Surviving an Industry Nightmare

The commercial insurance crisis hits home

March 1, 2001

With more than 40,000 hours of flying experience, Pauline Glasson thought she had seen everything in aviation. But when she received a letter in the mail last August from her insurance company, it spelled the end of her flight school in Corpus Christi, Texas. It wasn't because she was 89 years old; rather, she became a victim in a vicious numbers game that swept the country  causing insurance rates to double, in some cases ? leaving behind a graveyard of flight schools and orphaned students.

Glasson soloed in a seaplane in 1934, was the most seasoned racer on the Powder Puff Derby circuit, and was an early member of The Ninety-Nines. Although she's not sure how many students she's taught, not one ever failed a checkride, and she had a perfectly clean accident record ? yet she couldn't find commercial insurance at any price. (After months of not being able to teach in her own airplane, Glasson received word that she might be getting insurance, but she hadn't seen anything in writing at press time.)

"I devoted my life to aviation. It makes me sick that I can't continue on," she said, having to turn away 11 students.

Like many other small flight school operators, Glasson received a letter from Avemco Insurance Company saying that the policy for her Cessna 152 would expire in 45 days without a renewal option. In a follow-up e-mail to one of Glasson's concerned students, Avemco described the move to pull out of the commercial insurance market as a strictly "business decision" because of "extremely high losses suffered." (Avemco was barred from commenting to the media by its parent company.) The message concluded with, "You may not agree with our decision to leave the commercial market, but at least you understand this had nothing to do with Ms. Glasson."

Actually, the whole commercial insurance crisis had nothing to do with Ms. Glasson personally, even for someone who had played by the rules from nearly the beginning of aviation. When Avemco decided to focus on the noncommercial market, it touched off a panic for its customers at a time when other insurers were already in a state of flux. The difficult market correction involved several factors, some cyclical and some unpredictable, that came together at a time when general aviation was lifting itself from the doldrums. The tremors would be felt all the way down to the renter pilot who saw his hourly rates increase in the rising tide.

A brewing storm

In the mid- to late 1980s the insurance industry was flourishing. Even companies that weren't involved in aviation suddenly saw it as a viable market and, in fact, pilots were paying more to insure their cars than their airplanes ? the rates were set far lower than the risk that the insurance companies were taking on.

But the number of new aircraft being built was shrinking. A cry went out to do something about product liability reform to protect manufacturers and ultimately bolster GA with the production of new airplanes. After the General Aviation Revitalization Act (GARA), which received wide support from the aviation industry, was signed into law in 1994 to limit liability on older airplanes and parts, Cessna began making airplanes again and Piper emerged from bankruptcy. Insurance industry experts say GARA essentially shifted a good chunk of the liability for older aircraft from the manufacturers to everybody in the aircraft logbook, from the owners to the mechanics, making the attorneys go after a dozen small pockets instead of one deep one. This is known as the "shotgun approach."

Since the value of airplanes went up, so did hull insurance. For many operators the premiums were actually higher in the late 1980s than now, but there was a lull and a period of reductions for a few years. Over time the loss ratios started working against the insurance industry, and insurance companies were soon paying out far more in claims than they were collecting in premiums.

Insurance companies began to panic and some went looking for profits elsewhere. For the ones that stayed in aviation, they either stopped offering commercial insurance for FBOs and flight schools or raised premiums and put caps on liability because of pending claims and lawsuits.

There were big changes in the insurance industry over the past few years. In the midst of the corporate shell game, Houston Casualty bought Avemco and Signal Aviation. American Eagle found itself in trouble and was taken over by Great American. And Extended Reinsurance Group went out of business. When Avemco pulled out of the commercial insurance realm and Great American left aviation insurance entirely last year ? leaving a handful of companies that would write commercial insurance ? the hurricane made landfall and FBOs and flight schools were caught off guard.

"For years the aviation insurance industry has not been collecting enough money. It is now going through a painful correction," said Ray Olsen, an insurance expert who was hired by AOPA as a special consultant to look for solutions. "It is painful for the companies, and it is painful for their customers."

AOPA flew staff all the way to Europe to meet with agents from Lloyds of London. Even the agency that insures the unusual ? crocodile attacks, Russian cosmonauts, and Bruce Springsteen's voice ? decided to pull out of the GA market a few years ago while it continues to take hits from airline disasters.

The insurance storm left plenty of wreckage in its wake: higher premiums, lower liability limits, the near impossibility of business start-ups, and the closure of established FBOs and flight schools. It hit the smaller outfits the hardest and had a much bigger impact on piston operators than turbine. "Sadly, I don't think there is a silver-bullet solution to the commercial insurance problem," said AOPA President Phil Boyer. "But AOPA has taken this up as a cause, and we'll leave no stone unturned looking for ways to make the situation better."

