There are only some 200,000 aircraft in the U.S.—there are more cars than that in a large town—so why any profit-oriented insurer would enter such a restricted market seems to defy logic. Yet, in the last decade, the number of aviation insurance underwriters has gone from the old, hard core of nine to 14, an increase of more than 50 percent. The result is predictable—with a relatively large number of companies competing in a limited market, insurance premiums are low and owners have little trouble getting coverage.
What does this mean for owners and pilots seeking insurance in the short run and the industry in the long run? We put those question to several insurance brokers and underwriters and got consistent answers: Because we’re in the “softest” market in over 40 years, it’s a great time to be buying insurance, but the fact that premium dollars are barely covering the cost of claims paid means the current situation should not be sustainable—yet there’s no end in sight. (This article was written two years ago, yet the situation has not markedly changed. Ed.)
How it Works
Insurance companies enter into contracts to pay money to an insured should specified events (usually accidents) occur in return for a fee (the premium) from the insured. The insurer takes the premium money and invests it. So long as the amount the insurer earns from the premiums and investments exceeds what it pays out in claims, the insurer makes a profit.
One way to improve the balance sheet is to not pay claims, however, that’s not really an option for aviation insurers because the aviation community is so small. If an insurer gets a reputation for fighting claims, aviation insurance brokers learn about it quickly and steer their clients away from that insurer.
Jon Doolittle, owner of Sutton James insurance brokerage, told us that the market is as soft as any he has ever seen, “Prices are down significantly and underwriter guidelines are eroding.” Doolittle said that where owners of turbine and cabin-class airplanes used to have to go for simulator-based recurrent training annually, now it’s likely they can get the insurer to agree to recurrent training every two years and it can be in the airplane. In addition, more and more insurers are agreeing to allow owners to take recurrent training through aircraft owner groups such as the American Bonanza Society and Cessna Pilots Association.
While the brokers we spoke with agreed to be quoted, those involved in underwriting (setting premiums and deciding who their employer insurance company would insure) would not agree to be identified. The underwriters we spoke with said that they were offering higher limit coverage to less-experienced pilots than they had in the past. One underwriter said that it was tough to hold the line when it came to pilot experience for coverage. He said that his company had been approached to cover a private pilot with less than 100 hours who wanted to step into a six-place single. That was outside the parameters for his company, so he declined. He later learned that another company agreed, and charged a premium that was half what it would have charged for such a high-risk pilot five years ago.
Underwriters were unanimous in telling us that companies were currently writing coverage for pilots stepping up into sophisticated airplanes that they would not have touched 10 years ago. One said that if a pilot has the money to buy a lot of airplane, his chances of being able to get insurance on favorable terms are the best he’s seen in his decades in the business.
Mike Pratt, a broker with Epic Insurance Solutions, told us that he’s been able to place coverage for clients at levels unheard of just five years ago. He recounted recently obtaining a $5 million smooth liability policy for an owner-flown twin-turboprop for a $9000 annual premium—if he had even been able to obtain such coverage five years ago it would have cost $20,000.
Jon Doolittle told us that insurance underwriters have different levels of comfort and expertise. They get to know some types of aircraft very well and prefer to write policies for those aircraft. Historically, he said he knew which insurers to contact to get the best rate and coverage for the particular type of airplane owned by a client. Now, he said, underwriters are constantly looking for a niche, and which ones are looking where changes regularly. So when he is trying to place insurance for a client he knows that he’s going to be able to get a good deal, but he has to make many more calls until he finds the underwriter who is in that niche at that time.
Pratt echoed the sentiment, noting that one insurer that had historically only covered classics suddenly started writing insurance for all types.
Okay, the market is soft, there are good deals on insurance to be had, how do I buy insurance for my airplane, or to cover me as a renter?
As an aircraft owner who wants to insure his or her aircraft and self, the procedure is to buy two types of coverage that is bundled together into one policy—insurance that fixes or replaces the aircraft in the event of an accident (hull insurance) and insurance that covers the owner for liability should the owner get sued as a result of an accident (liability insurance). To do this, we recommend that the owner contact an aviation insurance broker. In fact, contact a few and talk with them to see which one you connect with and choose him or her.
A broker owes a fiduciary obligation to the owner, not to any insurance company, so he or she seeks out the best coverage available for the owner. A broker is not an insurance company. The broker then shops coverage for the owner—going to the various insurance underwriters with the details of the owner’s piloting experience and the aircraft to get quotes for coverage. The owner and broker then discuss the quotes and coverage and the owner makes a choice.
A warning: Do not try playing brokers against each other by having more than one broker get quotes for you. The brokers go to the same insurance underwriters for quotes and underwriters don’t like quoting the same airplane twice. You can get into the position of being unable to get any insurer to cover you.
At the same time, the owner is working with a broker, we also recommend that the owner also contact the aviation insurance company Avemco. Avemco is the only direct writer of aviation insurance. That means it sells insurance directly to aircraft owners (brokers do not get quotes from Avemco). All other aviation insurers only sell insurance through brokers. When contacting Avemco for a quote, a owner needs to understand that the person with whom the owner deals with is an employee of Avemco and owes a fiduciary duty to Avemco, not the owner.
Once the owner has quotes and coverage information from the broker and Avemco, it’s a matter of comparing them to see which best fits his or her needs.
