The End of a Wild Ride
While taking a look into the future of aviation insurance for the upcoming year of 2005 one must understand the wild ride of premium spikes and underwriting changes that took place the last five years. It is without question the most challenging experience in aviation insurance since the first policies ever written in 1927, when the oldest surviving aviation insurance company started underwriting aviation.
The aviation industry as related to insurance, among other challenges today, has been involved with a evolving aviation insurance business that has experienced many companies failing, merging, or pulling out entirely of aviation insurance. This includes the foreign markets to the U.S. market such as London, Switzerland, France, Germany, Italy, Japan, Australia, and others. The insurance market of 2005 is certainly smaller, leaner and probably meaner than what was experienced in the past.
This changes in insurance practices was not the direct result of the events experienced on September 11, 2001 but instead were likely compounded by the attacks and their aftereffects. Most of the changes were already in process before September 11.
So what does all this mean for this year and those beyond? The stability of current premium levels and the underwriting approaches that aviation insurance companies have taken in the last two years led to overall rate reductions for most accounts in most, but not all, areas of aviation. Insurers will continue to redefine the underwriting or managing of the risk--that is, what an insurance company is willing to insure and at what limits of liability, considering pilot requirements, training demand, and a better understanding of previous, if any, losses or accidents. Once the underwriter has made its decision on how or what to insure and set a price for this, there are in most cases no changes to that decision. There are always exceptions and it is best to discuss this with your broker.
Helicopters for the most part have experienced what was just described for the 2003-2004 fiscal years, but with the uniqueness in the rotor industry pertaining to the small numbers of operators or owners, variety of uses, increasing hull values and high accident or loss rates. This area for insurance has always maintained certain limiting factors and is best brokered or insured by a handful of experienced experts. Since the evolution of the aviation insurance industry began several years ago (and was compounded by the events of September 11, 2001), to help manage the loss experience and increasing premiums, underwriters began underwriting the helicopter exposures as quota share or partners with competing insurance companies.
This concept is not new; this is the way underwriters insured the airlines for decades. The principle is the basics of insurance. To transfer exposure to 100 percent of the risk of a helicopter hull loss or liability, one company will quota share or partner with one or more companies to share the risk. Therefore, in the event of a catastrophic helicopter loss, two or more companies will pay their agreed percentage of the loss up to 100 percent for the helicopter operator.
This has been a successful tool the past five or so years since the aviation insurance companies started to do this, and it has managed to stabilize the rapidly rising premiums and keep the reinsures interested--another form of risk transfer.
The practice of quota sharing in helicopters started just with the few big helicopter operators in America. Since its introduction five or so years ago, the practice of quota sharing has become commonplace for even high-value, high- liability, single-ship operators. For more explanation on how this works and whether you insure your helicopter this way, discuss quota sharing with your broker. In some situations, this may be the only way to buy insurance.
With the practice of quota sharing, tighter underwriting requirements and an improving U.S. economy, we have seen premium reductions for 2004 for the most part loss-free or low-loss helicopter operators experience. The next year will see more of the same, based on each individual operators' own loss experience. Some operators may see slight premium reductions or rates stay as they are.
There has been some rumbling in the helicopter community that accidents involving EMS and other operators during 2004 may limit the underwriter's appetite to be aggressive in reducing premiums for 2005. This is not to say helicopter operators with good loss experience can generate an underwriter to compete for your business and reduce your rates for them. There are many factors involved in this process and once again I request you discuss this with your broker.
So, all in all, 2005 will be a continuation of what you experienced in 2004, with perhaps not much in premium changes as before. If we work together to reduce the accident rate and continue to grow with the economy, then perhaps 2006 can experience another round of reductions.