Part two of our feature on how the aviation sector offers producers a vast and stable market
(Read the first part of this series here.)
A soft market with tremendous capacity
The aviation insurance market has changed quite dramatically in recent years. As recently as 1999, there were three major players in the US and three to four niche players. Today there are six to seven major carriers and at least 12 niche players, signifying a huge expansion in the US from a capacity standpoint.
“Right after 9/11, rates jumped for a couple of years depending on market segment, and ever since then, they have been slowly coming down,” Donofrio says. “The theme of the aviation market is that there is tremendous capacity, keeping rates very low.”
The rate decrease has been most dramatic in the last couple of years; the main driver has been overcapacity in the market. Capacity in the aviation marketplace also ties into another trend.
“We have seen a reduction in the number of catastrophic losses [in commercial airlines] since early 1990s, driven by improving aircraft technology,” Donofrio says. “Airlines have put a lot of work into safety culture.”
That may seem counterintuitive, given the high-profile aviation tragedies that have occurred since 9/11. But the number of catastrophic crashes not related to terrorist activity has indeed gone down dramatically over the last 20 years. In the ’70s, Donofrio says, there were a couple of major accidents every year. But the last major non-commuter airline to crash in the US was in October 2001. Since then, there have been just two commuter airline crashes.
“It’s pretty amazing that, over that time span, there have been very few losses,” Donofrio says.
Along with the excess capacity in the sector has come more willingness among carriers to be flexible in their terms. As an example of this phenomenon, Hunter recalls a policy she placed last year with a high-net-worth individual who owns two private jets.
“When you provide this kind of coverage, there is generally a pilot warranty, where the carrier says it will provide insurance, but will warrant that only a limited number of specifically named pilots can fly the planes, and that they have to maintain a certain level of training and retraining during the year,” she says. “Last year when we quoted the risk, underwriters would only offer terms that mandated a very specific and rigorous level of pilot training. This year, when we quoted the renewal, several companies were willing to relax their requirements because the marketplace is so competitive.”
A stable sector
As antithetical as it might seem, the aviation sector is not terribly dynamic.
“I’m sometimes jealous of other lines of coverage like cyber that are really growing and popping,” Donofrio says. “Aviation is mature, and there are tremendous barriers to entry. Financial networks talk about disrupters, but we don’t see that in the aviation world. There are regulatory and capital barriers to entry. You don’t come in and say, ‘I will be the next aircraft manufacturer.’”
The aviation market is also going through a period of consolidation. “Not only are we not seeing new people coming in, but we are seeing airline mergers and manufacturer mergers that are reducing the number of insureds in the market over time,” Donofrio says.
On the bright side, global airline growth tracks the global economy, so if the global economy is growing at 3%, so is the aviation sector.
The general aviation market in the US is also quite mature.
“It will be more flatline than anything in the coming years, while some markets such as owner-flown aircraft are actually contracting,” Donofrio says. “Flying doesn’t have same wow factor that it used to have. Thrill-seekers these days seem to have a lot of other competing interests.”
The one exception to this rule is the recent phenomenon of drones, or as the insurance industry refers to them, unmanned aerial vehicles [UAVs]. “That may be the one area where there will be substantial growth in coming years,” Donofrio says.
The insurance market for UAVs is still very much up in the air. It remains to be seen whether these projected opportunities will ultimately land in the aviation market. Regardless, insurance carriers are racing to create innovative new coverages.
“We have specifically designed a policy to cover physical damage and liability, similar to an aircraft policy,” says Joe Trotti, president and CEO of AIG’s Aerospace division. “In terms of client base, it’s not always an aviation client. Major corporations use drones as part of their business model and wouldn’t necessarily be buying coverage from the aviation market.”
The gamut of drones is pretty broad, from something that would be purchased by a weekend enthusiast to something as large as a commercial aircraft. With an estimated 1 million drones sold in the US to date, “it’s an area that’s growing significantly,” Trotti says, “and we anticipate that it will continue to grow over the next five years or so at a fairly rapid rate.”
While the perils associated with operating a drone are very similar to those of a traditional aircraft, “there are far more dangerous things than flying a small UAV,” Donofrio points out. “And the reason the aviation market exists is because the non-aviation market is concerned about harm to passengers when you have a crash. With the major aspect of liability stripped out of that coverage, you can certainly see where non-aviation markets would be fine with covering those risks.”
But, he adds, “once you start seeing UAVs flying outside of the line of sight of the operator, and if the UAVs are operating in same space as an airline, it changes the game significantly,” both from an ethical and risk standpoint, and would ultimately demand more of an aviation-driven coverage.
Where the opportunities are
“It’s hard to find opportunities in the aviation sector right now,” Donofrio admits. “It’s a mature sector, the client base is shrinking, and brokers are having to fight very hard to keep the clients they have. With the market coming down, brokers’ revenue is coming down, too, because they are on commission, and their fees are under competitive pressure.”
But despite that rather bleak landscape, Donofrio adds, “If you provide valueadded services beyond the renewal transaction, such as contractual reviews or risk management, that creates an opportunity for the savvy broker.”
It is also possible, he says, to look for ways to cross-sell other coverages to aviation clients. “We deal with a lot of brokers who are purely aviation brokers, specialist brokers, and some specialists are able to provide non-aviation coverages such as P&C, auto, etc. That tends to be a differentiator.”
Trotti agrees. “It’s important to look for those emerging opportunities and really try to find those niches to best serve your client and offer a full suite of expertise to support it.”
Hunter, meanwhile sees unique opportunities for insurance producers in the aviation manufacturing sector.
“There continue to be a number of manufacturers that don’t insure their aviation products,” she says, “either because it’s not required or because they are ignorant about the fact that the products policy they purchase to cover their other products might not cover the aviation products as well. There is an opportunity to have a discussion with your client, and ask them if the product they are making is going into any sort of aviation product, and if so, give them the quote, because the market is so soft.”
