Insurance premiums are rising across the board while liability limits are falling, particularly for the small operator.
By John Boyce, Contributing Editor
The availability of insurance is tightening and everybody is paying more for their coverage — if they can get it at all. For the foreseeable future, that trend will continue. And the reasons for the upward trend are many and varied.
They include consolidation of insurance
companies and the withdrawal of some from certain lines of insurance;
increasing costs of settling claims on bigger, more expensive aircraft;
increased costs of litigation; and tightening of re-insurance around the
world; and at the FBO and maintenance facility level, the Statute of Repose.
The Statute of Repose, in which aircraft manufacturers are absolved of liability for their product after a certain number of years, has shifted the burden of claims on those aircraft to the maintenance facility.
Looking at the details of insurance, particularly aviation insurance, one can be overwhelmed by its complexity. The forces that shape the premiums one pays to keep a businesses safe from ruin are national and global in nature. And that’s not because of the "new global economy" that we’re so fond of talking about. It has always been that way; it’s just that those forces are coming to bear faster now.
Insurance people, in trying to get a handle on what was happening in their industry, used to talk of seven-year market cycles but because of the ease and speed of communication and information gathering, the market (or the people in the market) reacts much more quickly to changing events and cycle lengths are harder to identify.
But for all its complexity and seeming intangibility, one thing is rock hard and clear about aviation insurance: When the supply (capacity) of insurance shrinks, the demand increases and the price of the product goes up, and vice versa.
For some observers, aviation insurance represents the closest thing to the pure core of capitalism; that is, supply and demand dictates price. And those observers might have added, the little guy gets hammered.
"Clearly," says Doug Johnson, president of Southernair in Atlanta, GA, "the trend is up for rates and down for limits (of liability). The insurance companies are making an effort to control the hemorrhage of red ink that they’ve seen for the last two or three years by limiting their exposure and increasing their income with higher rates. Unfortunately, in some instances, that’s going to have the effect of putting some people out of business, just plain and simple.
"As with everything else, the effect is far more pronounced on the lower end of the scale; the smaller the operator, the bigger their problem and probably the larger the percentage increase they’re going to see."
Large airports and corporate operators will likely see increases but they are among the most attractive risks for insurance companies because of their good loss histories, according to some analysts.
Of the airports, Ed Underwood, president of Avsurance Corp. of Ann Arbor, MI, says, "Underwriters are not seeing many losses in airport liability from the perspective of the airport operators or owner, municipal or individuals. You don’t see as much litigation with that as you do with hangarkeepers claims. That’s been true over the past few years. There are some very high limits available for airports which could indicate that the claim experience has been favorable."
Estimates of the average premium increases that are taking place and will take place across the board in aviation vary from 15 to 40 percent, depending on who’s estimating. Of course, that’s an average so some are seeing much more and some are seeing less.
The major trend affecting all of aviation is the increase in premiums, says Kyle Sparks, vice president for AIG Aviation in Atlanta. "There has been a tremendous amount of capacity over the past few years that has allowed rates to drop below a profitable base; a lot of capital willing to invest in insurance and aviation… They’re (rates) slowly climbing in all product lines."
Many of the companies experiencing the most insurance trouble are those hangarkeepers, maintenance organizations, and rental and flight instruction businesses that were insured by a group of companies that have withdrawn from that class of coverage. That means they are scrambling to find coverage with the limited number of providers remaining.
Bill Behan, president of AirSure Ltd. of Golden, CO, says, "There has always been a group of smallest operators that have insured with two or three companies that just aren’t doing it anymore, some are out of business and some have ceased writing commercial — flight instruction, rental, FBO services — for smaller operators. Where there were five or six providers, today there are three. You can imagine the results.
"What is just amazing is the number of those smaller operators who are looking for new homes (i.e., insurance) are finding that the difference between what they paid in the past and today’s numbers are 50 to 200 percent increases. This is a small number, maybe 10 to 15 percent of the operators out there. The people that have been with the surviving (insurance) companies are seeing 10 to 15 percent increases … So, the people who are being hurt by this are pretty much the smaller operators that were insuring with the companies that are no longer in that business. It’s a little wake up call for them. I don’t want to see anybody go out of business but it’s a natural process that many industries go through."
However, the increased cost has forced some FBOs — and not just smaller ones — to reorganize their companies. Johnson at Southernair reports that one FBO he knows of spun off its flight school into a separate corporation to avoid either not being able to get insurance or having to pay a phenomenal amount for it on his entire operation. In doing that, Johnson says, the FBO is "paying through the nose," for the flight school insurance but is "able to save a fair amount of money on the rest of the operation."
A CHALLENGE FOR SOME
While all segments of the aviation industry — from airports to the small FBO — will see increases in premiums, some will experience problems in getting the liability limits they want, and some will have to live with higher deductibles, say sources. However, operators in the rental and instruction segment, maintenance organizations, and those in the hangarkeeping business are likely to experience difficulty on all fronts.
"Your instruction and rental class of business," says Mary Bade, manager of the aviation division of Lockton Companies in Denver, CO, "is in a very critical situation based on diminishment of (insurance) providers. That situation has made this class of business, in some cases, uninsurable. And in cases where the other companies are willing to pick up the business their prices have, in some cases, doubled and even tripled. I’ve written several in the past six months where the best quote we could get for them was double-plus what they have been paying.’’
Tom Coughlin, president of Air-Sur in Ormond Beach, FL, agrees and says, "Deductibles have been going up on the hangarkeepers’ side and, frankly, on some of the fleets for the better part of the past 18 months.... (And) the operators with at least eight to 12 airplanes the (liability) limits are still available to them but they’re the ones that are better managed, have good loss records, and they’re tied into some type of tighter training arrangement. For the well managed, the limits are still available; it’s more pricey but still appears to be pretty affordable. Those (companies) not as well managed with no strong track record, no strong business success plan’’ are going to have difficulty getting the limits they need.
"The (insurance) industry has seen between 200 and 300 percent loss ratio the past two or three years," Behan says. "Instruction and rental has been very problematic. Where we could get $5, $10, and $20 million limits for that (flight schools and rental facilities) five and 10 years ago, it’s very difficult to get more and $2 or $3 million today.... So unless you’re paying some six digit number (in premium) you really don’t have a full array of liability limits for a lot of these operators.
"That applies to maintenance also. The smaller maintenance companies are being hit very hard. Where those people were paying $5,000, $6,000, and $8,000 now can’t get it for less than $30,000. They really need to wake up to the fact that this is the world they have to be able to compete in, and if it just doesn’t work for them then there’s some distasteful options they have to consider."
Coughlin is concerned that newer, bigger business jets will just exacerbate the insurance problem for FBOs. "The FBOs have not been all that (well) equipped to make the transition to managing that kind of equipment. In other words, having the appropriate size tugs, better training, better tow bars, and really doing an employee orientation," he says.
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Liability and the Statute of Repose
A major portion of the difficulty for maintenance facilities is
the Statute of Repose, which Congress enacted in 1994. While the
statute was designed to release manufacturers from extended liability
for their aircraft and presumably encourage them to begin making
piston aircraft again, it has had the effect of burdening the people
working on those aircraft with the liability for problems with the
aircraft; a burden that was previously shouldered by the manufacturers.
Doug Johnson at Southernair explains: "The problem is, that the plaintiff attorneys now, instead of shooting at one big pocket (manufacturers), are going after a whole bunch of little pockets (maintenance shops). It has thrown the burden back on the retail suppliers, and where a retail supplier used to be able to buy their way out of a lawsuit for $5,000, their insurance companies are having to pay $250,000, $500,000, $1 million.’’