Posted by: Jeff Rhodes | February 1, 2010

Surfing, Sayings, & Aviation Insurance

The old saying goes, “the more things change, the more they stay the same.”  There’s also one that says something to the effect of “nothing’s new under the sun.”  We see many examples of this in the aviation industry.  The boom of the Golden Age in the 1920’s was followed by the bust of the 1930’s.  There are tens of thousands of 1946 model airplanes of all kinds as manufacturers continued on a near wartime production schedule to supply all the returning GI’s with the airplanes they would supposedly be demanding.  Unfortunately, there are very few 1948 models, as the supply outstripped the real demand.  The late 1990’s and early 2000’s saw aircraft factories cranking out airplanes by the hundreds.  Those are the same airplanes now being dumped on the used market at fire-sale prices.

Aviation insurance is similar.  We’ve been here before and will go back again someday.  The old salts have seen it all before, although sometimes they forget in the meantime.  For the consumers new to aviation, they way it is now is reality – all they have ever known.

Roughly once a decade the aviation insurance market will expand and contract its capacity.  Premiums will follow that increase and reduction in supply.  The crest of the current wave occurred about 2002.  The terrorist attacks of September 11, 2001 helped the crest form when it did, but the wave was building prior to those events.

I believe that we are currently in the trough.  Right now, aviation insurance is exceedingly cheap.  Coverage is available for almost anything.  For a highly sought after risk, policies are currently being written for a loss.  The insurers are getting less premium than, statistically, what they will pay out in losses on that risk.  Other buyers markets occurred in the late 1980’s and the mid 1990’s.

Market cycles move as does the business cycle of the economy, although not in perfect step.  Economic conditions are an indicator of insurance cycles, but they are not as closely tied as one might assume.

The aircraft operator that has become affiliated with corporate aviation since the early 2000’s has only seen premiums fall as the market surfed the front side of the wave.   For those operators, there is a risk of falsely believing that this is the market’s normal condition.  In a micro economic sense, falling premiums seem logical – as I build loss-free experience as a pilot or aircraft operator, my insurance should become cheaper and cheaper, right?

If you can find one that remembers, ask an operator that paddled up the back side of this wave from 1999 through 2003.  Premiums got ten, twenty, in some cases fifty percent higher year to year.  For a time, single pilot jets become almost impossible to insure – some operators paying 100% surcharges to operate single pilot.  Insurers were reluctant to provide high limits of liability, were reluctant to approve transitioning pilots, and were quick to further increase rates following losses.

Another cliché is “all that’s old will be new again.”  As insurers and reinsurers continue to pay losses with limited premium bases, the market will once again shrink.  The reduced supply of insurance capacity will begin to push rates back up.  The operators new to aviation will be shocked that their renewal rates don’t decrease, as they always have in the past.   As you budget, be aware of the market conditions. Your broker SHOULD BE helping your prepare for what the next renewals will bring and positioning you to be the most capable surfer paddling up the building wave.

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