Page 40 - mmopaMJ21

to the aircraft owner due to the huge capacity and competition between insurers to underwrite policies. Simple economics dictates that new insurers aren’t going to write much business
if they offer the same or higher rates than legacy insurers are offering. So we saw “new” insurers in the space undercutting premiums from the legacy carriers and thus the softening of the market took hold, which is essentially a race to the bottom.
We saw historically low premiums, high liability limits available and somewhat lax training requirements as insurers all competed for your business insuring the Meridians down to the early model Malibus. The period of time from 2010 until 2018 was certainly a buyer’s market. In fact, PA46 owners were able to buy a better policy in
those years for less money then you could in the early 2000s relative to the comparison of like-hull-valued aircraft. This soft market continued for an abnormally long period in terms of market cycles, but did start to self-correct until late 2018. For the first time in years, aviation insurance underwriters were writing business at what turned out to be unprofitable premium offerings.
Outside Forces at Work
While losses (number of claims) weren’t significantly higher, some key data points made the dollar amounts paid out significantly more. The
first, and most widely known, are
the Boeing accidents and resulting claims from the 737 Max grounding (grounding liability claims against Boeing’s insurance coupled with the hull and passenger liability claims on the aircraft involved in the accidents). Originally the reserves (money set aside to pay claims) was set at around $900 million. Recently I heard that reserves have been increased to more than $2 billion. While not all underwriting companies were directly involved in these claims, its impact was felt across the board with all aviation insurers with even a small participation on the primary policies or via re-insurance
costs given the re-insurance market tightened overall in aviation.
Along with the Boeing accidents, there were a number of other high- profile accidents with high reserves being set – Kobe Bryant S76 crash, the PC-12 accident in South Dakota, the Chris Cline AW139 helicopter accident in the Bahamas, and the King Air 350 crash in Addison, TX to name a few. All aforementioned were catastrophic loss of life (high passenger fatalities) in addition to the high-value hull losses.
Another factor driving higher
dollar amounts being paid out is that aircraft are more expensive to acquire (asset values) and in most cases more expensive to repair when damaged. For example a late 1990’s Mirage was half the cost new to purchase than a 2021 Piper M350. Certainly the asset value of the M600 has doubled the asset value of the PA46 product from the early 2000’s. The price of owner-f lown turbine aircraft overall (i.e., Cessna Citation M2, Cirrus SF50, PC12NGX, TBM 940, M600. HondaJet) has also skyrocketed in the past decade. Even without an aircraft being totaled, the cost to repair a damaged aircraft has increased substantially due to cost of parts, labor, raw materials, etc.
Finally, the sheer number of
natural disasters (i.e., tornado, fires, hurricanes) occurring in the past few years delivered a major hit to the entire property/casualty insurance industry. Unfortunately, aviation insurance is such a small market segment, but its policy holders are directly impacted by natural disasters, which are weather- related or acts of God. The Tune Airport (Nashville, TN) tornado for instance wiped out $100 million in aircraft in addition to the property/ building destruction that took place on the field. All aircraft policy holders have trickle down impact as a result of this type of event and large property losses via aircraft insurers who paid significant claims to policy holders impacted by the tornados.
To that end each year, aviation underwriters buy “reinsurance”
policies from large global firms to protect themselves from potential losses. These reinsurance companies cover all different types of risks. So, when hit with all the natural disaster- related claims, reinsurers have higher rate structures for their re-insurance products, which results in a cost increase to the end user – in our case the aircraft owner.
As I mentioned earlier, I expect this trend will continue through 2021 and we hope to see some “flattening” in 2022. Most of the underwriters we have spoken with suggest that increases of 10 percent-plus will remain commonplace, which is somewhat down from the
25 to 50 percent-plus percent changes we were seeing throughout 2019
and 2020. We’ll likely have a better idea on 2021 shortly, but this far we have seen increases dropping down in percentages compared to last year’s renewals.
In addition to rising premiums, underwriters are also more closely reviewing risk and being more selective in the quotes they offer. Many are not actively pursuing new clients and just trying to maintain their current clients and become profitable again. It is now not uncommon to have a PA46 class aircraft renewal garnering perhaps 1 to 3 quotes in total. Some policyholders are seeing only one renewal bid and that is from the carrier who insured them last year. Again, the market has become much less competitive than
it was in 2018 and prior so. Don’t be alarmed if your broker returns only 1 or 2 quotes for your PA46 renewal.
Glimmers of Light
We do however see some positive signs in the space as it relates to the PA46 class – mainly in the hull value(s) and current insurers’ appetites. All Pipers from the M600 on down are
$3 million or less asset value. This yields the maximum amount of underwriting options compared to other OEM’s (Daher, Pilatus and Textron) as competitors’ products are all $4.5 million or higher in asset value. High-value assets with owner-flown
40 MMOPA MAGAZINE MAY / JUNE 2021