Aviation Insurance Market Update

At the time of this writing the stock market is down, there is great uncertainty in the economy largely due to the fallout of the sub-prime mortgage issue, and the aviation insurance market is near the bottom of its rate cycle. A common forecast for all of these issues is that they are all going to change over the coming months and years. The following paragraphs will outline the current aviation insurance market conditions and some of the major issues that have recently surfaced.

There are nearly twice as many aviation insurers in the U.S. general aviation insurance market as there were 2 years ago. Given the number of potential customers in the marketplace this has caused over-capacity in the aviation insurance market. The insurers are trying to gain or keep market share by sharply decreasing rates. This type of competition has created a very soft market over the past eighteen to twenty-four months. Turbine aircraft, FBO’s and other commercial operations have seen the most favorable decreases. While this has been good for aviation insurance customers, it has created issues for their insurers. From the data reported on claims, we know that claims have not significantly decreased enough (if at all) to offset underwriting losses with the premiums generated by the low rates. Interest income, which is can also used to offset underwriting losses, is also down given the current financial conditions. This means that the market will not be able to continue to operate at these rates for very much longer.

The market is seemingly in a position where it is just waiting for a catalyst to start the cycle back toward higher rates. This may be an insurance company pulling out of the aviation sector, a large loss or series of large losses, increases in reinsurance costs, or other external factors. The shift in the cycle is coming but industry professionals are not certain when it will occur. Airlines are often an indicator of where the aviation insurance market is going and indications are that they are going to start seeing increases this year.

There have been many questions from policyholders and potential customers of AIG Aviation on their stability as a company. This stemmed from issues that the AIG parent company had with liquidity. AIG Aviation (a part of AIG Commercial Insurance Group) has maintained that their capital and operations which are separate from the parent company remains strong and are still reporting adequate credit ratings and a solid capital position. The U.S. government provided a loan to the AIG parent company in an effort to help provide them the liquidity they needed to move forward and get past those issues. A website has been created by AIG that is updated regularly with the latest news and information from AIG Commercial Insurance. You can visit the website by clicking here. PIM continues to monitor the situation and should the AIG’s (or any other carrier we write with) credit ratings drop below acceptable levels we will make policy holders aware as soon as we can. State Insurance Department regulators are also monitoring the situation closely, but continue to report that AIG insurance companies are still financially strong.

Aviation insurance customers have been enjoying lower premiums for several years, but should now start to consider that this may change in the not-to-distant future. Rates will go up again, eventually peak and then come back down. This typically occurs over a cycle between 6-10 years. We can hope that the economic conditions will continue to improve and that the aviation insurance market will have a strong number of players going well into the future.

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