Why insurance rates are increasing 10 to 100 percent

AOPA President Mark Baker and other AOPA leaders have met with numerous underwriters and insurance executives to understand what is happening in the insurance market to cause premium increases of 10 percent to 100 percent or more in some cases.

The change is a result of a “hardening” of the insurance market after more than a decade of flat to (in some cases) decreasing premiums. However, as the insurance companies have sustained significant losses in aviation and other markets in recent years (think hurricanes, tsunamis, floods, earthquakes, and fires), losses have outpaced premiums. That has caused some insurers to exit certain markets, including aviation. In order to be profitable, those that remain have increased premiums—in some cases dramatically, particularly in the owner-flown turbine market and for older pilots. AOPA continues to be involved in helping to educate insurance underwriters about the continually improving general aviation accident rate as the AOPA Air Safety Institute works to create training materials to help pilots fly safely. In the meantime, members should not let their policies lapse.

To help understand the changes in the insurance market, we turned to Bill Behan, CEO of AssuredPartners Aerospace, AOPA’s partner in hull and liability insurance for members. In the in-depth interview, he uses his 40-plus years of experience to explain the dynamic marketplace and hints that more increases will come before things begin to flatten out in 2021. He also offers some suggestions for pilots on how to mitigate some of the increases they will face.

1. Please explain what is happening in the global insurance markets and, separately, inside the aviation markets, that is contributing to the increases owners are seeing in aviation.

Insignificant premium levels to support aviation industry losses are the prime culprit for the increases AOPA members, as well as others, are experiencing today. All the aviation insurance premium in the U.S. last year was between $1.5 billion and $1.6 billion. That premium included space (satellites), airlines, manufacturers products, and general aviation. The aircraft most AOPA members fly are in the pleasure and business insurance niche, which is sustaining the least of the increases in premium costs thus far.

2. How many underwriters are active in the GA market, and how has that changed in recent years/months?

Currently there are technically 15 insurers, albeit one of those insurers has three franchises from which they market their product lines to consumers. This number was 20 a year ago. Maybe a more focused question for general aviation aircraft owners is how many insurers will provide coverages for AOPA members. Therein the problem lies. Every insurer has changed their appetite for risk in the past year, which means they can insure the same aircraft and member they insured last year, but they no longer wish to do so. Or, they will only provide coverage for a portion of the requested coverage, thereby requiring the broker to seek other insurers to add to that placement in order to fulfill a 100-percent capacity in order to assure coverage for the aircraft. This is titled a “quota-share placement,” quite common in the Lloyd’s market for centuries, but not the norm for the U.S. market. It spreads the risk among more than one insurer in the event of loss, normally seen on higher risk placements, such as owner-flown turbine fixed or rotor wing, or underqualified or older pilots. Any category which insurers look upon and in their sole judgment, they believe they don’t want all the risk on a placement, they will offer a price for a percentage of the policy and it is then incumbent upon the broker to find additional insurers to complete the placement if another insurer is not available to offer a 100-percent placement for their client.

3. What causes the cyclical swings we see in insurance premiums?

Protracted periods of soft market pricing, large losses to a line of business, a [catastrophic] shock to the line of business, or poor performance by other lines of insurance business, which impacts insurers’ need to increase revenue to support their financial balance sheet reserves. In the case of our current hardening swing, what has precipitated this has been the first two points mentioned. Twelve years of soft market pricing for the aviation insurance industry worldwide was unprecedented. Normally, hard markets occur every six to eight years, but this has been far longer and deeper than ever before. Pricing has gone far, far below prior historic levels for all classes of aviation insurance segments. When this happens, insurers have no reserves to pay for large losses if they occur, and in the past five to six years, a significant number of large losses have occurred which have not only depleted current annual premiums paid in those years, but have also hugely impacted insurers’ reserves. Insurers now are trying to replenish reserves, “right-price” their products, and stay in the business. They can only do that if a particular line of insurance business is self-supporting and not requiring the insurer to draw from reserves to fund today’s losses. If they can’t be self-funded, those insurers will likely be out of the aviation insurance business, decreasing the number of insurers from 15, reducing the competition further, increasing pricing further, and tightening underwriting further. In my 40-plus years in this business, I’ve seen this go beyond the stage where it is today to a point where there were six insurers. That would not serve the AOPA membership at all. It should also be known that normally there is a lag between insurers underwriting a policy, resultant losses realized from those policies, and then corrective reactions by insurers—all of which takes three to five years. Accordingly, it can take a while for insurers to recognize the hole they’ve created, but quite often once realized, they usually respond swiftly, taking action to fill the hole which often is several years of results that have either been ignored or insurers have hoped their luck would change. As in any business plan, luck should not be a strong component from which future financial results are dependent.

