Aviation Insurance: How to Navigate Today’s Challenging Market

Tony Kioussis (00:33):

Welcome to another Asset Insight podcast, covering the aircraft ownership life cycle. I am Tony Kioussis, President of Asset Insight, and your host.

Tony Kioussis (00:42):

LL John’s Aviation Insurance is a company whose clients range from Fortune 500 companies to weekend pilots, large turbojet aircraft to piston driven singles, to Part 139 airports and T-hangers. Steve Johns, our guest today, is responsible for leading LL Johns and running daily operations, in what is, by all accounts, a challenging period in the insurance industry. Let’s discuss the state of the current market and how we got here and perhaps more importantly, what it all means to an aircraft owner and what they can expect going forward. How would you describe the current aviation insurance market?

Stephen Johns (01:29):

I asked an underwriter that question today, and the response was “difficult.” I have referred to it, as we’ve talked to customers and talked at industry events, as just being chaos. Premiums have been going up, but quite frankly, that’s been really the tip of the iceberg. That’s been a smaller issue than coverage reductions, and lately the biggest challenge being pilot restrictions, training expectations, and experience requirements.

Tony Kioussis (01:57):

I think it would help if we put this into context, what caused all this?

Stephen Johns (02:03):

Our industry is cyclical. The rates are cyclical. The underwriting capacity is cyclical and that’s what’s behind it. After the events of 9/11, premiums went up drastically in some cases. Through the following five or 10 years, the industry was quite profitable. All that data is not available to us as brokers, and it’s rather opaque, but we had an influx of capacity from 2005 to 2010 time period. And our understanding is that the industry was quite profitable.

Stephen Johns (02:40):

So really starting in 2009, we started to see rate reductions. We started to see underwriting thrown out the window, to a large degree, from a standpoint of training and pilot requirement expectations. And we started a race to the bottom in premiums. So to give a little background on that, we have one customer that’s had a Falcon, relatively steady value over the last 20 year period. And in 2018, their premiums for basically the same liability limit, same values, were about 45% of what they had been in the year 2000.

Stephen Johns (03:22):

So we saw this extended down cycle in the insurance premiums because of the overcapacity that came into the market in that 2008, 2009 timeframe. By 2018 had reached a point where that was no longer sustainable. And we started to see this drastic change in the marketplace. So by 2018, I remember I was dealing with a renewal on December the 15th, and I had told them coming up to that period of time to expect a 10% increase, to budget a 10% increase. That was pretty consistent with what we had seen in that quarter. And on 2015, when I got the renewal quote, it was a 15% increase.

Stephen Johns (04:02):

And so late in 2018 is where we saw things start to really swing. By early 2019, we were telling our customers to budget a 25 to 30% rate increase. And then we just watched that accelerate through 2019, where we have the combination of, number one, rates that were unsustainable through that 10 years earlier, through that period, combined with a steady flow of accidents, and fatal accidents, throughout 2019, and then into early 2020.

Stephen Johns (04:36):

So that’s really what has driven that change from the folks that had been buying insurance through 2010 to 2018 time period, all of a sudden in ’18, ’19 and now ’20 they’re seeing drastic changes, and that’s kind of the backdrop behind it.

Tony Kioussis (04:54):

Did the Boeing Max accidents have an impact on the business aviation side of the insurance equation?

Stephen Johns (05:03):

Absolutely. All of the aviation insurance really worldwide runs through the same providers, the same insurers and re-insurers. So the Boeing Max accidents, in the way that I see it, really just poured fuel on the fire. We already had a fire burning in late 2018, as I said, with this unsustainable condition, and then the Boeing accidents had big impacts from the standpoint, immediate impacts, from the standpoint of the grounding liability. That whole fleet of airplanes being grounded was an insured event. And my understanding is that it cost the aviation underwriters about $500 million, just for the grounding of the airplanes, not to mention of course the aircraft that were lost, and the liability claims that are still developing as a result of those accidents.

Tony Kioussis (05:57):

Okay, so that begs the question, what can an owner expect in today’s insurance market?

Stephen Johns (06:03):

Well, they can expect increasing premiums, of course. That has almost become a secondary topic, a secondary discussion. The topic has received enough press that people know it’s a tough insurance market, and they can expect increases on their aviation premiums. Outside of that, they can expect coverage reductions, or what one of our underwriters refers to as coverage rationalizations. And I’ve enjoyed giving him a hard time over that term, but what he’s speaking to is some of the coverages, some of the secondary provisions as we refer to them, in the policies became very generous. For instance, there’s a coverage in most business aircraft policies that provides reimbursement for the use of aircraft if yours is down for a covered loss.