Policies Are Not the Same
Unlike auto insurance where policies are nearly identical, each aviation insurer has slightly different types of coverage and policies—and those differences can be critical. We strongly recommend that you obtain a sample of the actual policy for each insurer that gives you an attractive quote.
Insurance policies are contracts and only cover exactly what is in the contract. Look at what is covered and what is excluded. A very low premium may sound great, but the policy may have so many exclusions that it is worthless for the type of flying you do.
However, if a policy looks attractive, but has an exclusion you don’t like—such as no coverage for operations on grass runways—see if the insurer will remove the exclusion. Often that can be done at no charge or a small increase in the premium.
Buying renter’s insurance is essentially buying the liability portion of an aircraft insurance policy. You are buying insurance to cover yourself should you have an accident and have to pay for the airplane and/or someone sues you. The procedure is the same; contact a broker and Avemco, get quotes and compare policies.
When seeking insurance, we recommend that you spend some time talking with your broker about yourself, your flying and your airplane. While getting a quote on coverage may simply involve entering data on a computerized form, much of the work a broker does is to talk with underwriters personally—aviation insurance is still very much driven by people talking directly to people.
If your broker knows you, he or she can bring out those things that make you a good insurance risk when talking to underwriters—which can mean better coverage at a lower price than comes from a one-size-fits-all computer form.
Never, ever lie about your experience to make yourself look good. Padding your hours, ratings and experience is a way to get coverage denied should you have an accident.
All of the underwriters we spoke with expressed concern about the general aviation accident rate due to the soft market. Especially for higher performance airplanes, insurance requirements for time in type and recurrent training have helped keep accident rates down. As underwriting standards slip, higher risk pilots are flying higher performance aircraft—and for the folks who make their living looking at accident data versus pilot experience, it’s a bad situation.
They know that the one variable that affects accident risk is recency of recurrent training and the underwriters we spoke with expressed concern that because recurrent training requirements are slipping, more people are going to get hurt.
With insurers apparently making little profit in the aviation field, we don’t think the current low rates will continue. But, as Mike Pratt pointed out to us, people have been saying that for over three years, yet when one insurer leaves aviation, another comes in, keeping premiums down.
While we don’t think the sky is going to fall, insurers have to see a profit to justify staying in a particular field, so more may step away from aviation. With fewer players, premiums will go up and experience and training requirements to get coverage will tighten up.
We’ve seen it happen in the past as soft markets drove insurers out of aviation—through conscious business decision or bankruptcy—and the market hardened. It usually happens gradually, however, a sudden series of general aviation accidents or a major airline accident that mean insurers have to pay large claims can, and has, caused the market to harden in short order.
Our take is that the current soft market is good news if you are buying or renewing your insurance. Having your broker shop your coverage could give you a lower premium than last year. If you’ve been considering moving up to a higher performance airplane but have been concerned about coverage, there’s never been a better time to make the move.
Policy Sublimits: Wealth Hazard?
For more than 30 years, the most popular liability policy in aviation has provided coverage of $1 million with sublimits of $100,000. Owners sleep soundly at night, confident that they have an insurance pool of a million bucks should they roll Ol’ Bessy into a ball. These same owners have the personal net worth necessary to own an airplane and often have auto and homeowners insurance that has at least $1 million in liability coverage.
There’s only a minor problem—that sublimits policy only offers $100,000 of coverage per person injured or killed in an accident, not $1 million. For a full million dollar pool of money to draw from for personal injuries should you have an accident, you need what is called a smooth policy, one with no sublimits.
We recognize the popularity of sublimit policies with insurers—because they are among their most profitable products—and aircraft owners, because they are notably less expensive than smooth policies. However, in speaking with aircraft owners over the years, we have found that a substantial portion don’t realize that they only have one-tenth of the overall value of the policy available for any on person who is injured or killed.
Insurers tell us—and our experience is in agreement—that the vast majority of lawsuits or claims made against a pilot by someone injured in an accident settle for the $100,000 limits. However, a majority isn’t all of them. If the pilot messed up and caused an accident that seriously injured or killed the sole passenger, the value of the claim against the pilot could easily exceed $100,000. We have seen lawsuits brought against pilots and the estates of pilots in which the insurance company immediately paid the $100,000 policy limit, but the case continued against the pilot because he or she, or the estate, had assets. In addition, once the insurance company pays the limits of the policy, it no longer has to pay to defend the pilot, something that can be staggeringly expensive for the pilot.
In our opinion, an owner must be fully aware of the nature of the liability coverage he or she is buying. A $100,000 sublimit policy may be the right one—but it may not.
We do note that while it is not well known, there are policies available that offer $1 million coverage with sublimits of $200,000 or $250,000. They are priced less than smooth policies.
If a person has the money to buy an airplane, trying to save a few hundred dollars on insurance by buying a sublimit policy may be a serious mistake. We recommend that an owner speak candidly with an insurance broker and an attorney about coverage—and read the policy—before making a decision on liability insurance coverage. In the current soft insurance market, smooth policies are cheaper—and available for more pilots and airplanes—than they’ve been in years.
Rick Durden is an aviation attorney who holds an ATP with type ratings in the Douglas DC-3 and Cessna Citation and is the author of The Thinking Pilot’s Flight Manual or, How to Survive Flying Little Airplanes and Have a Ball Doing It, Vols. 1 & 2.
This article originally appeared in the August 2015 issue of Aviation Consumer magazine.