Is There an Insurance Crisis Ahead?

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EDITORIAL. Aircraft insurance is something of a cyclical business, and General Aviation insurance rates have been fairly reasonable in recent years. However, premiums may soon be headed for the Flight Levels, at least if the author's own recent insurance renewal experience is any indication. Whether you own or rent the aircraft you fly, be afraid ... be very afraid!

ATISFebruary is insurance renewal time for me. I've been an airplane owner since 1974 when I realized a dream and bought my beloved 1966 Mooney Super 21, N9324M. Since then I have owned three other airplanes, including my current 1979 Aerostar 601P, N6069N. For the past 23 years, every February has meant calling my agent and getting quotes for my next year's policy.

My Aerostar is presently valued at $150,000, and I insure its hull for that full value. I also carry $5 million "smooth" in liability and property damage coverage (to cover damage or injury I might cause others). In insurance parlance, "smooth" means that there are no sub-limits to these coverage limits, such as a limitation of $1 million per person, per seat or per occurrence. My policy has no such sub-limits.

I am a commercial, multi-engine, instrument-rated pilot with over 4,000 hours of total time and about 1,700 hours in Aerostars. I have gone through simulator-based Aerostar training with Piper, FlightSafety, Simcom, and Recurrent Training Center, and I do such recurrent training every year. In more than 36 years of accident-free flying, my only insurance claim was due to the lightning strike I wrote about in AVweb last year. For the past several years, USAIG has written the insurance on my aircraft.

Carl's AerostarSo you can imagine how flabbergasted I was to open my insurance renewal letter this year to find a 72% increase in premiums. To be specific: last year's premium was $4,400 and this year's premium quote from USAIG was $7,570, a whopping increase of $3,150.

Wow! OUCH! Did somebody accidentally hit the multiply key instead of the plus key when totaling up my premium? Or mistake my Aerostar for an Astrojet or an Astra? Or think maybe I was running a Part 135 charter operation instead of just a Part 91 aircraft?

What's going on here?

I phoned the insurance agent from whom I've purchased aircraft insurance for the last three years to inquire into this shocking quote. He told me that aviation insurers were trying to get away from "high limit" liability policies, and that policies with $5 million "smooth" liability limits were getting much more expensive and harder to find. In fact, he said he had obtained several other quotes from other underwriters that were even higher than USAIG's.

The agent told me that if I was willing to settle for "a more normal" $2 million liability limit, USAIG would be happy to sell it to me for a premium of just $4,200 (about what I paid for $5 million in coverage last year), but if I wanted the $5 million limit I was going to have to pay an additional $3,350 for the incremental $3 million in liability. Subtracting out the hull insurance component of the premium, this meant I was actually going to have to pay more for the extra $3 million in liability coverage than I would for the first $2 million!

That didn't make sense to me. It didn't make sense to anyone else I talked to, either. Only the insurance companies thought it was reasonable.

Asking the experts

I called Bill Welbourn, a Senior Vice President at USAIG's home office in New York, and asked him how come the additional $3 million in liability coverage was so expensive. He told me that USAIG's "book of business" of $5 million liability policies was very small. According to Welbourn, about 70% of the company's aviation policies are written for $1 million in liability coverage, often with sub-limits of $100,000 per seat. Only 5% of their policies are for $5 million and above.

At the same time, Welbourn told me, more and more of the liability claims "were reaching into the excess of $2 million amounts." He indicated that most liability plaintiffs go after the defendant's full amount of insurance, so that having a higher policy limit all but guaranteed higher claims. This, he explained, is why liability insurance costs about as much for the additional $3 million as it does for the first $2 million. As to why my particular policy went up so much in one year, Welbourn was only able to tell me that it was due to USAIG re-evaluating their pricing on $5 million liability to bring it more in line with their actual costs.

Another aviation oriented insurance expert, Sandy Palley of the Pally Simon agency in Jenkintown, Pennsylvania (and owner of a Piper Lance), told me that price swings in the aviation insurance marketplace are not uncommon. "Competition in the market often drives prices down to unrealistic levels until the insurance is no longer profitable for the companies," said Mr. Palley. "At that point some companies leave the marketplace which reduces competition and the remaining ones realize that they have been charging too little. Both of these factors lead to rapid rises in premium costs to consumers," Palley explained.

I spoke with other aviation insurance agents, who told me that consolidation and mergers had reduced the number of underwriters they were able to use for aviation insurance. "I used to get 10 to 12 quotes", one agent told us, "now I can get only 5 or 6."

Not a good thing

Anyone who knows me could have predicted that I wasn't about to take all this lying down. Many hours of hard shopping around — and switching to a new agent — yielded a policy with the $5 million "smooth" limits I wanted for about $1,000 less that what USAIG had quoted initially. This was something of a victory, but a small one at best. My airplane insurance is still going to cost me almost 50% more this year than last. In a time of near-zero inflation and slowly growing wages, a 50% increase in insurance premiums is (as Martha Stewart would say) not a good thing.

Furthermore, it seems to me that an insurance company that would raise a customer's rates by more than 50% in one year without any obvious external conditions forcing that rise is not being fair to its customers. What if all companies, at all levels of liability coverage, decided that they would like to make 50% more next year?

Be afraid. Be very afraid.

Are we headed toward an era of rapidly rising aircraft insurance costs? I don't know if the increases will affect all limits of liability, or even if everyone else who carries $5 million will be hit with the same sort of sticker shock that I was. But there certainly seem to be warning signs that a critical component of the aviation cost equation — one that affects everyone who flies — may be headed sharply higher without regard for the industry it is serving.

I can't predict how many aircraft owners will sell their airplanes, or how many renter pilots will give up flying altogether, if insurance rates were increased 50%. But rate hikes like the one I just endured can only hurt General Aviation, perhaps as much as the loss of strategically important airports like Meigs Field in Chicago, or the FAA holding up field approvals of approach-certified GPS installations, or the issuance of costly ADs and Service Bulletins that don't seem to address any demonstrable safety hazard.

We all should carry insurance. For most of us, this is not an option. To that degree, we are all at the mercy of the insurance companies. We count on them to be fair in their pricing and claims. To me, a sudden increase of 50% for the same coverage is not fair or reasonable. USAIG has lost me as a customer as a result, but clearly this problem is not limited to one underwriter...the pendulum seems to be swinging toward higher rates industry-wide.

Is this the first raindrop in a TRW++? Maybe not, but at least it is time to turn on the radar and take a good look around ... before lightning strikes.