All this talk about a “new normal” of predictable unpredictability at first seemed like a post-pandemic cliché to me, but I’m beginning to think there’s more to it. Who would have thought we’d see inflation reaching high single digits, mortgage rates exceeding 7 percent amid an economy headed to an elusive “soft landing,” regional airline first officers earning more than fast-food wages, or me flying an instrument approach to near minimums through smelly wildfire smoke to get into Teterboro, New Jersey?
The aviation insurance market hasn’t proven to be any more predictable than the world at large. One would expect rates to stabilize after five years of increases, but they are still going up. Similarly, underwriting criteria haven’t loosened and are still tightening in certain areas, such as war risk. This volatility is driven by largely unforeseen domestic and global factors. On a domestic level, inflation of parts and labor and stubborn supply chain issues continue to increase costs to settle hull claims. Also, attorney rates and litigation costs are rising, so insurers pay more even if they prevail in successful defense of their insureds. Globally, the market is facing billions of dollars of unexpected claims because of the Russia-Ukraine conflict, followed closely by the $3 billion Boeing 737 Max claims saga. And to add insult to the injury of unpredictable outcomes, aircraft that were destroyed in the Sudanese conflict earlier in 2023 could result in another $250 million to $300 million of losses.
It’s worth reiterating that aviation premiums are collectively small on both a national and global scale, and aviation breaks the “law of large numbers,” a cardinal rule in actuarial science that predicts outcomes with reasonable accuracy if there are enough similar exposures to consider. At the risk of oversimplifying a complex underwriting process, we can demonstrate this concept with a simple coin-flip exercise.
We can predict the outcome of a standard coin flip will result in heads 50 percent of the time. Try flipping a coin 10 times and see if you get five heads. You probably won’t. Now try flipping a coin 100 times or even 500 times if you’re ambitious. I’m sure it will be much closer to a 50 percent outcome. With so few similar exposures in aviation insurance, we are the 10-coin-flip gamble of the insurance world, whereas on a relative basis boat insurance would be about 900 coin flips and auto insurance would be 10,000 coin flips.
You might be wondering what this all means for where aviation insurance is headed in the next two to three years, and we’ll address that. But first let me paint a picture of where we are today.
The good news is insurance rates for pleasure and noncommercial, business-use piston aircraft—being further removed from international shock losses—have largely stabilized, and we are seeing increases in line with inflation. This is particularly the case for basic trainers and common models with many serial numbers in service. Factors that continue to pose an underwriting challenge include low-time pilots in high hull value and/or retractable gear aircraft, make/models with limited parts availability, experimental aircraft, and older multiengine pistons.
While pilots over 70 years of age will continue to face challenges finding options for new aircraft purchases, we find most underwriters willing to renew coverage for pilots who have demonstrated loyalty to the same insurer over many years, though liability limits may be lowered, and operations under BasicMed might be off the table. More underwriters are now willing to insure new aircraft purchases for pilots as old as 79 in basic, fixed-gear models such as a Piper PA-28, Cessna 172, or even a Cessna 182, especially if the pilots are high time and instrument rated.
Commercial operators flying piston aircraft, such as flight schools and charter companies, will likely face higher increases than non-commercial operators, but still lower than what we saw in 2020 through 2022, unless there has been notable claims activity. Unfortunately, commercial piston operators may still find few competitive options at renewal time because these accounts are manually rated. Insurers have not been immune to staff shortages that plague many industries, and underwriters need to prioritize what they work on because they often don’t have time to get through every submission on their desk. If you are unhappy with your incumbent insurer for some reason other than price and want to make a change, it helps if your broker communicates that sentiment to their underwriters because they are more likely to quote when they know there is a realistic chance to win an account.
Another positive sign we are seeing is that several new insurers are entering the piston/light aircraft market. It is too early to tell how competitive these new insurers will be and to what extent they will disrupt the market status quo, but an expansion of insurers is usually a sign of a hard insurance market about to turn the corner.
Turbine: Owner Flown
The owner-flown turbine segment, which includes turboprops and jets, continues to be a tough nut to crack. Because rates were so depressed for so long, and many insurers suffered high-dollar losses as a result of large hull values and liability limits, it’s taking longer for this sector to recover.
Increases here will generally be higher than inflation and may come with decreased liability limits, fewer ancillary coverages, and higher hull deductibles. But most insurers are still willing to renew existing accounts until pilots reach their mid-70s.
Pilots new to the turbine market need to be strategic about their transition plans. It helps to find an airplane that is as similar as possible to the one you’ve been flying. For example, a Cirrus SR22 to a SF50 Vision Jet, or a Piper Malibu to a Piper Meridian are the sort of transitions that are viewed favorably by underwriters if a pilot is instrument rated with at least 1,000 hours total time.
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With regard to training, I implore turbine transition pilots not to request “in-aircraft” initial or recurrent training for the first three years. I’ve already heard every possible justification for it and so have your underwriters. Nothing is going to change the fact that simulator training is the gold standard to insurers because of its thoroughness and standardization, and requesting a waiver early on in your turbine career may negatively bias how underwriters perceive your attention to risk management, safety, and training. High-time turbine pilots with substantial make/model time who are under 70 may be able to obtain approval for in-aircraft recurrent training if not annually, then at least in alternating years.
On the positive front, we can usually obtain an insurance solution for even the lowest time turbine transition pilots if they’re prepared to pay, able to accept basic liability limits, and willing to allow a mentor CFI to babysit them from the right seat for 50- to 100-plus hours. For example, we recently quoted a student pilot in a Cessna Caravan for a six-figure insurance premium and have written Cirrus Vision Jets for sub-400-hour pilots at around a $75,000 annual premium.
Turbine: Professionally Flown
Corporate or commercially operated turboprops and jets fall into a different and more favorable rating tier than owner-flown risks. Accounts with favorable loss history are generally seeing increases at least in line with inflation but less than owner-flown turbine accounts. War hull and liability coverages have doubled in many cases because of the aforementioned global conflicts, but these coverages are fortunately a small component of the total premium for domestic aircraft without significant international exposure.
Many commercial operators have seen flight activity pick up in recent years. While premiums aren’t normally rated or audited for annual hourly utilization, claims activity in the form of weather events, bird strikes, and hangar rash usually increase with utilization. We’re seeing the effects of this reflected in higher loss ratios and rate increases greater than average for commercial operators who are flying more.
There remains competition for and favorable treatment of “best-in-class” risks in the professionally flown turbine world. You can separate yourself from the rest by living and breathing a culture of risk management, pilot proficiency, and safety that goes far beyond an SMS program. Top accounts in this segment will proactively seek input from their insurer’s safety and loss control departments for improvement and select one or several underwriters to partner with to achieve a long-term, mutually profitable relationship for both insurer and insured.
Now to predict the unpredictable, let’s circle back to my earlier exercise and flip another coin. I call heads, the market gets better, and tails the market gets worse. I can tell you with nearly 100 percent certainty that one of these two outcomes will be correct and also that we’ll be in for an interesting and unforeseen ride along the way.
This story first appeared in the September 2023/Issue 941 of FLYING’s print edition.