Business jet insurance 2013: Competitive but still profitable for underwriters

Decreasing rates, thanks to more competition among insurers, should make insuring corporate and private aircraft cheaper in 2013 – but only for those buyers with the patience to shop around.

In 35 years in the insurance industry Mark Church, global head of aviation at Aon, has never seen general aviation insurance rates as low as they are now.

“We’ve been in a softening in the market for the last few years and the rates are still soft,” he says. “And I think rates going forward will continue to reduce. It’s great for the client – the end user has a very competitively priced product.”

It is a buyers’ market, Church says, and he attributes this to several factors. Firstly, there have been almost no costly losses in recent years meaning underwriters have been making solid profits anyway – despite rate decreases.

Secondly, the corporate jet market is also growing in some areas – notably in Asia, Russia and the Middle East – meaning that insurers can preserve the same levels of premium income even while cutting rates. “Underwriters are still maintaining a level of overall premium increase because of the replacement of their aircraft and/or upgrades,” Church says.

These views are reflected by the majority of brokers and underwriters surveyed by Corporate Jet Investor this month. The general consensus is that rates will soften in 2013 due to a lack of big losses, increased capacity and underwriters trying to grow their accounts.

“We’ve been hearing underwriters talk for years about their lack of margin and their vulnerability to a single event in a given year and the fact they need to get the rates up but nobody’s willing to push the rates up when they’re frightened they’re going to lose a piece of business,” says Steve Johns, president of LL Johns, a broker that specialises in this sector.

Johns believes some players will eventually withdraw – especially in markets where rates are exceptionally soft, such as the US. But he adds it is impossible to speculate on when this might happen.

“Eventually we’ll see some of the capacity diminish in the market, in the US at least. As that happens, rates will start to shift. I think it is likely that one or two of markets will disappear or be purchased by a competitor and when that starts to happen we’ll see some impact on rates. Whether or not it will happen in 2013 I just don’t know,” Johns says.

More of a good thing

But in the meantime, and in most other markets, capacity looks set to increase. One respondent predicts a 20% rise in capacity in the market for 2013, while more conservative estimates predict increases of closer to 5% globally.

“In general, aviation insurers have had a profitable year so we can expect market capacity to at least remain the same if not increase a little,” says Dale Jones, managing director of Covermyplane Aviation Insurance. “We understand there are new players entering the market too, which will further increase competition and client options for cover providers.”

He adds that favorable claims experience in the commercial aviation sector in recent years also helps the general aviation sector as the commercial sector, to an extent, subsidises the general aviation sector. “However, it is crucial to remember that, due to the nature of the risks being underwritten, unexpected events can always throw predictions off course,” he says.

Church agrees that this sector remains attractive. “I think there will be more capacity but not substantially more,” he says. He adds that many of the new players entering the general aviation market are experienced airline insurers looking to expand their remit.

“We see certain insurers turn round and say: ‘we haven’t been involved in general aviation but we now realise we’ve got a premium hole to fill.’ So we are seeing more of an appetite for general aviation.”

Swiss Re Corporate Solutions – the insurer that is part of Swiss Re – is a good example of a relatively new entrant that is already the third largest underwriter in Canada. Swisse Re started offering general aviation underwriting in Canada and Germany in 2008. In 2010, it launched in Australia and in 2011 targeted the US and Singapore.

“General aviation is not the same as car insurance. These are complex risks and it takes time to meet all the customers and build a business but the name and our strong capital base helps,” says says Paul O’Ryan, Client Manager Aviation and Aerospace at Swiss Re Corporate Solutions. “Rates are still soft. There is a lot of capacity and not a lot has changed. It is an attractive industry for us as an insurer.”

Private and corporate jets are an attractive prospect to insurers, as long as robust risk management processes are followed by the owners. Things like insisting on experienced good quality pilots, regular training and using a good management company are often insisted on by insurers and can reduce the premium.

