begin to see more and more increases in the renewal premiums.  The underwriters will most likely continue to offer the higher liability limits to those that qualify and the pilot requirements will remain fairly lenient, but this will begin to change as well.  Shortly after the rates begin their journey up the wave, pressure to decrease limits and stiffen pilot requirements will not be far behind.

So what do we do now?  Look to increase your liability coverage while the higher limits are still available.  Once the market starts up the hardening wave, those limits may not be available as a new coverage, but if you already have the higher limits prior to the market change, the underwriters are more apt to continue providing the option.

If you have been waiting on the “opportune moment” to make that jump into a higher performance aircraft, then now is the time.  From an insurance standpoint, make the jump while the rates are still relatively low and the underwriters are cooperative on transitions.  Although a higher performance aircraft usually means a bit more in insurance, it may still be cheaper to pay that transition increase now and lock in your rate for a year while you build your hours and/or ratings. The idea is to transition and pay the dues while the rates are relatively low so you will be a more preferred risk upon renewal in a harder market where the rates may be higher.

Don’t let the media fool you.  Although the economy may be slower than in previous years, it is far from dead.  Great aircraft deals are being purchased every day.  I have seen more new “light aircraft” purchases in the last six months than I have seen in a long while.  The difference is that far more have been cash purchases and much fewer have had lien holders than in previous years.

If you have not gotten any recurrent training during the policy period, get it on your calendar.  Recurrent training is the best way to help your renewal rates, and in a hardening market, it can help you more than ever.  Train well and train often; it may save more than just your pocketbook someday.

Clear skies & tailwinds!

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