4. How long might this hardening of the market continue?

Our prediction is that in Quarter 3 or Quarter 4 of 2021 some relief will be seen and 2022 will likely be even better. What does that mean? Pricing will likely stabilize on a higher plane for all aviation insurance and stay there for the next three to four years, but the underwriting usually starts to loosen after two years whereby some of these quota share placements might not be as prevalent and insurers may return to 100 percent placements (that’s a guess). Training requirements which have stiffened will likely relax starting late 2021 and thereafter. Pilot age issues will likewise improve along those same timelines. All of these are our best estimates, but given our depth of experienced personnel on our team, this is historically what has occurred.

5. We have heard that owners of single-engine turboprops can expect increases of 25 percent or more in premiums in each of the next three years, while other categories might be closer to 10 to 15 percent. Does that sound accurate?

We are advising our owner flown turbines [policy holders] to expect more than the 25 percent for their next renewal. The following years will also increase, but likely by a lesser percentage. For example, we’ve had several clients renew their policies with increases between 20 and 110 percent depending upon their liability limit, their age, their experience level in the aircraft, value of the aircraft, etc., and we don’t think next year’s renewal will be similar. Likely a 15- to 20-percent increase may be expected, but at this time, it is too early to predict. In regard to piston-owned/operated aircraft, for the most part, not 100 percent, but mostly we are seeing a 10-percent or less increase in pricing if the liability limit is $2 million or less. If over $2 million, the insurance market may not offer the limit or it will be dramatically more expensive. There have been times when insurers have been unwilling to insure owner-flown aircraft with more than $5 million liability for turbines and $1 million for pistons. Today, we have some clients with $20 million on pistons and $100 million on turbines, which is a sign of how the insurers’ underwriting guidelines have loosened in the 12 years of a soft market. Now, however, when they have all realized they are financially in trouble, they revert to their core underwriting knowledge, take as little risk as possible, placing more importance upon their survival compared to customer relationships because their existence is more important to them.

6. How does the hardening market affect owners’ abilities to get higher liability limits?

It is painful now for an aircraft owner to secure liability limits higher than what they currently have in most cases. It’s not a matter of paying a higher premium. It is simply not available in most cases. There is no set standard currently, but in canvassing insurers, their guidelines suggest they will not incur a loss greater than $2.5 million for any pleasure and business policy. Some insurers’ threshold levels are as high as $5 million but only for exceptional risks. That is hull and liability combined. Some companies have thresholds lower than that, few higher. So, if you have a member with a new $1 million hull, and they want to purchase a $2 million liability limit, that places that insurer at a potential max exposure of $3 million. That creates a series of underwriting hoops which the broker then has to share with the client, addressing training, where the aircraft is maintained, pilot age, etc. Every request for higher liability limits is scrutinized more fully today not only for premium cost, but also for whether it fits the underwriter’s parameters for a higher limit.

7. Aside from 2019, GA has generally seen improving safety numbers over the past couple of decades. It appears that activity levels are up, so even with an increase in accidents in 2019, the actual rate may be flat. How much does the accident rate play into the setting of premiums—or is it more related to individual risks for a particular pilot?

This is a tough question to answer. Let us share an easier story to follow: Imagine living in Orlando, Florida, inland from the coasts. A hurricane impacts the state, damaging South Florida, both coasts heavily incurring Category 4 wind losses 150 miles from you. Nevertheless, there’s $70 billion of damage done to the state’s infrastructure, roads, refineries, buildings, personal property of inhabitants of the state, marine property, businesses, airports—everything was impacted south of Fort Lauderdale and Fort Myers. Within the year, gasoline taxes, sales taxes, property taxes, auto insurance, and property insurance all go up 30 to 50 percent for everyone in Florida. While it didn’t rain a drop in Orlando, not a shingle on your roof was disturbed, for the next five years, you get to enjoy those increased costs. Why? Because you’re in Florida and a basic principle of insurance is best described as the sharing by “a group of people contributing premiums into a pool of monies to support a select few who may need financial assistance when one of those people of the group incurs an insured loss.”

Back to AOPA and your question: You’re in the group! Many, many of the commercial aviation businesses are seeing well over 50-percent increases. Point is this, the insurers are trying to apportion the increases to where the damage has come. The pleasure and business segment has hurt them the least—with some exceptions, like high valued aircraft with high liability limits. Helicopters are up 30 to 150 percent. Airlines are facing 35- to 50-percent increases and that still won’t be enough. Satellite insurance will likely double. Airports, up plus 50 percent. Manufacturers products liability insurance, up plus 25 percent.

8. Has the Boeing 737 Max situation impacted GA premiums?

Absolutely, as have other airline-related accidents.

