Update: Insurance

Sept. 8, 1999


Operators being forced to lower liability limits; while airports, corporates see continued competitive pricing

BY John Boyce, Contributing Editor

September 1999

There doesn't appear to be any clear trend across the spectrum of classes of aviation insurance. However, there does seem to be a trend among underwriters to want to force liability limits downward for individual aircraft operators and FBOs with flight operations.

As Glenn Tate of AON Risk Services in Wichita, KS put it, "The upper limits of liability are getting kind of precious."

Bill Behan of AirSure Limited in Golden, CO, explains further, "For the small aircraft owner," Behan says, "the rates are generally stable, but some are going up if the consumer is looking for a higher liability limit of $2, $3, or $5 million. Those rates are very noticeably going up 20 to 50 percent. And they're especially noticeable at $5 and $10 million. Not many people have those needs, but the professional people that are flying a new Bonanza or a Baron or something like that, they don't want to have a $1 million limit. The availability of limits is not what it was two or three years ago."

This is a disturbing trend to Tom Coughlin, president of Air-Sur in Ormond Beach, FL. Referring to a major aviation insurance underwriter, Coughlin says, "What disturbs us about that particular trend is that we haven't seen that out of USAIG in the 22 years we've been in business. What's happening is that on those higher layers they've been paying out those kinds of awards (for losses). So, apparently they're not getting enough premium for the limits they're selling. They term it ’limits management.'"

Coughlin says that limits management has been attempted in the past with marginal success, but now better success is expected because not many companies are offering the higher limits at more competitive pricing.

The situation troubles Coughlin because the lower limits the operators are being forced to buy, "Frankly, are not going to be adequate."

Although Behan at AirSure concedes that this trend is unfortunate for the consumer, "it really has a healthy affect on the industry. If you charge too little for your product, sooner or later you're out of business and that doesn't serve anyone's long-term needs."

On the other hand, insurance competition for all airports, from general aviation to major commercial hubs, is so fierce that the pricing continues to go down, prompting Ed Underwood, president of Avsurance in Ann Arbor, MI, to say, "Airports are dirt cheap. There are multiple underwriters and I mean good, financially very strong underwriters. I just haven't seen any increases in airport premiums.

"The premiums are very low even on major hub airports. I don't see any hardening (of prices) at all because the (loss) experience has been very good on airports."

Much the same can be said of the turbine/corporate operators market. The loss experience has been good so rates are soft, perhaps dangerously soft for the insurer. "The turbine/corporate operators market is as soft as I've ever seen it since I've been in business in the mid-70s," Behan says. "It seems to be trying to stabilize but the market is at a level where none of the four companies that are predominantly writing that class of business can afford to take a Gulfstream hit and make a profit. It's down to a ridiculously low level of premium...

"The buyers are obviously pleased but these insurers don't want to give up market share, and as long as there's one of four willing to offer lower prices today than yesterday, the other three will chase them."

According to observers of the industry, the irony of the situation is that the underwriters are not making money. Under usual economic circumstances, that situation would tend to force the price up but it hasn't. Major airports are seeing as much as 25 percent reductions in their premiums.

"I think it's pretty common knowledge," says Hal Williams, president of Nationair Insurance Agencies, Lincoln, NE, "that not too many underwriters are making profits. Maybe they are from investment income, but they certainly aren't from a loss experience."

Underwriter profits on airlines insurance are also down, down so far that the rates are beginning to climb as much as 25 to 30 percent. But as Behan points out, "the airlines are paying a third of what they paid three or four years ago."

Some segments of the industry are going to experience a considerable shift in pricing and deductibles. While FBOs, generally, can expect something like a 5 to 10 percent premium increase, operators in rental, instruction, and maintenance can expect sizable increases in their premiums. Hangarkeepers can expect an increase in price and/or deductibles.

"For flight schools," says Underwood at Avsurance, "it's going to be a difficult market for availability of insurance. A lot of underwriters have had a lot of losses with flight schools. You have these new Cessnas in the flight schools so that now when you have a loss it's a lot bigger. The old 172s, 152s they're looking at $20,000, $30,000 hull values. Now, if you total a 182, you're looking at a 180,000 bucks; that's with no one getting hurt. Now the guys who have no losses and have been with the same carrier for ten or 12 years, they're not going to see much of a rate increase."

Profoundly affecting the rental/instruction market is the withdrawal of a major insurer, Houston Casualty, which is undergoing reorganization after purchasing three other companies. "I suspect," says Behan, "that they just can't figure out how to make it work so they're just not renewing. That has an obvious affect on that class of business and we're seeing probably an average of 10 to 15 percent increases there."

Hangarkeepers liability insurance is likely to go up, but more significant is a change in deductibles that underwriters are beginning to insist upon. "Most of our operators," explains Coughlin at Air-Sur, "up until last year were carrying $1,000, $2,500 types of hangarkeeper deductibles. Again, USAIG being the predominant player, with the medium to larger operator they're mandating deductibles of $5,000 and $10,000. So the operators are beginning to take a little more of the bottom end risk"

For the small aircraft maintenance operation, insurance availability and pricing could get a little sticky, according to Underwood: "Say a guy has $30,000 or $40,000 in receipts, which he might be making a nice living off. The insurance company doesn't want to write a policy for $3,000 and put up a million bucks. The insurance will be available, but you're looking at $10,000 minimum premiums on most of those."

Coughlin expects to see some insurance changes in employment practices and issues, such as hiring and firing and sexual harassment. "Operators are getting sued for that stuff," Coughlin says, "and without having some insurance coverage they're having to pay their own investigation and defense.

"My biggest concern is the ignorance of the operator. And the first line of defense is doing all the right things so that the liability coverage acts as a backdrop. Five years ago, the average defense costs were $10,000 and $20,000; now they're upwards of $150,000.

In addition, Coughlin says many FBOs are exposed when it comes to historical environmental contamination. The pollution liabilities on fuel farms and tanks don't usually cover contamination left behind when operators sell their businesses. "That's a new area," Coughlin says, "but a positive one in that the insurance industry is coming out with products and pricing that allows these operators to better protect themselves."