April 3, 2008
AOPA is continuing its efforts to look into the growing commercial aviation insurance problem. The association recently hired a special consultant to look at possible solutions for flight schools, independent flight instructors, and small FBOs that are finding it increasingly difficult to obtain insurance coverage.
That consultant, respected aviation insurance expert Ray Olsen, has already produced his first report, including a list of insurance companies that will consider providing instruction and rental insurance under some conditions.
"It's important to have a professional aviation insurance agent scour the market and contact all the companies writing commercial aviation insurance," Olsen advised AOPA. "Some instruction and rental insurance is available but maybe not at a rate you like and maybe not for the limits you need."
AOPA has found that some insurance brokers don't exhaust all possible sources for commercial aviation insurance. And AOPA has other suggestions on how operators can maximize their chances of getting the best insurance deal (see below).
Olsen's preliminary report identified nine insurance companies that will provide instruction and rental (I&R) insurance under some circumstances.
AIG Aviation will now accept commercial accounts, although with more restrictions than in the past. William Brown and Associates generally will write commercial operations if the loss ratio is under 30 percent for the past five years.
Associated Aviation Underwriters, ACE, PartnerRe Ltd., USAIG, Phoenix Aviation Managers, Houston Casualty Company Aviation (HCCA), and Aerospace Insurance Managers will also write some I&R insurance.
Unfortunately, it is also apparent that some operations still won't be able to obtain insurance, and others will have to pay higher rates than in the past.
Olsen's report helps explain why.
"Ten years ago, the aviation insurance industry was flourishing with competition and awash with losses," Olsen reported to AOPA. "New agencies started up, and companies who never had been in aviation before thought it would be a good idea to have a little aviation insurance to complement other lines."
That competition forced companies to keep rates artificially low to maintain market share. Insurance companies' costs continued to increase as aircraft became more expensive to repair and replace.
But insurance rates didn't keep pace with these increasing costs.
"People in the insurance industry were saying that most single-engine, fixed-wing operators were paying less for their aircraft insurance than they did for their automobiles," Olsen reported. Meanwhile, insurance companies' investment profits were declining, yielding less non-premium income to help pay claims.
As the market got tighter, detailed underwriting reviews revealed that most of the losses were coming from business insurance for small FBOs and losses arising from instruction and rental insurance. Some companies had I&R loss ratios of 160 percent or more, meaning the company paid out $1.60 in claims for every $1.00 in premiums.
"The first thing done was to reduce total limits and impose sub-limits," noted Olsen in the AOPA report. "But for some companies, the losses were still too much. They withdrew from that class of business."
It was the sudden withdrawal this spring of two companies—Avemco and Great American Insurance Company—that blew up the long-festering problem into a major crisis.
"The remaining companies established new underwriting guidelines to stem their losses," said Olsen, "and everyone raised their rates."
Small FBOs, flight schools, and independent flight instructors were hit with sharply higher insurance rates. New businesses found it almost impossible to find insurance at any price.
"For years, the aviation insurance industry has not been collecting enough money. It is now going through a painful correction—painful for the companies and painful for their customers," Olsen reported. "But as the industry goes through this cycle, history tells us that some company will raise its head and try to make a niche or undercut the current market."
Meanwhile, AOPA has tasked Olsen to look for other "outside-the-box" possibilities to make commercial aviation insurance more available and affordable. Among possible steps are (1) an insurance pool, and (2) a "summit meeting" of insurers.
AOPA staff also recently traveled to Europe for discussions with agents for Lloyds of London. However, European reinsurers are less willing to take on new, higher risks due to large recent claims.
"AOPA is vitally concerned about this issue," said AOPA President Phil Boyer. "This insurance problem has already forced some flight schools and other aviation businesses to close. Others had to raise their rates. If we start losing more flight schools, there will be a sharp impact on general aviation.
"Sadly, I don't think there is a 'silver bullet' solution to the commercial insurance problem," Boyer concluded. "But AOPA is taking this up as a 'cause," and we'll leave no stone unturned looking for ways to make the situation better."
Despite an extraordinarily tight market, operators can maximize their chance of getting the best insurance deal. AOPA recommends that they:
The 360,000-member Aircraft Owners and Pilots Association is the world's largest civil aviation organization. More than one half of the nation's pilots are AOPA members.
Special AOPA consultant Ray Olsen is the former vice president of Employers Reinsurance Corporation, where he was responsible for aviation and marine insurance as well as international operations. He has served as chairman and director of several international insurance companies.
An AOPA member, Olsen is also the Airport Support Network volunteer for Johnson County Executive Airport outside Kansas City.
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