The Insurance Crisis #1 : Understanding the Causes

Editor’s note: A very inside look at a very expensive problem that effects us all.

As a pilot and CFII I have great sympathy for persons who are being priced out of aviation, and especially those whose livelihood is threatened by the unavailability of insurance. I’m alarmed at what the “insurance crisis” may do to personal flying. As a former airplane insurance agent, however, I’ve been privy to conversations with a number of underwriters and aviation insurance firms, and have come to realize that there is no great “shadow government” jacking up insurance rates in a veiled attempt to price “little airplanes” out of the skies.

The key to understanding aviation insurance costs is the “loss ratio (LR).” The LR is the ratio of money paid out in claims, compared to the money taken in through insurance premiums. The loss ratio in general aviation insurance has exceeded 1.1 to as much as 1.25 or more for the last several years. This means that most aviation insurance companies have paid up to a dollar and a quarter for every dollar they’ve taken in, for each of the last several years. No wonder so many are closing down, merging, or getting out of the historically riskier aviation activities.

So why are the loss ratios so high?

  • The cost of repairs is soaring. Fixing even minor damage is getting more expensive. Cost of parts is only one factor — labor costs are up phenomenally, costs of complying with Federal and state regulations are climbing, and taxes are going up. There are fewer airplanes in the fleet, so manufacturers don’t produce as many parts, and the cost per part goes up. Old-design parts may not be available at all, or only at great expense.
  • The number of insured accidents is up. Lots of pilots used to fly without insurance and paid out of pocket if damage occurred. Now, it’s very unusual for any airplane to fly without hull insurance. Although the number of accidents may be down, the total number of claims has gone up.
  • The value of airplanes is soaring. More valuable airplanes mean higher repair bills. This is one area where the excellent economy is *not* helping.
  • It’s more common to ‘total’ an airplane. Damage that would be fixed cheaply twenty years ago when parts were plentiful would now cost a significant percentage of the insured value of the airplane to repair. Often the insurance company finds it cheaper to ‘total’ an airplane and write a check for the full insured amount.
  • Aviation insurance rates are low when compared to the financial risk an underwriter assumes.

What other factors affect insurance rates?

  • The stock market is less predictable. For a decade companies could guarantee a profit — even with loss ratios exceeding 1.0 — because they could invest their income. Insurance company boards will no longer accept unpredictable investments to make up for insufficient premiums.
  • Lawsuits scare underwriters. It’s rare when an aviation case goes to court — because insurance companies know they’ll lose when a jury hears the case. It’s simply too easy to prove pilot negligence, so it’s cheaper for insurance companies to settle for hundreds of thousands or even millions of dollars.
  • The General Aviation Revitalization Act. GARA deflects lawsuits from airplane manufacturers and toward aviation service providers and pilots. An ironic consequence for a move aimed toward bringing about a rebirth in General Aviation.
  • The market itself is shrinking dramatically. Despite increases in new aircraft sales, there are simply fewer pilots and airplanes to insure and that drives the unit cost up.

We need to remember that aviation insurance companies are *not* charities aimed at preserving our standard of living, or entitlement programs designed to subsidize private flying. They’re businesses, and they have to make more money than they spend to stay in business.

There are strategies, however, you can consider to reduce your aviation insurance cost, which we’ll look at in the upcoming: Insurance Crisis #2: Your Options and Your Premiums.

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