Stephen Johns (06:55):

If we back up 20 years ago, 15 years ago, that coverage was generally three to $5,000 a day, and maybe 150, $180,000 per event. Over the last few years, it became pretty common to see that extra expense coverage with the limit of $1 million or even $2 million, and no daily limitation. And that’s one of the coverages that we have seen paid out occasionally, I’ve never seen the number that high, but for instance, if you back up 10 plus years, when the Dulles jet center collapsed, a number of those airplanes were unavailable for over six months, and that coverage came into play.

Stephen Johns (07:34):

So the insurance companies have looked to reduce some of those benefits or rationalize the coverage limit that they’re providing. We’re seeing reductions in coverage forms, where we had very broad policy forms and very open wording. Now we’re seeing it pull back to very basic aircraft hull and liability forms. And one of the bigger things that we’ve been challenged with is dealing with pilot experience and training requirements, and training has really been one of the hot buttons. So as insurance buyers come into the cycle of renewing their insurance policy many of the business aircraft flown by professional crews have had a pilot clause that allows approval of any pilot who’s approved by the named insured, often with no specific training requirements as part of that pilot clause. That’s pretty much disappearing right now in our marketplace.

Stephen Johns (08:30):

So just this morning I took a call from a Falcon operator, who I’ve known for years, but we don’t do their work. And he said to me, “Steve, what do I do? I’m doing 135 training in this airplane. I’m doing training in other comparable airplanes, but my insurance company is requiring make and model simulator school every 12 months. Is there any chance of getting that waived or coming up with another approach on that?” And I told him, “Not likely.” And that’s been one of the biggest challenges for operators as they’re moving into this new renewal cycle.

Tony Kioussis (09:04):

Interesting changes. Which entities or what types of owners have been hit the hardest?

Stephen Johns (09:09):

The hardest hit in the current industry have been, or in the current market, are operators that have claims history, specifically those that have claims arising out of operations. You know, it’s one thing if we have operators who have bird strikes and fog damage, but those who have hanger incidents or pilot induced events, those are getting hit hard. Another area that’s been hit especially hard are low value turbine aircraft. So a lot of the older airplanes, where the values are down in the one to three million range, most of the insurance companies have taken a position that they will not write those airplanes unless they have at least $10,000 on the hull premium. So that’s just the hull premium. And then of course the liability on top of that.

Stephen Johns (09:58):

The reasoning, the thinking behind that, I think in the underwriting community is, a single FOD event is going to eat up a lot more than $10,000. In a lot of cases, they’ve been writing some of those older airplanes for hull premiums of two or three or $4,000. And so they’ve got to set the floor at 10,000, but when you look at that on some of the older value airplanes, that’s a pretty big percentage increase.

Stephen Johns (10:21):

High liability limits. They’ve gotten much more expensive. They’re still available. Availability has not become a question or an issue for professionally flown airplanes with two crew, but they’re much more expensive. Another area that’s been hit especially hired are single pilot operations, and that whether it’s a professionally flown airplane or an owner pilot airplane. In those cases, most of the insurance companies have taken the position that they’ll write up to a $10 million liability limit and up to a $5 million hull value. And they’ll do that 100% for single pilot operations. Above that, they require that the placement be verticalized or written on a quota share basis where we have multiple insurance companies accepting exposure.

Stephen Johns (11:10):

So single pilot operations hit hard, owner pilots, as I mentioned. Two more areas that we’ve seen a lot of impact, those that are operating with third party leases. So Tony as you know, there’s been a lot of dry lease use of airplanes in recent years. The industry has been focused on that and whether it’s illegal charter in many cases or not. So the insurance industry is now focusing on that as well. And they see a lot of dry leases. In some cases they’re charging premiums for those. And in many cases they’re just walking away. They figure it’s an area that is questionable whether or not it’s a legal operation, and they’re just walking away from providing terms on those.

Tony Kioussis (11:53):

So what type of owners have been impacted the least?

Stephen Johns (11:56):

The least impacted are the part 91 turbine operations with two professional pilots. They’re still seeing price increases, but for the most part coverage not impacted, and those seem to be the operators that are least impacted by specific wording being added to their policy that requires simulator based make and model school every 12 months.

Tony Kioussis (12:21):

Not exactly positive news for most people seeking coverage. What are some of the best practices owners and operators should follow in order to navigate the current market?

Stephen Johns (12:31):

Well, that’s a good question. As we work through the renewal process with our clients, and as we seek to help them through the process, we focus on a few pretty basic things. Number one, start early. As we work through the challenges, as the coverages are restricted, as we add new requirements to the policy, time is always on our side. So specifically as we find ourselves working with risk managers, they tend to be way out in front of the process and it’s very helpful. Often when we’re working with folks that are responsible for managing the flight department, it tends to bump up to the expiration before we’re able to really make progress and get the information.