The little guys

Paul Baker didn't give insurance serious thought until he was clinging to the strut of his Cessna 172 in Mooresville, North Carolina, as the winds roared through a shed during Hurricane Hugo. In 1989 he didn't have any insurance, but back then he didn't hear as much talk about litigation.

"When you're born in the '30s, you don't think of the lawyers taking everything you got," he said, adding that he always thought of flying as something that was supposed to be fun to do. "Now everybody has got to worry about lawyers."

The issue came to a crossroads when he saw his commercial insurance policy from Avemco start to rise from $1,700 a year in 1998 to $2,800 the following year. When he was shopping the market last summer he received quotes from other carriers of $4,600 to $5,000. That's when the fun went out of it. As a retired U.S. Postal Service employee who has been a flight instructor for 40 years, it was time to get out of the commercial business because he knew he couldn't make the numbers add up with only four to five students a year. Although he can still get insurance for pleasure flying, a problem occurs when it's time for students to solo and he's no longer in the airplane. Baker is back to what he was doing a decade ago: bringing students up to solo and then turning them over to a nearby flight school, an inconvenient solution. "I don't do it for the money, I do it to teach people how to fly," he said.

Legalese

Arthur Alan Wolk has received plenty of hate mail over the years for suing aircraft manufacturers and lately for his opinions posted on his law firm's Web site. As a plaintiffs' attorney he has been vilified along with the rest of the lot for what they are bred to do: represent their clients and reach settlements and judgments, sometimes in excess of $200 million for major airline crashes.

While many think attorneys like Wolk, who is also an experienced pilot, only brought grief to GA, Wolk believes aviation safety can be improved by holding manufacturers accountable. (His firm, Wolk & Genter, also seeks steps to improve safety as part of settlements and sponsors safety and maintenance seminars for pilots, focusing on product defects.) He said that the only time you can have a lawsuit is if you have an accident. And if you improve products, many of the accidents, and ultimately the attorneys, go away.

Wolk said the liability limit of $100,000 per seat and total limits of $1 million that most insurance companies are currently offering are essentially no insurance. That statement has a double meaning; less insurance money for attorneys to go after and less protection for insurance holders.

Wolk saw the shift in liability from the manufacturers to the FBOs, mechanics, and flight schools coming and warned aviation organizations after he was consulted. He told one group that it was "signing its own death warrant" if it pushed for GARA. The act was opposed by personal injury attorneys and consumer groups, some of whom had no interest in aviation. Instead, they saw it as a threat to the whole tort system. GARA was a delicate balance for AOPA members ? they wanted fair compensation for victims of faulty products and at the same time they wanted reasonable prices. It was also a balancing act for the manufacturers who wanted a 12-year statute of repose that bars tort claims for product defects. AOPA wanted 20, and the parties settled on 18 years.

GARA did exactly what it was supposed to do: It dramatically shortened the liability tails for manufacturers. The financial firm First Equity Development Inc. in Connecticut estimated that in 1994, aircraft manufacturers were responsible for the liability on 95,000 aircraft. By 2000, the number was projected to decline to 26,000, a 73-percent decrease. Even with the increased production of new aircraft the number of active aircraft has only gone up slightly, from about 205,000 in 1989 to 206,530 in 1999.

David McCredie's business, Piper McCredie Agency Inc. in Flint, Michigan, has been selling aviation insurance since 1964, and he puts the blame for the insurance crisis mainly on the legal climate in the country. He doesn't recall much talk about the side effects of GARA before it was passed, but shortly afterward the speculation began within the insurance industry.

Kyle Sparks, vice president of AIG Aviation Inc., sees GARA as only a partial cause of the insurance hikes while others think GARA is only the beginning. Timothy Bonnell, president of Professional Insurance Management Inc. in Wichita, thinks the aviation industry should support more product liability legislation to further limit awards in aviation accidents. He said that GARA was good for aviation as a whole, but far more needs to be done.

Take it or leave it

Despite the number of brokers, there are really only nine insurance companies left that will write commercial aviation policies, about half as many as there were a decade ago, because of mergers, takeovers, and withdrawals from the market.

Larry Kuebrich, owner of Air West Flight Center Inc. in Longmont, Colorado, remembers when brokers would play insurance companies against each other to get the best quotes. That changed. So far Kuebrich has been lucky; his premium with AIG only went up 5 percent. But he says his premium was already fairly high.

Kuebrich has a few things going for him: no claims filed in the past three years; all aircraft under the same policy (no leasebacks to complicate things); and safety in numbers. "The chance of going out and wrecking 13 airplanes is slim," he said. But Air West is also sticking its neck out to offer students more training possibilities. The company owns two Cessna 310s, not your simplest flying machines, and three taildraggers for tailwheel and aerobatic training. Air West had to raise its rental rates because of higher insurance and fuel costs. Kuebrich won't know until May 1 when he renews his policy if he'll have to raise rental rates again.

