Insurance and the Future of Aviation

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In recent months, AVEMCO and at least two other underwriters have stopped insuring small flight schools, FBOs and repair shops, while others have increased premiums sharply. If the trend continues, it may not be long before such business simply cease to exist. What does this portend for the future of general aviation and pilot training? Tom Chappell of CS&A Aviation Insurance explores where the industry may be headed in response to the current insurance crunch.

InsuranceDuring the past century, man has realized his dream to fly. The aircraft has been developed and partially perfected. The aviation industry, as it is known today, has grown into a set of definable sub-industries based upon usage. Modern-day aircraft range from military to commercial airlines to the most diverse group, general aviation. As with any technology-based industry, aviation continues to grow and develop. New uses for aircraft are identified, better aircraft and avionics are created, and problems are recognized and solved.

Lear 45 Although aviation has come a long way in the last 100 years, it is still a developing industry. With growth and development come problems that must be solved before an industry can graduate to the next level. In the United States, aviation is now being confronted with a series of problems that may take as long to solve as the act of flight itself. As aviation enters the new millennium, it is these problems with which the aviation insurance industry must deal. Some are simply growing pains. Others are outside influences for which no simple solution may exist.

Legal Concerns

Justice?In many cases, changes in other areas of our society have a great influence over aviation. This is the case with our court system. The trend toward unreasonable verdicts and ridiculous awards has forced many aircraft owners to create shell corporations to "front" as the registered owner of their aircraft. Owners today are uncertain as to how much liability insurance is adequate protection, a situation made far worse by the growing reluctance of insurance underwriters to offer higher limits of liability protection at any price. The underwriters explain that it is impossible for any aviation insurance company to predict an adequate liability premium rating structure when the court decisions are so volatile and erratic. All aviation insurance companies are heavily reinsured by companies in London and other foreign markets, and those foreign insurers usually charge passenger liability premiums for aircraft operated in the United States that are three to five times as much as those paid by non-U.S. operators.

And so it goes for the owner of general aviation and commercial aviation aircraft in the United States. Aircraft owners seem to be trapped between inadequate coverage limits, high-priced liability insurance premiums, and the perils of the U.S. court system.

Can Small Aviation Businesses Survive?

FBO (Eureka, Calif.)In the future, some sectors of the aviation community may simply cease to exist as a result of the threat of financial devastation due to lawsuit. We've had a glimpse of this already when the escalating cost of products liability insurance practically stopped the production of light aircraft in the mid-1980s. It was only after a change in legislation limiting the time an aircraft manufacturer could be held responsible for products liability that our industry resumed production of new light aircraft.

In the future, such sectors of general aviation as the small piston repair shop and the small flight training school may not be able to afford the increasing insurance premiums and in some cases may not be able to buy adequate insurance at any price. This may spell the end for many in these businesses. As of February 2000 at least three aviation insurance companies have ceased writing small "Instruction and Rental" risks while others have increased their premiums for this class.

Piston engineThe future may see the small maintenance facility replaced with a new-technology aircraft requiring far less maintenance. The same style of maintenance used by the military and airlines — the remove-and-replace concept — may become commonplace throughout general aviation as well. Maintenance problems may be identified by computer and repaired only by the manufacturer at factory service centers, a practice that is already common in today's bizjet fleet. "Plug and fly" replacement parts keyed to a computer analysis may decrease cost with little or no downtime.

All this, of course, is little consolation to owners of existing, older-technology, maintenance-intensive aircraft. They're not getting any younger ... and neither are we.

Aging Fleet, Aging Pilots

Super CubWhile aviation is not exactly a mature industry, it is aging. Maybe what we're seeing today is just the end of a plateau in the overall development of aviation. The average age of both our pilot population and our fleet (both commercial and general aviation) is increasing. Many commercial and airline pilots today received their initial training in the military. The World War II pilots are now in their 70s and 80s, the Korean War pilots are in their late 60s, and the Vietnam pilots are in their 50s and 60s. One of the most common conversations we have with our clients and friends concerns how they can extend their insurable years as a pilot. Aviation is a great hobby for our retirement years.

Throttle quadrantAircraft hull and liability insurance for the senior pilot has become such a concern that our insurance agency has developed a special task force to help deal with this problem. Looking into the future, as the baby boomers age, our average pilot populations continue to age. As with automobile drivers, we have found this segment of our industry to be no more likely to have an accident than the younger group. In fact, they tend to be more cautious, better trained, and better financed than most underwriters care to admit. Maybe it is because we are growing older ourselves, but we believe increased awareness at the underwriting level will soon improve insurance company acceptance and serve to extend the insurable age of the senior pilot. We can assure you, we are doing everything in our power to influence the underwriting community in that direction.

Meantime, what can be done to infuse new blood in the cockpit? The industry is currently suffering from a lack of trained professional pilots. Without the military-trained pilot to help fill the need for commercial and airline pilots, we must depend solely upon civilian-trained pilots. This then becomes an economic problem. There is no longer a generous GI Bill to offset the cost of flight training in an age of escalating costs.

Many of our charter and corporate clients complain of sending a young second-in-command to school on their aircraft, only to have the airlines snap them up upon completion. The trend toward younger and younger pilots in the right seat is disturbing whether at the charter, corporate, or airline level of operation.