Stephen Johns (13:13):

So starting early is imperative so that we can go through our job of making sure that we’re going to the various markets looking for the best program. Along with that operators can be sure to provide thorough and complete information in a timely manner. So if a flight department is seeking or is bail certified, those are types of things that are very helpful for us to understand, if they’re bringing in trainers for extra training outside of just the make and model recurrent training on an annual basis, that’s good information. So information, start early, and communicate. The thing that we’ve always talked about in our industry to the extent that an operator can build a relationship, not just with their broker, but with the underwriter, it’s invaluable.

Stephen Johns (14:02):

Traditionally, we have been big proponents of sitting down with our customers and the underwriters on a regular basis. Ideally not at renewal time or maybe midstream in addition to the renewal time. Of course, COVID has changed all of that. So now we’re doing virtual meetings. But just in the last two weeks, we had two pilot situations, actually one was a pilot approval situation, and one was a transition to a new aircraft of a single pilot owner turbine. In both cases, we were able to put together virtual meetings. We were able to put the two together to let the operator talk about their commitment to safety, their training philosophy, their operating processes and procedures. And in both cases, we came away with a favorable response from the underwriter and then a client that was somewhat surprised to get what they were looking for.

Stephen Johns (14:56):

So communication is key in building that relationship and that rapport. A couple other things that have come to our mind as we’ve been working through this process with our clients. You know, I’m an insurance agent. I sell insurance. I make my revenues by the commissions off of the policies we sell. I also provide guidance and advice to my clients on the coverages they should carry. So I step into this one carefully, but one of the things we think people need to do is reevaluate their coverages and their limits.

Stephen Johns (15:27):

So over the last five or 10 years, as we’ve been in this extended soft market cycle, a lot of clients have looked at their limits and said, “Boy, for another $2,000, I can add another $50 million of liability. So I’m going to go from 50 million to a 100 million for two grand.” Now those higher limits are getting much more expensive. So maybe there’s an opportunity to reevaluate the coverage limits, maybe more appropriately to reevaluate operations. It’s an opportunity for operators to reevaluate their operations. We recently working on a King Air 350 renewal, and they have provision in the policy for single pilot operations without passengers. They also had a provision in the policy that allowed them to name their second in command pilots in that airplane when they were flying with two crew, but there were absolutely no requirements for the SIC other than to be approved by the named insured.

Stephen Johns (16:26):

At renewal, as we came through the process, the policy had a 100 million limit. And at those limits, most of the insurance underwriters are taking the position that if both crew members in any turbine airplane have not been to simulator based training, then they’re not in the airplane. They treat it like a single pilot airplane. So we are still looking for a solution for this particular operator who said, “I can’t live with the requirement that all of my co-pilots need to have gone to make and model simulator based school.” Yet, I think that only happens a couple of times a year. So maybe as we go through the process and we put a number on what it’s going to cost to insure it the way that they would like to that’ll bring them to the point of re-evaluating those operations. But I would encourage operators to reevaluate coverages, limits, and specifically operations. What do we really need out of the insurance policy?

Stephen Johns (17:24):

And finally, we’ve been encouraging our customers in the process to hold on. It is cyclical and this too shall pass.

Tony Kioussis (17:33):

I think that last piece is good advice actually, but for those who need to do something right now, it’s not exactly comforting. I appreciate all the information, Steve. It really is good. Is there anything specific that you would want people to know about your team and your company’s capabilities and services as it relates to the business aviation community?

Stephen Johns (17:56):

Tony, there are a few things that I would like to share about our team. First of all, as you know, we do exclusively aviation insurance at our firm. We don’t get involved in other areas of insurance except in very rare cases in support of our aviation customers. One of the things that we have chosen to do over the years is to stay in the full range of aviation insurance. So we have one department that does gliders. I think we’ve got the second largest glider customer base in the country. We do a lot of light aircraft, a lot of pleasure and business use aircraft as we refer to it, and we’ve got a whole team that’s devoted to that. And then we have a team that’s devoted to business aviation. The clients for that team range from small airports to large airports, airline airports, range from owner flown Citations and turboprops to long range, professionally flown managed airplanes.

Stephen Johns (18:53):

That segment of the business is a good segment of the business for us. We’ve looked at it over the years and said, “We need to serve the entire gamut of the aviation community if we’re going to play in this space.” So that’s one thing I’d like people to understand about our capability. A lot of folks will have a business jet and a helicopter, or a business jet and a Pitt. We deal with that full range. Beyond that, our commitment to our client looks a lot like other aviation insurance brokers. We’d like to think we do a better job of it. It’s making our customers feel like they are our only customer. And in this recent market, that’s been a bit of a challenge, but that is always our goal.

Tony Kioussis (19:35):

This has been another Asset Inside podcast covering the aircraft ownership life cycle. Please visit our ever-growing podcast library at assetinsightpodcast.com, and select from any number of topics discussed with business aviation industry experts. This is Tony Kioussis, and as always, thank you for listening.