Filed Under:Agent Broker, E&S/Specialty Business

Flier's Market

Carriers battle for rate, growth opportunities in ultra-competitive aviation insurance marketplace

The story in aviation insurance over the past decade has been a precipitous descent in premiums across all lines of coverage.

“We have a 10-year client where, when we first wrote the account, pricing was about $80,000 a year. When it renewed this year, it was about $16,000 and there were six different insurers competing, all within $500 of each other,” says Jeff Rasmussen, president of Aero Insurance LLC in Madison, Wis.

Renewal premiums across the aviation industry have dropped nearly 11 percent through August 2013, according to Willis. That represents a $54 million-dollar decline in premium despite an average increase in fleet values of 8 percent during that same time period. Which amounts to a buyers' market across hull, liability and cargo insurance lines, particularly among owners of higher-valued aircraft.

“It takes the same amount of underwriting to insure a $30,000 Cessna 172 as it does a $1 million Citation, so you're seeing a lot more competition on those [higher valued] planes, along with competition for corporate operators, large flight schools, and FBOs [fixed based operators],” adds Rasmussen.

To some extent, a correction over the past decade was inevitable due to the massive jump in rates that happened after 9/11, when industry-wide premiums spiked from under $1.5 to over $3.5 billion. However, the larger reason for the drop in pricing to nearly turn-of-the-century levels is strong capacity, drawn to the aviation market by the promise of greater returns than in the investment marketplace and by favorable loss experience. Loss ratios have steadily declined over the past four years, and the worldwide 2012 calendar year loss ratio across all lines was 56.0, according to Willis.

“We have an abundance of capacity today,” says Kyle Sparks, chief underwriting officer for Starr Aviation. “Within the last six years, several new markets have come online. There are over 15 carriers in the domestic space that are quoting for business, along with capacity from outside the U.S.”

 Capacity is unlikely to decrease even if losses increase for a number of reasons, according to Ginger Turner, senior economist at Swiss Re's American headquarters in New York.

“Capacity doesn't shift in and out as quickly as it does in other lines because of the expertise required to write aviation business,” she says. “There are specific teams within companies dedicated to underwriting that business, and those companies are in it for the long haul.”

Also, aviation insurance tends to be just one part of a carrier's larger book of business, which allows insurers to offset any performance issues on that line. “Back in the '90s when we did see capacity leave the market, it happened because a lot of the capacity was tied to MGAs or single-line specialists,” says Sparks. “Today, new entrants entering the U.S. market have strong balance sheets, write multiple lines and have worldwide reach.”

Competitive Strategies, Careful Underwriting

As global premiums drop toward the $1.5 billion mark, insurers are struggling to find growth opportunities. “The industry had fantastic growth going into 2008, and then it all came to a screeching halt,” says Sparks.

One area in which companies are trying to differentiate themselves is in coverage: Airlines and other aviation businesses—themselves profit-challenged by high fuel costs and increased competition—are looking not only to pay less premium, but receive more for their premium dollar.

“There has been broadening of coverages,” Sparks says. “For instance, if you are in the business of managing aircraft, some carriers have added reimbursement expense for management fees if the aircraft is damaged, similar to business income coverage. In another case, we saw a major airport able to roll auto liability into the GL program, rather than handle it on a separate auto form.”

In June, QBE began offering Aviation Excess Grounding Liability insurance, a products liability coverage triggered when aircraft are prohibited from flying by aviation authorities following an accident or incident. QBE offers a $125 million limit, which differs from primary coverage (typically limited to $125 million by aviation insurers) in that there is no coinsurance clause.

“We've had interest [in the coverage] from some major [aircraft] manufacturers, but it's gotten off to a slow start,” says Graham Daldry, QBE portfolio manager for aerospace.

At the same time carriers are working to become more attractive to buyers, they are also aware of the need for careful underwriting. Despite favorable loss ratios, in an era of declining premiums underwriting profitability has been difficult to come by, with Swiss Re reporting that the combined ratio for aviation has been close to or above 100 for the better part of two decades.

Unsurprisingly, efforts to increase premium have been met with buyer resistance. “Our retention varies from 90 percent to 50 percent” depending on pricing approach, says Sparks. “We are seeing much lower renewal retention in areas where we have adjusted prices to levels that would be profitable. Also, the more transactional business is, smaller fleets or single aircraft, the tougher retention is.”

“Premiums are starting to approach the attrition loss level in certain segments of the business where you're not able to collect enough premium for the known losses, let alone the unknown,” says David L. McKay, president and CEO of United States Aircraft Insurance Group, a pool of five member companies providing coverage worldwide. For the market to sustain its buyer-favorable pricing, McKay says the quality of its underwriting has to get better, a sentiment shared by Swiss Re's Turner.

“On the process side, carriers need to focus on underwriting discipline in the face of competition. They also need to understand new innovations in aircraft materials and manufacturing as well as operations. On the organizational side, there is potential for global insurers to combine expertise across regions and for underwriters to communicate with each other across lines of business on how to assess and measure risks,” she says.

New growth opportunity for insurers may come from emerging areas of aviation, such as unmanned aerial vehicles (UAVs). “Right now, the majority of UAVs are for military and surveillance applications, but once they start showing up in the civilian marketplace, there will be great demand for those aircraft,” says Sparks. “We're looking right now at the unique exposures that unmanned aircraft will have as they are introduced into the industry.”

Hope For Modest Premium Growth

Absent a series of major catastrophes, the aviation market will continue to be competitive because of strong capitalization.

“There is more capacity expected to come in over the next year from Lloyds,” Daldry says. “There is no immediate end to this rating cycle and a lot of pressure from all areas to adjust the rates [downward] even more. The question is whether that's sustainable over the long term.”

As the economy improves and travel increases, premiums should grow by virtue of increased exposure, despite the expected continued drop in rates. Swiss Re projects that premiums will increase on average by about 4 to 5.5 percent per year over the next 10 years.

“Our fortunes are tied to our customers,” adds McKay. “The economy is picking up and there are forecasts of higher business aviation aircraft sales that are encouraging. As we climb out of the general economic doldrums, we are excited about the trajectory for the industry."

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