Insurers Gaining Altitude…Barely. BY BILL BEHAN, CHIEF EXECUTIVE OFFICER, ASSUREDPARTNERS AEROSPACE T welve months ago, an article entitled “Arresting a Dangerous Descent for Insurers,” predicted a change in the aviation insurance market, which now is quite apparent to most General Aviation (GA) insurance buyers. After a dozen years of soft insurance market conditions, with rates steadily declining, we are now experiencing premium increases and a tightening of insurers’ underwriting stan- dards. Through three quarters of 2018, GA insurance premi- ums have risen an average of 7.8% and appear to be gaining altitude quarterly. For years, competition amongst insurers focused on pricing differentiation to maintain market share. Now insurers no longer seem concerned with this metric, in favor of simply finding a way to secure sustained profits. As predicted in the aforementioned article, the previously intense premium competition favored by the buyers of insur- ance (the insureds) was simply not sustainable long-term. Given the predictions of 2018 have come to pass as antici- pated, what can be expected for 2019? Today, three factors impact the aviation insurance market’s ability or need to move pricing: 1. Continued shrinkage of the insurable market (number of units and aircraft values available to insure). 2. The impact of increasing loss frequency and severity as the overall flying activity of GA increases. 3. The drive towards sustained underwriting profitability (this is a combination of insurer pricing, insurer over- head and claims costs). Through the third quarter of 2018, the total number of GA businesses continued to decline slightly, due to mergers and acquisitions (M&A) activity. Accounting and consult- ing giant PwC reported that global aerospace and defense industry M&A activity was 30% greater in the first half of 2018 than the same period in 2017. The number of GA air- craft, while down approximately 9% from 10 years ago, has recently remained consistent, which is a positive note. Today, there are simply fewer aviation businesses and air- craft for insurers to spread the risks without increasing rates to pay for overhead costs and the rising claims costs. Other than the unmanned aircraft systems (UAS) niche, in the near term, there is no dramatic growth forecasted for the U.S. GA industry. Dramatic or widespread growth of insurable units Aviation Business Journal | 4th Quarter 2018 would help insurers to grow their way out of past unprofit- able underwriting results with new premium growth, but unfortunately that is not available. The industry continues to see depreciation of insured hull values of the remaining GA fleet. This depreciation results in generating less insurance premium for insurers when providing hull coverage to insure the aircraft. Yet, when that same aircraft is damaged, the cost of repairing the aircraft, mostly due to ever-rising part costs, is dramatically higher than three, five or 10 years ago. Overall, this is very problem- atic to all aviation insurers and adversely affects their ability to reach profitability. On a positive note, business seems to be improving as GA activity is increasing—more flying, fuel sales, avionics and parts sales, maintenance activity, etc. However, as activity increases, so do losses. While loss frequency has statistically improved per 100,000 hours as measured by the FAA over the past 10 years, 2017 and 2018 have seen an increase in loss severity because of a large number of high-profile GA accidents. Loss severity has crept up to levels previously unheard of for both physical damage (hull) claims and bodily injury, especially fatality claims. The value of claims in the past two or three years has averaged significantly higher than the past 10 years, some- thing which many insurers may not have factored into their rate pricing models until recently. Now, insurers are antici- pating average bodily injury claim settlements to exceed the Continued on page 44 43
