Business jet insurance 2012: A buyer’s market
Buying insurance for a corporate or private jet can represent a headache to the uninformed or unprepared. But with insurance prices at a ten -year low and carriers competing to provide coverage it is very much a buyers' market at present - good news for jet owners.
Buying aircraft insurance can cause headaches for the unprepared, but with insurance prices at a ten-year low and carriers competing for coverage, it is very much a buyers’ market, writes Wyn Jenkins.
It says a lot about the speed of change in the aviation insurance market that the last market-moving event to occur in this sector was September 11, 2001. The terrorist attacks on New York had a devastating effect on many areas of the financial and insurance markets but aviation was hit the hardest with rates rocketing as a result.
Since then, however, the market has seen a slow but steady decline in rates with a growing number of insurers entering the market. Because corporate jet insurance is relatively uncorrelated with other sectors of the insurance markets, it is viewed as an appealing, if somewhat esoteric, business to be in.
A good time to insure
“After 9/11, the number of carriers willing to take these risks in the US plummeted to fewer than 10,” says Steve Johns, President of LL Johns & Associates, an insurance broker that specialises in aviation insurance. “But in the past five years we have seen many companies re-enter the market or increase the amount of risk they are willing to take. There are probably 20 or more companies we do business with now.”
But Johns names 11 core players dedicated to this market, which the broker deals with the most. He says USAIG, Global Aerospace, Chartis and W Brown & Associates have been strong players in this sector throughout. Other players, which have either entered the market in the past five years of significantly increased the capacity available, are: Allianz, CV Star, XL, Phoenix Aviation, QBE, Berkeley and Meadowbrook.
These are the core players in the US, Johns says, and many offer coverage globally. And he is clear that it is very much a buyers’ market at the moment with capacity steady and rates showing no sign of increasing.
“Rates are very soft right now and we see little reason for that to change,” he says. “Before 2011 there was a lot of talk about coverage becoming more expensive but nothing materialised.”
These sentiments are echoed by Matthew Day, director of Hayward Aviation, a London-based broker that specialises in placing corporate jet risks and is a market leader in Europe. “We place our business mainly at Lloyd’s of London and in the London market but also deal with a number of strong insurers in Europe and the US as well,” he says.
“There are probably 25 to 30 strong business aviation underwriters globally. That is outside the players who do general aviation and just do a little bit of this specialised area.”
He says most of these players hold the risks themselves. There is overcapacity for some risks, he admits, and brokers can help secure further reductions by instigating competition between insurers. More esoteric risks can be tougher to place, which is why using a specialised broker with experience is important, he says.
Rates broadly remain stable year on year. “Business aviation is no where near as volatile as general aviation. We might sometimes see rate swings of plus or minus 10 percent year on year whereas in general aviation the changes can be closer to 30 percent. This is a far more stable market and that is reflective of the losses.”
Attractive to new players
This may be part of the reason why the market remains an attractive one to new players. One company that is targeting this sector at the moment is Swiss Re. Despite being one of the world’s biggest reinsurance companies (an insurer of insurers) Swiss Re Corporate Solutions prefers to write aviation business directly. It has historically underwritten aviation risks globally from a London operation but in the past three years it has opened offices all over the world.
Wayne Murphy, head of the general aviation and aerospace team at Swiss Re Corporate Solutions, says it has done this because it feels it is important to be closer to clients. It has opened offices in Canada, Germany, Singapore and Australia in recent years and a US operation, based in New York, in the past 12 months.
He explains that although the market remains very competitive, it is an attractive one to Swiss Re because of its lack of correlation with its other business interests and the fact that as a direct player, it can tightly control the risks it writes. He adds that accident rates are low and this year has been a very healthy one for the corporate jet market in the US specifically.
“In 2010, the corporate jet market in America received a lot of bad press,” Murphy says. “There were examples of the bosses in the automotive industry flying to Washington to ask for bailouts. It went down badly in the press and corporate jets were regarded as a perk as opposed to a necessity.
“That certainly changed in the first half of this year, although we may well see another slow down now thanks to the latest crisis in Europe. Companies have seemed willing to invest in these again and we have also seen a boom in other areas. Commercial helicopters are very much in demand thanks to an explosion in the oil and gas and minerals industries exploring new sites. That is an area we particularly like.”
Johns agrees that he has seen a similar trend. Although he acknowledges that he has seen many companies scrap their corporate jets, he has also seen those accounts replaced in the past 12 months leading to an overall stability. “The recession doesn’t seem to have made a difference overall,” he says.
This also reflects Day’s experience in recent years. While he says the initial recession had a severe impact on the market, things have recovered since. “Since 2009/2010 we have seen the green shoots of recovery,” he says. “It is even showing signs of grow now as owners upgrade and buy new jets having hesitated during the recession.”
Usage versus price
Pricing in the aviation market is determined based on the liability limits required and the value of the aircraft. But a host of other factors also come into play such as how often an aircraft is used, where it is flown and the experience of the pilots.
“Insurers obviously evaluate very carefully how often it is used and in what circumstances,” he says. “They are also very big on training and many require annual simulator training, for example. That said, this is a sector very much based on an underwriter’s judgement. No models exist. If they are comfortable with the experience of the operator then there is usually little problem obtaining coverage.”
Murphy says the main advice he would give a company seeking coverage of a corporate jet or commercial helicopter would be to find a specialist broker, get good advice and take great care looking at the fine print of what is actually covered.
“Make sure your valuations are robust and accurate but also look at what limits are placed on various parts of the coverage. Search and rescue costs, for example, can be hugely expensive. We had an incident in Brazil recently were the bill from the authorities was $5 million just on that. That is were the true differences between carriers emerge – on what limits they set on different scenarios such as that.”
Murphy also says that Swiss Re Corporate Solutions has an advantage over many of its rivals in this market in that it is able to retain all the risk – many insurers pass the bulk onto reinsurers, he says. This means that the client is taking twice as much counterparty risk on the coverage.
Johns agrees that it is important to use specialist insurers and brokers and he agrees that the lowest price will not always represent the best deal. “Be careful – don’t jump to the lowest price,” he says. “It is a sector where relationships matter. If you keep changing suppliers you can get into legal arguments around what coverage was in place when a certain accident happened. And that means additional legal costs.”
Day at Hayward Aviation also agrees, stressing that, by definition, jet owners should demand a better quality of service. “The reason someone chooses to have a personal jet in the first place is because they require a higher than normal level of service. They have opted not to fly first class but to fly wherever they want whenever they want on their own aircraft.
“It stands to reason, therefore, that they would want to choose an insurance broker who can emulate the level of service they seek in other areas of their lives and truly understand their requirements. They are price sensitive but they don’t want to be treated just as any other risk and pumped down the risk of priorities when something bigger comes along. That is why choosing a specialist broker makes sense.”
He also notes that specialist brokers and insurance carriers will also be more understanding of how varied the use of a jet can be and the terms of coverage should reflect this. “By definition, they will want to fly to different places at the last minute. You might have top fly into a war zone. You need someone who understands that.”