9. What can individual pilots do to help mitigate potential premium increases?

Work with their insurance brokers to provide all the updated flight experience information, aircraft information, and training updates possible. Some aircraft owners may want to consider higher hull deductibles in order to trade premium concessions for self-insuring deductibles. Some insurers simply are not interested in such trades; others may show some premium breaks for enough increases in deductibles, especially of turbine aircraft. Deductibles of $25,000 to as high as $100,000 are not considered unrealistic by some turbine aircraft owners who may want to trade their ability to sustain a hull loss of that size for the need to have high liability limits, which have become very expensive, and an aircraft owner chooses to limit their insurance spend accordingly. This is a strategy which could be employed for two to three years and modified when the market begins to improve. Remember this, however, hull deductibles apply to foreign object damage as well, so increasing deductibles for turbine engine aircraft places more risk upon the aircraft owner for those uncontrollable birds, rocks, etc., which can cause costly damage to turbine engines.

10. How much does pilot age affect premiums, and what can older pilots do to help manage their insurance costs?

Obviously the members cannot change their age, but if they are willing to secure the most demanding medical possible in lieu of their normal third class medical, that sometimes helps. Attending recurrency training helps, whether in their aircraft or in another make and model for which they receive a certificate of completion. These are helpful to then present to the member’s insurance broker and have the broker make certain insurers take this into consideration that this pilot may be age “X,” but look at what they have done in the past six to 12 months, setting this pilot above the norm. If they want treatment above the norm by insurers, at this time, they have to be proactive. We encourage that, but it is up to the pilot to do so, providing us the resources to negotiate with insurers on their behalf.

11. The insurance industry seems to place a lot of emphasis on the importance of simulator-based training. However, with so many aftermarket avionics solutions now available, often the simulators don't reflect the panels that pilots are flying behind, particularly in legacy airplanes, including turbines. Is there any movement toward placing greater value on in-airplane recurrency flights?

Unfortunately, underwriters today are much less skilled aviators versus gamers. Honestly, the percentage of pilot underwriters who are making decisions for your membership may be at an all-time low, which is problematic as these underwriters understand sim training is good because there are standards that they’ve been told, “sim training is good.” That is not to say sim training is not good. We strongly believe [in] and support it. However, your point is well taken, especially given the myriad of avionics packages out there which populate aircraft, especially legacy aircraft, and that makes this a very, very challenging matter. Take into consideration the scenario where an insurer who historically has covered a member’s aircraft and now says they want 30 percent more and only want 50 percent of the risk and will not agree to the $10 million limit but will agree to offer only a $5 million limit. That renewal which consumed five to eight hours of a broker’s time last year, just went to about 30 to 40 hours to thoroughly serve just that one client. The broker must approach a dozen other insurers now to find that other 50 percent—some of which may have already rejected it at 100 percent. Then, after submitting to the dozen insurers, phone calls discussing the aircraft, loss history, avionics packages, training history, and oh, by the way, we don’t want to use SimCom because our panel is different than what SimCom has in their Meridian, and one, by one, by one, the dozen insurers drop to one or two and the price keeps going up. I think you get the picture. In the melee of the process of a renewal, right now, the first year of the market turning hard, these insurers just don’t want to hear it. This will be something which, in 2021 and 2022, brokers can use to help loosen the grip insurers have upon us all to bring reason and common sense back into the market, hopefully.

12. We are hearing that some underwriters are unwilling to accept BasicMed for older pilots and that some are even requiring pilots take a third class medical exam every year. What are you hearing?

We’re hearing the same mixed messages. I suspect insurers are looking at BasicMed and in some cases, opting to revert to the third class medical protocol and requesting that it be done annually, just to be able to respond to those above them in the organization when asked, “Why did you underwrite this risk?” As noted earlier, “If they want treatment above the norm by insurers, at this time, they have to be proactive,” which a third class medical certainly would be proactive at this time for aging pilots. And, as I also noted, “Unfortunately, underwriters today are much less skilled aviators versus gamers,” which in our opinion, their belief is third class medicals are better than BasicMed approvals for pilots and will result in fewer losses. We’ve not seen any data to support that as yet, but underwriting today is more in the hands of actuaries and not those who have any aviation knowledge, skills, or passion.

13. How are the changes in the market affecting insurance for flight schools and those who lease airplanes to flight schools?

Flight schools are being hammered with increases and liability limits are being curtailed by insurers wherever possible. Many flight schools are requiring their students to purchase non-ownership liability coverage (often called “renter’s insurance”), the same as what is available to the AOPA membership, in order to provide some insulation of the flight school’s insurance policy if a student damages a flight school aircraft or incurs a bodily injury claim.