As 2022 begins, inflation is a recurring conversation topic. It has become impossible to ignore the increased expenses associated with everyday goods, services and commodities. As aviators, we are mindful of the expenses associated with operating our aircraft. The King Air community, as with all turbine aircraft, has seen an increase in their insurance premiums. The aviation insurance market has been in a hard state for nearly three years. The premiums have been increasing, while ancillary coverages have been decreasing or eliminated altogether. Within the industry, it is a constant discussion of what has caused the increases in hull and liability premiums and when it may peak. Finally, we have reasons to believe the aircraft insurance market may be improving in 2022 or at least be “less bad.”
Before 2019, King Air premiums were at all-time lows with unbelievable coverages included. Annual full-motion, simulator-based training wasn’t necessarily a firm requirement and ancillary coverages were broad, offering higher liability limits that were easily obtainable for single pilot operations. Insurance carriers also didn’t cringe when you signed an FBO hangar lease waiving their rights to subrogate for damage that may have been caused by a line attendant.
A strong attribute to the soft market was an abundance of supply. By some measure, there were three times as many companies writing King Air insurance in 2018 as there were in 2002. The competition for your business sent rates plummeting. This cycle lasted for over a decade as carriers entered the aviation sector and earned business by offering the lowest quote. Many of these companies ended up incurring substantial losses and abruptly left the aviation sector. But as one carrier left, another was entering, keeping your premiums low. However, by mid-2019 the market changed. As one insurance company exited the aviation market, there wasn’t one lined up to replace it. Essentially where supply had once been abundant, it was now suppressed.
The discussions about what was, or is, driving the premium increases vary. While in the FBO at my local airport I overheard a group of pilots discussing their insurance rates and one gentleman said, “The insurance company told me they are in the business to make money so they had to raise their rates to offset the losses.” While everyone understood the logic, the group still smelled greed from the carriers. But when you look at the news headlines over the past three years it’s difficult to argue their point. Consider all of the factors that trickle down to affect your rates: The Boeing 737 MAX, multiple hurricanes with massive losses, the tornado that ripped through Nashville and the hangar collapse in Dulles from a massive snowstorm. Additionally, there were several rotor wing fatalities with large losses, including the crash that killed Kobe Bryant and eight others. In 2021, we also witnessed Citation, Challenger and Gulfstream crashes, just to name a few. While the hulls will be paid quickly, the reserves for liability won’t be paid out for quite some time and will most likely result in tens of millions of dollars, if not over $100 million for each of those business jet losses when they eventually settle.
Multimillion dollar lawsuits, followed by significant jury awards, have a meaningful impact on the aviation insurance industry. The insurance companies invest the premium dollars they collect. When $1 billion of premiums are paid into the system and investments turn it into $1.2 billion, but third party liability payouts, in addition to totaled aircraft hulls, equate to $1.4 billion, the deficit determines that premiums must increase.
Our aviation insurance industry is a tough puzzle to solve. We have attritional losses nearly every day and, unfortunately, the occasional catastrophic loss. Capitalism is attracted to cash flow, and there is a lot of it in aviation. In some cases, it simply comes down to luck of the underwriter. Every carrier is one major loss away from either making money or losing it during their fiscal year. It is hard to argue the basic economic principle of “supply and demand” and the impact it has on your insurance premiums.
As 2021 concluded, we saw record demands for insurance coverage. As hull values and hours flown increased paired with a tight supply of aviation insurance companies offering coverage, we saw rates continue to increase as the demand for coverage exceeded the market supply. Compounding the limited supply was the buyers’ demand to have every carrier quote their renewal in hopes of reduced rates. Aviation underwriting in the turbine market is manually processed. One underwriter can only handle so many submissions each day, in addition to servicing their current client needs such as issuing certificates, reviewing hangar leases, etc. To alleviate their workload, they must decline new submissions, increase rates on existing clients or both. This overload also puts time constraints on the buyer, as they may not see their renewal proposals until just before their current policy expiration date. In December 2021, www.NBAA.org published an article, “Experts Offer Aviation Insurance Best Practices,” which included some good pointers about how to get the most attention from underwriters and make them want to insure your aircraft. Joe Williams was quoted saying, “… underwriters can recognize patterns of professionalism from seemingly small variables, such as the neatness and completeness of your application or renewal and pilot history forms.” The current market is tough, and this is an easy step to increase your appeal to the underwriters.
As I mentioned earlier, there is hope for 2022. History has shown that the general aviation market traditionally follows the airline insurance market. Airline renewals are a good indicator of what is coming to the GA industry. As 2021 closed, the airline sector had more capacity for their renewals moving into 2022 than in previous years. It is reasonable to hope your upcoming policy will bring a flat renewal, which is an improvement from significant increases of previous years. Adding to the supply is a new carrier, Applied Underwriters Aviation. This group is comprised of aviation underwriting veterans who left a leading aviation carrier to compete specifically in the turbine market. Their former employer is fighting back by recruiting some top talent from other carriers to hold their market share. This competition could yield the King Air community some much desired relief. Applied Aviation Underwriters informed me they intend to insure King Airs, as well as other turbine aircraft.
Typically, soft markets last longer than hard markets, and the indications in the aviation industry are that the hard market may be coming to an end. Applied Aviation Underwriters has already put business on their books and will continue to expand their offerings in the market. Depending on the state you are located, you may start seeing Applied Aviation Underwriters’ quotes from your broker as early as March or April. Hopefully by the fourth quarter of 2022, you may start seeing the decreases. In the meantime, watch for the wild card that could derail this prediction, or cause it to be short-lived: The increasing cost to adjust claims, combined with the appreciation of used aircraft and the record number of business aircraft utilization.
If general aviation remains strong through increases in number of aircraft movements and increased hull values, two things will occur. There will be more claims and the costs to fix aircraft will be higher. Adding fuel to that flame would be the economic cycle of not enough people to repair the airplanes and parts availability. That’s a concern worth noting, which would read as an inflationary hard market for objective reasons and not just a carrier supply and market demand relationship. Turns out, it’s not just a pilot shortage, but a shortage of aviation professionals in all areas of our aviation ecosystem that is adding cost to our passion for flying.