Ground Clutter

April 18, 2007
Insurance 101.

During recent years we oft heard that "there are only three or four carriers insuring general aviation — obviously, the market ain't working." Oh, ye of little faith. The market is alive and well in the insurance business, and is proving it.

At the VLJ Exhibition and Trade Show in Charlotte, NC, one of the speakers, long-time aviation insurance pro John Stoen of Hays Aviation, showed us a list of 16 carriers now providing coverage for GA aircraft.

What caused this? Other carriers noticed the lack of competition in the field. You can imagine each of them saying, "Hmmm… There's no competition in that market. Let's jump in and get some of that business." They have, and now they're competing with each other. Can there be any doubt that insurance will be easier to get and rates will fall?

Make no mistake, times did get tough for awhile. Maintenance shops couldn't get adequate coverage at reasonable rates. Some of the best shops quit working on older aircraft because they were hard to insure. Some shops quit doing certain jobs; others just got out of the business.

I sold general aviation insurance during most of the 1970s and 1980s. During that time I covered airports, FBOs, business and pleasure aircraft, cropdusters, and even one airline.

Back then rates varied greatly from year to year. They still do. I quickly learned that during times of low rates, buyers were convinced they had "earned" the low rates. During high-rate years, the buyers said it "wasn't fair" and they tended to think that carriers "controlled" the market.

What causes insurance rates to rise and fall? It has nothing to do with "fair" and everything to do with supply and demand. The carriers do not control the market -- they can't. It's that simple.

Twenty years ago this month, two 747s collided in the Canary Islands. Hundreds were killed. In both liability and property damage, it was a disaster for the entire insurance industry. (Most people don't know it, but the insurance industry may be its own biggest customer. One carrier does not insure an airline; the risk is divided up — via reinsurance and other tools — among many providers.)

I had Cherokee and Skyhawk customers telling me that they didn't cause that 747 disaster, so their rates shouldn't rise. It wasn't fair. Maybe not, but gobs of money had been sucked from the market and carriers pulled in their horns. As with everything else, when supply drops and demand remains, prices rise.

The stock market influences insurance rates. When profits come easily, carriers seek premiums they can invest. That creates an increase in supply, which causes rates to climb. The reverse is true when profits are hard to come by.

It all revolves around the free market. To paraphrase William Cowper's poetry, the market moves in mysterious ways, its wonders to perform.