Hardening and softening

While the crisis hit many by surprise, Ralph Herr, president of Airways Inc. at the Lancaster (Pennsylvania) Airport, saw the market hardening a year in advance. "The grapevine was pretty good to us," he said. But it didn't do much good as he watched his hull insurance take a sharp increase. Besides the obvious need to reach for a calculator to see how he would absorb the costs, there was a competing flight school 10 miles away that hadn't been up for renewal yet, putting Airways at a short-term competitive disadvantage.

At first, Herr said he couldn't get a quote from anyone. His school had filed no claims the previous year ? before that there were only "fender-benders" and no fatalities, Herr said ? but it was also operating large twin-engine piston airplanes as part of an air taxi service. To get a new policy with United States Aircraft Insurance Group (USAIG) he had to shed the charter twins, concentrate on flight instruction with a Piper Seminole and single-engine airplanes, and pay much higher rates. Over the years Airways has branched out into other lines of business. The company's pilot shop has expanded onto the Internet and Herr sees it as a source of growth.

But the ultimate source of growth for the whole GA industry is new students, and one of the easiest ways to become one is to head down to the local FBO and sign up for lessons. "That person beginning to fly is the pipeline," Herr said. One potential solution that Airways is experimenting with on a 1998 Piper Saratoga is fractional ownership, similar to the arrangements for corporate jets. Although it would spread the costs and liability, what happens, as Herr put it, when you're 20 years old and can't afford a share?

Airways is lucky enough to have insurance, but there is the realization that it is literally one crash away, after more than 12 years in business, from going under. Herr said the insurance company might cover the first accident but in today's climate wouldn't be likely to write a new policy.

Just sell fuel

The idea of pulling back and selling the lifeblood that courses through the veins of aviation may seem all the more appealing now, with rising insurance costs and pilot and mechanic shortages. The truth is that selling fuel alone has its liability risks because a lot can go wrong on the ramp. There's no escape for the FBOs.

Omer Lucas, owner of Omer Air at Gene Snyder Airport in Falmouth, Kentucky, quit offering flight instruction several years ago. Now he sells fuel and offers repairs. After 26 years in the aviation business he hasn't seen anything like the current commercial insurance crunch. FBOs have also seen hangar insurance go up. The reason has been attributed to more expensive airplanes on the ramp, particularly business jets from the fractional boom ? it costs far more if you ding a Gulfstream V compared to a Piper Archer. Lucas collected his equipment over a 40-year period and said there is no way he could get into the FBO business today.

Clearing skies

Insurance companies and reinsurers (those that accept some or all of the insurance risk from other insurers) and aviation businesses find themselves faced with the same vexing question: How do we all stay in business?

Some types of businesses, such as flight schools and repair stations that may never be that profitable for insurers, are necessary for the survival of general aviation. Close off those doors and there won't be anybody left to insure. "Many insurers and reinsurers today are micromanaging each line of business they write so as to only write the profitable individual lines of their book, rather than looking at the profitability of the whole book of business," Bonnell wrote in the Aviation Insurance Association's newsletter.

Since the GA market is relatively small there aren't a lot of data, and with tiny sample sizes comes ample variability. Although insurance companies have become better at forecasting, there are many more things that can go wrong in aviation compared to the more predictable auto insurance business. From parachuting to patrolling power lines, some risks are nearly impossible to predict from one year to the next.

The ultimate factor that puts insurers at ease is minimizing risks. One thing operators can do in this overwhelmingly sellers' market is to show an effort to make their businesses safer. The more information insurers have to go on and the more they can see positive safety patterns, the better an operator's chances of getting decent coverage. "It's the name of the game right now," Sparks said.

Most insurance industry insiders agree that it could take a couple of years for the storm to dissipate. Wolk sees the insurance crisis as a cyclical phenomenon, with better days ahead as carriers come back to the GA market. "This is a short-term problem that has to be weathered," he said.

AOPA's consultant has put forth several ideas on how to get the best commercial insurance deals: Work with a broker that specializes in aviation insurance; insure all aircraft under one policy; carefully estimate aircraft values and don't overinsure; require all pilots to have renter's insurance (available through the AOPA Insurance Agency at 800/622-2672 or on the Web at www.aopa.org/rentersinsurance.html); and consider higher pilot standards for retractable-gear aircraft.

"As the industry goes through the cycle, history tells us that some company will raise its head and try to make a niche or undercut the current market," Olsen said.


Links to additional information about commercial insurance may be found on AOPA Online ( www.aopa.org/pilot/links/2001/links0103.shtml). E-mail the author at nate.ferguson@aopa.org.