“Top end jets with good pilots are perceived as being very attractive risks notwithstanding the low current rating level,” says one respondent to our recent survey.

Some insurers are also being more picky on the nature of the package they insure. “There is some market resistance to writing liability-only risks, for example, with premiums carrying a small loading if hull risks are omitted. War risks are priced on a client specific basis and generally reflect client activities and the geographical areas in which they operate,” says Jones at Covermyplane.

But while capacity is increasing across the board, growth in demand looks set to come from specific areas. Russia, parts of Asia and the Middle East represent growth markets. Corporate jets are seeing more demand than the private market and some existing aircraft are being upgraded.

“I think there is one-upmanship within the corporate jet world where if a certain corporation runs one aircraft and their competitor upgrades to a new machine, there’s a certain amount of rivalry which means people will go out and buy new machines,” says Church. But despite this, he predicts demand will stay relatively stable on a global basis.

Jones agrees. He says that general aviation is a fairly slow-moving sector, with growth gradual even in more bullish economic times. “Within the general aviation sector there is a finite book of business that increases only slowly over time,” he says.

“Unlike the motor car market there are no bursts of activity to increase ownership among the populous. This means any major activity will come from within the existing market as clients become either more cost conscious or more aware of the fact they have options apart from their existing insurance provider sending out their renewal invitation.”

Crucially, although many corporate jet owners and operators will have been affected by the global economic slowdown, few have been prompted to sell up and withdraw from the sector.

“Most of those who are operating business jets are certainly impacted by the challenges of the economy but not to the point that they’re pulling out of business jet operations; that’s why I would expect to see the market stay relatively constant on the demand side,” says Johns.

Paul MacMillan, active underwriter of Kiln syndicate 510 at Lloyd’s, agrees. But he claims that the economic slowdown has changed the nature of demand. He has seen specific growth in both the light jet end of the market and for larger business jets.

“We anticipate that there will be continued growth and demand within these sectors. The large business jet sector is somewhat recession proof while the light jets have become more attractive due to their operational and maintenance costs,” he says.

More growth to come

Overall, participants in this market are positive. Despite rates being soft on many lines and capacity increasing, the lack of large losses means profits remain healthy. As such, the majority of the general aviation underwriters and brokers surveyed feel positive about the contribution this book of business will make to their wider business in 2013.

It is not just the underwriters that are looking to grow. Many brokers also see opportunities in this business.

“Our intent is to grow in the marketplace. Obviously that’s a challenge when demand is going to remain relatively level so for us to grow we’ve got to be winning additional market share,” says Johns at LL Johns.

Church at Aon also sees opportunities in this sector. “We’re finding right now that general aviation is a good source of quality business and we are trying to make sure we do it in the most efficient way to benefit the clients that are coming to us new as well as the ones we have already,” says Church, who is looking to grow Aon’s general aviation book in 2013.

Similarly, Covermyplane is enjoying exceptional growth and is looking to expand further into the general aviation market in 2013.

“Domination by one or two major players has led to a degree of complacency and ever more cross-subsidy,” says Jones. “Going forward, there is an opportunity to cherry pick risks that will be attractive in isolation to underwriters willing to quote keen prices. Individuals and companies stand to save hundreds or thousands of pounds by reviewing their risks and being willing to change provider.”

Given the high levels of capacity in the market, now is certainly the time to shop around, and to ask questions about the finer details of any proposed policy.

“I think one of the most important things is to identify a broker that you trust, that you are confident in their skill set and their competency and their commitment to serve the customers’ best interest,” says Johns.

Church advises that you take time to make sure your broker and insurer are totally aware of your overall operation, including the fit of the aircraft, crewing and training. In particular, make sure your underwriter is informed if an aircraft is equipped with additional safety equipment, because this may enable them to offer you better rates. Ultimately, the more information you can give them, the better.

“It will mean that they have a more educated insurer with regards to any losses they might have but on top of which they will get the best possible price for the market,” says Church.