Risky Business

RISKY BUSINESS

Insurance premiums are rising across the board while liability limits are falling, particularly for the small operator.

By John Boyce, Contributing Editor

October 2000

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."