Aviation insurance brokers: Prepare to cruise with confidence
Aviation insurance policyholders will likely see rates leveling out in the year to come.
Despite some headwinds, the aviation insurance market is currently cruising along with very little turbulence, according to a pair of recent reports released by two industry experts.
Alex Trotter, executive director, general and corporate aviation, WTW, rates the overall state of the industry as “relatively strong” with a healthy amount of insurance capacity available. Trotter is lead writer of the WTW report, “General aviation insurance market outlook: Q2 2024.”
Related: Why are aviation claim costs on the rise?
Meanwhile, Risk Strategies predicts that insurance carriers should be able to level-off aviation-insurance rates in the coming months, which should result in premium relief for insureds (and less tap dancing for brokers), according to the firm’s report State of the Insurance Market Report.
Dave Watkins, head of aviation, QBE North America, agrees with the generally upbeat assessments of both reports.
“The aviation-insurance industry continues to attract capital, despite very inconsistent underwriting results,” Watkins says. “It’s an appealing specialty line that compliments larger P&C portfolios well.”
Thomas Hollinger, director of general aviation, Beacon Aviation Insurance Services, accesses the landscape like this: “My overall analysis on the next twelve months is that the market will be in a bit of a plateau. The majority of the insurance markets now are finding themselves on the right side of the ledger.”
Enterprise market
New insurance products designed to cover the fast-growing unmanned aerial vehicle (UAV) and unmanned aircraft system (UAS) market are especially hot in the aviation sector. Use of these aircrafts has tripled during the past six years, according to Haley Hughey, aviation practice leader, Risk Strategies.
“North America accounts for the most revenues for small drones and UAVs, commanding more than a third of the market,” adds Trehane Oliver, managing director, McLarens Aviation. “We’ve seen the likes of retail giant Amazon announcing plans to begin drone deliveries.”
What’s spurring this rapid market growth? Increasing numbers of businesses are switching from human-piloted aircraft to UAVs and similar devices to take advantage of the tech’s lower cost and reduced risk.
“We are seeing some manned exposures shift to unmanned operations including newsgathering, security and rescue, crop dusting, consumer deliveries and film production,” says Hughey with Risk Strategies. “There are several advantages to operating UAVs, including range of motion, reaching hazardous areas, lower costs to maintenance and minimization of risk.”
As the UAV/UAS market grows, so are the sizes of some of the aircraft being insured. “It was once common to imagine a drone shaped like a small cube,” Hughey says. “But in the current market, we are insuring drones the size of a pick-up truck.”
International stressor
Unfortunately, challenging the relative tranquility of the aviation market has been a sharp elbow from the Ukraine/ Russian conflict, in which more than 400 planes — insured by American International Group, Chubb, Swiss Re and other carriers — were seized by Russia, according to Risk Strategies researchers.
Initially hit by the Russian seizure in 2022, aviation insurers and their customers are still sorting out who is at fault and what could or might have been done to avoid the loss.
Financial responsibility for the loss is also in dispute: Should insurers bear the cost of the lost use of the planes? And, should they bear the cost associated with a complete loss of the planes?
Scott Gault, senior vice president, aviation and aerospace, Newfront, predicts that ultimately, insurers will be taking a substantial hit from the fiasco.
“The number of aircraft seized in Russia that are subject to U.S. sanctions amounts to an eleven-digit figure, some claiming to be about $12 billion,” Gault says. “That would potentially be the largest claim ever recorded in aviation.”
Beacon’s Hollinger also sees significant blowback: “It no doubt will have a lasting impact.”
Hughey believes the seizures will take years to resolve: “There are countless law firms involved representing the contingent hull war insurers, the all-risk insurers, and the lessors,” she says.
That confluence of players has led to heightened sensitivity and an overall complex landscape regarding the sums involved. “AerCap is one of the more prominent parties involved originally suing their insurer for $3.5 billion dollars, with over 100 aircraft stranded or confiscated in Russia,” Hughey says.
Expanded coverage needs
Not surprisingly, many airlines and airplane owners aghast at the prospect that their equipment might face a similar fate are currently clamoring at insurers’ doors to add war coverage to their policies.
It’s a persistent trend that has attracted a number of new insurers to the war coverage market, which can be very lucrative, says Trotter with WTW.
Yet another major reverberation of the Russian seizures will be a move by many insurers during the next few years to reword their existing war coverage policies to ensure they’re less vulnerable to acts of war, Trotter adds.
Meanwhile, when it comes to air crashes, aviation insurers are dealing with a double-edged sword, according to Risk Strategies researchers.
On the plus side, catastrophic air crashes have become relatively rare events for insurers.
But unfortunately, the air crash catastrophes that do occur often trigger lawsuits and “nuclear verdicts.” Settlements for air crashes that averaged around a million dollars in years past are now pushing into eight-digit figures, according to the Risk Strategies researchers.
The trend that has shaken the market considerably, forcing insurers to respond with hefty rate increases, rewrites on policies that limit coverage, and new or increased deductibles during the past five years, Risk Strategies reports.
The silver lining
Gratefully, those rate spikes appear to be stabilizing in 2024.
A scarcity of parts and engines represents yet another stressor on the aviation insurance market. This put considerable pressure on insurers that offer insureds workarounds to handle material scarcities, such as rental of temporary replacement parts, substitute aircraft and similar options.
“Aircraft are sitting longer on the tarmac or in the hangar awaiting parts,” Hughey says. “Each day that passes costs insurers more money and prevents the client from performing normal operations.”
“For example: A hail claim can take months to settle, but while the aircraft is being mapped for damage and parts are on order, the insured is likely operating a substitute aircraft, which is additional cost paid by the insurer.
Indeed, besides impacting every sector of the aviation industry overall, the scarcity of parts challenge is hitting the rotor-wing sector especially hard, according to WTW.
The groundings of rotor-wing aircraft while they wait for parts are increasing the risk of operators, who may be forced to renege on some contractual obligations to clients as their equipment sits idle, WTW reports.
Meanwhile, yet another challenge still plaguing the industry is a significant shortage of pilots.
QBE’s Watkins agrees. “We’re already seeing some operators slow hiring and, in certain cases, offer early retirement,” he says.
However, the pilot shortage eased somewhat once airlines began to partner with training facilities and universities to punch-up pilot education, Risk Strategies says.
But pilot training is still anemic in comparison to demand. Specifically, the drive to train more pilots suffers from a dearth of training sites, constricted classroom capacity and a need for more instructors.
Moreover, freshly trained pilots entering the aviation industry have done little to solve the problem of the shrinking community of extremely experienced pilots, who are needed to fly ever more complex aircraft and jets.
Joe Dysart is an Internet speaker and business consultant based in New York City. Reach him by sending an email to joe@breakingnewsintech.com.
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