Shrinking Fleet

Primary training costs are increasing for a number of reasons. The high cost of new replacement training aircraft and inadequate and expensive insurance render the training sector of aviation vulnerable to lawsuits and financial disaster, and a shortage of qualified instructors has slowed the flow of new pilots to a trickle. The shortage of career CFIs is due in part to the low pay scale at most flight schools, whose owners respond that they're just barely able to stay in business as it is.

Cessna 182SThe majority of the general aviation aircraft flying today are 15 to 20 years old and older. To replace a simple single-engine Cessna 172 today would cost in excess of $140,000. A new twin-engine Beech Baron is in the $1,000,000 range. Of course, used aircraft are always an option. The obvious problem is that as new replacement aircraft increase in cost, the price of good used aircraft is forced up as well. Today, there are no bargains. It is often a struggle to find a used aircraft for sale with no damage history. Couple the normal attrition of our aging fleet with the high cost of replacement aircraft and it is easy to understand why our overall general aviation numbers are plummeting.

Again, a look into the future suggests that the majority of primary training will be done in flight simulators and computerized flight-training devices. As demand increases and technology advances, the full-motion simulator should become much more affordable and so realistic the only thing left for the student pilot is the checkride. "Safe and inexpensive" will become the name of the game.

If you want proof, the military has already adopted this method of training from the combat tank to aircraft and everything in between, and airline pilots are getting type-rated in new transport jets without having ever set foot in the actual aircraft.

Sam Williams and the FJ-11Trend Toward Turbines

The current trend for corporate-owned-and-operated aircraft seems to be toward turbine-powered aircraft. If new Barons sell for "a million bucks" out of the factory and a good used King Air is also in the $1 million range, the decision is clear to many which is the preferable aircraft in size, safety and maintenance cost. The myth that a light piston twin is easier to fly than a turbine-powered aircraft is beginning to be dispelled. Now that the underwriting community is imposing virtually the same training requirements upon the multi-engine piston pilot as the turbine operator, there is less advantage in buying the piston-powered aircraft. Couple the ease of operation of the turboprop and jet aircraft with the comparable cost of acquisition, and you have an even more compelling argument against the piston engine.

Cessna CJ2The proof is in the requests our agency receives for insurance quotations. We are seeing increasing momentum toward turbine and jet aircraft. For years, the corporate flight department has insisted upon the business jet for comfort and safety. Now, with the development of the single-pilot jets, there is increased interest from the businessman pilot in Citation SPs, CitationJets, and other new-generation Williams-engine-powered jets. In our opinion, this is clearly a look into the future. With the ease of operation and safety and the decreasing acquisition and operational costs of new-generation turbine aircraft, it is easy to see what the near future holds for the piston-powered aircraft. Coupled with the increasing profitability of medium and large businesses and their ability to afford private aircraft, and the frustrations of flying the commercial airlines, we believe that the trend toward the small corporate jet will escalate.

Training: Better But More Expensive?

Full-motion simulatorThere is no argument among most commercial pilots and aviation insurance underwriters that full-motion flight simulators should be a part of every training process. You simply cannot practice the emergency procedures in the aircraft that can be demonstrated in a simulator. (See article by Mike Busch, Editor-in-Chief of AVweb). Although not available for every aircraft at this time, more and more underwriters are requiring simulator-based training at least annually. We get the complaint from many of our clients that the cost to attend FlightSafety or Simcom is too high. Usually, they do not take into account the cost of aircraft operation when comparing this with the traditional in-aircraft flight training.

There is good news ahead, however. There is more competition in the upper-level flight training area. With increased competition will come improved programs and improved affordability. There will be more flight simulators available for a wider variety of aircraft. In the future, we predict there will be full-motion simulator-based training at every level ... yes, even for primary training. You may see a pilot solo without ever leaving the ground. This is an insurance underwriter’s dream!

What Does The Future Hold?

Cirrus SR20 panelWe have no idea what can or should be done about the U.S. court system with its irrational verdicts and out-of-control damage awards. From this standpoint, aircraft owners and operators will continue to be plagued by high liability insurance premiums and inadequate limits. We can only hope that society will wake up at some point, change its attitude toward litigation, and break loose from the hold that attitude has over all of us.

Of course, adversity is the mother of innovation (and invention). With this in mind, the future is very bright. New methods of training using simulators at all levels will produce more, better-trained pilots. As these techniques become more available, the cos ts will continue to decrease. Some of the new-generation flight simulation software for home PCs is quite spectacular, and CFIs tell us it offers excellent training value (although the FAA does not yet recognize this fact). New technology and new production methods may eventually bring down the cost of new aircraft ownership, and a younger, more efficient fleet will be born. A modern fleet of this type should be less expensive to repair and with the improved repair costs, insurance hull premiums will also decline. In addition, these new-age improvements are producing aircraft that are easier to handle and fly. Safety and comfort seem to be a priority. As this permeates our fleet, accidents will surely decrease, and insurance premiums will decline as well.

Glass CockpitThe advent of the computer is changing the way we live our lives, and the cockpit is no exception. First seen in our navigational aids with the very affordable GPS, the computer is revolutionizing the entire look and function of our instrument panels. Tom Chappell, president of our agency, recently attended the open house of one of our clients to view his new Lear 45. This new-generation aircraft is truly an awakening. Sitting in the cockpit wondering just what all the new pretty and colorful screens and dials were, Tom felt as if he was viewing a piece of equipment from a future epoch. The instrumentation, function and completeness of the panel were truly a look into the future of general aviation. The way pilots are trained in the future will be changing — not just to cut costs, but because the aircraft of the future are here and are like nothing you have ever seen.

What an exciting time in which to live!