The Bad Old Days, as one could call them—the 1980s through the mid-2000s—represented a period of high losses for the aviation industry. Not only were aggregate claims high, but seven of the 10 deadliest aviation disasters occurred during those years.
Since then, major incidents have diminished, and it has never been safer to fly. The number of fatal accidents in 2012 was lower than it has been since 1945. Today, there is less than one fatal accident for every million flights, according to Swiss Re—the lowest in decades.
Several factors have contributed to the decline in fatalities. Technological factors include significant improvements in communication and navigational devices, such as enhanced ground proximity warning systems (EGPWS), alert and collision avoidance systems, and widespread use of GPS navigation across both commercial and general aviation. On the process side of risk management, increased requirements for pilot and personnel training, safety management systems (SMS) and continually improving cockpit resource management have all contributed to low accident rates.
Dovetailing with that decline in fatalities has been a drop in losses to aircraft, particularly in U.S. domestic flights. Prior to the Asiana Airlines crash in July, all the hull and liability losses in excess of $10 million in 2013 occurred outside the U.S., according to Willis, along with the vast majority of other significant losses. Worldwide, insured losses fell to a 10-year low of less than 0.01 percent of total insured fleet value. Although partial losses have ticked up, they have been more than offset by the total loss drop. As a result, the industry's loss ratio fell to 56.0 percent in 2012—down from 63.6 percent in 2011 and less than half of what it was in 2009.
Yet despite the current era of low losses, insurers must avoid becoming complacent.
“Over the three years 2009-2012, we've seen a sharp decrease in losses, but three years isn't a very long time,” says Ginger Turner, senior economist based in Swiss Re's North American Headquarters in New York. “Continued underwriting discipline is important.”
Many of the technological innovations implemented have involved improving the safety of flight operations. However, it's not just flight-related catastrophes involving loss of life that lead to large insurance claims. “You can have a ground-handling accident that creates a multimillion-dollar incident, but it will never make the evening news,” says Jeff Rasmussen, president of Aero Insurance LLC.
Rasmussen points to one instance in which a charter flight pilot attempted to taxi the plane without ensuring that the tug was disengaged, causing the plane to hit a light pole and creating substantial damage. In another incident, a fixed based operator (FBO) pushed a Gulfstream into another corporate jet. (FBOs provide such services as aircraft fueling and maintenance, hangaring and parking, rental and charter services.)
Also, with fewer than 20 insurers handling the domestic market, the potential for concentration of risk at any one company is high. In Rasmussen's second example, a single insurance company wrote the insurance on both jets involved in the collision as well as the FBO that caused the accident. “The company ended up paying a $6 million claim while collecting a total of just $85,000 in premium for all three accounts,” says Rasmussen.
Also, attritional losses are a constant. “Gear-up landings, storms coming through doing hail damage to a lot of aircraft, weather events that will hit an airport such as tornadoes and lightning strikes, bird strikes, hard landings—all those happen on a consistent basis,” says Kyle Sparks, chief underwriting officer at Starr Aviation.
In a specialized marketplace, any carrier has to demonstrate claims expertise in order to write business. To differentiate themselves, insurers augment the value of their claims handling through proactive loss-control services. The aviation industry has been focused in recent years on SMS, which encompass a holistic, data-driven approach to managing risk. Carriers are providing resources that brokers and customers can use to augment SMS and focus on the human element of claims control.
“Education is a key element of safety and claims reduction,” says David L. McKay, president and CEO of United States Aircraft Insurance Group (USAIG). He points to USAIG's Performance Vector Program, offered to turbine-powered aircraft operators, which incorporates training, webinars, subscriptions to USAIG safety publications and a “Safety Bucks” program for helicopter operators that offers credit for flight proficiency training.
Whether the recent decline in airline losses represents a lasting change remains to be seen. However, no matter how comprehensive safety processes are, the potential for catastrophic losses caused by equipment or human failure is a significant risk—and insurers must be prepared for any claims that happen in a low-frequency, high-severity business.
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