Troubled commercial airlines are dominating the news agenda as travelers are increasingly frustrated with time-consuming security, lengthy delays, frequent cancellations and routes that center on the major hubs rather than smaller airports closer to the desired destinations.

The recent spate of groundings by the Federal Aviation Administration over safety checks has further reinforced passengers' disillusionment with the airlines.

The result is that since 9/11 and the terrorist attacks on the United States, more and more corporate travelers have been taking advantage of non-airline aviation services. This growth has evolved through:

o Corporations buying and using their own aircraft. (The General Aviation Manufacturers Association reported that corporate jet deliveries are up 40 percent in first-quarter 2008.)

o Business travelers or wealthy individuals buying flight cards–the right to chunks of flight time–on aircraft with a charter company.

o Fractional ownership with companies such as NetJets.

It is believed this trend can only become more pronounced with the advent of the Very Light Jets–or VLJs–whose introduction may mean even greater competition for the big airlines.

Although the certification of these jets has been much slower than anticipated, their small size, speed and comparatively low cost base are likely to add a whole new demand for smaller jet aircraft–both private and corporate.

However, in the last six months, the credit crunch, combined with sharply higher fuel prices, has started to slow this growth.

At the executive jet end of the market, aviation experts have started to report that the “forward' prices for new jets are falling sharply, while the demand for flight cards and fractional jet ownership (purchasing a piece of a specific aircraft) has also been decreasing.

So, how does all this affect the demand for insurance and reinsurance in the general aviation (GA) market? It is interesting to look at the capacity in the market, its effect on rates and some of the key issues.

There have been a number of changes to the U.S. GA marketplace in the last few years. The year 2006 saw three key new entrants–Berkley Aviation, Starr Aviation and Allianz–and in 2007, International Aerospace (Inter Aero) commenced writing a GA portfolio, as did both Travelers Aviation and Britt Paulk.

This increased capacity and competition has meant that rates in the majority of GA subclasses have come under pressure, with reductions of 10 percent to 15 percent–and sometimes more–not uncommon.

However, the overall growth in the original market bodes well for existing and future insurance carriers, and it is anticipated that premium volume may well increase from around $2 billion to $2.1 billion by the end of 2008.

This is partly due to greater technological sophistication in new aircraft, leading to higher hull values and equally higher liability limits being purchased.

Many older aircraft will be replaced by newer, more expensive equipment, and this could well offset any deterioration in the rates with regards to the total premium volume in the market.

New insurance entrants into the GA class need experienced underwriting teams, unlike the airline arena, where entry is easy and underwriting teams can write small following lines on a quota-share basis. This is currently an issue as there is generally perceived to be a shortage of underwriting expertise in the U.S. GA market.

In addition to market and technical knowledge, it is essential for the GA underwriter to be well known to the producing agents since the distribution network is more broadly based than it is in the airline market–with smaller, private agents and brokers playing a much more significant role.

In addition, efficient loss adjusting, good claims handling and control, as well as prompt quoting and policy issuance are key to the operation.

Underwriters must also be prepared for a gradual buildup of the portfolio during the period that rates and forms are filed and approved by the various states. It's considered feasible to be up and running in approximately 30 states within 90 days, while the remaining states may take up to a year to grant approval.

These necessary requirements deter a number of potential entrants into GA– hence the comparatively small number of facilities in this class.

There are currently 17 facilities writing GA in the United States, plus one excess liability facility. Although this is an increase in number from the early 2000s, it is a considerable decrease from the early 1990s, when a much larger number of facilities wrote a considerably lower total premium volume.

On the reinsurance side, the majority of capacity in this sector is provided by the European market, with the rest coming from London and Bermuda. Very little reinsurance capacity comes from the United States.

The bulk of this worldwide reinsurance capacity is provided on a proportional (or quota-share) basis, with few facilities protected on a nonproportional basis.

Reinsurers have, in general, enjoyed supporting profitable accounts, with gross incurred to earned loss ratios running from the low-40s to the mid-60s over the past 10 years.

Compared to other classes, GA tends to be less prone to natural catastrophes such as windstorms, since the assets can be moved from the danger zone–and many insurance policies reward the owners for doing so.

In general, the GA market's balance of probable maximum loss versus total market premium is far more attractive than the airline market, whose very high exposures are matched against a worldwide total premium volume which is currently running some $1 billion less than that of the U.S. GA market.

These are interesting times for the GA market as it sees further expansion in the demand for aircraft combined with pressure on insurance rates and rumblings of new players considering this market.

However, many potential new markets may well be deterred by the costs and constraints of entry. In addition, a number of current markets may withdraw if GA prices continue to soften in the next few years in conjunction with a hardening in airline rates.

A weaker market will also no doubt influence the profitability of the reinsurance carriers and, despite good results over the past few years, this may mean a reduction in future reinsurance capacity.

All of this may stem the continuing reduction in rates in the majority of subclasses and cause GA insurance rates to harden in the future.

Main Art caption (private jet):

Special Reports /

Are There Blue Skies Ahead For The General Aviation Insurance Market?

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