A soaring market
A staggering 75% of all General Aviation aircraft operated in the world are registered in the U.S. – making this the world’s largest General Aviation market. This is also a market with a high deliveries growth rate, especially as regards business jets – overall General Aviation aircraft sales trends currently lying in the 18% per annum range.

The corresponding insurance market for this class of business has been in excellent shape, in particular between 2000 and 2005 when the class consistently delivered good results due to a combination of steadily improving safety records and sound technical underwriting. It had not always been like this – the market shaped up following earlier poor results and the demise and/or consolidation of several significant market ­players.

From 2005 – a year of record results combined with high growth expectation and a simultaneous resolve by insurers to diversify their portfolios – and increasingly in 2006, the U.S. General Aviation market experienced a sharp upturn in the number of underwriting entities and capacity. As had to be expected, the effect was a softening insurance market as suppliers felt the need to compete for business, initially via rate reductions, and then of late, also by offering broader wordings and auxiliary covers at little or no extra charge.

Underwriting challenges
Pilot coverage is one of the elements of poor risk selection associated with broader wordings. Assessment of the pilot is as important as that of the aircraft itself – both in terms of flying experience, and of matching ‘man?&?machine’. At the top of the scale, cover is tied to named pilots and their respective flying experience – quantitatively and qualitatively. One step down, open pilot warranties give cover to any pilot ­fulfilling a certain minimum ‘flying hours’ condition. And the worst case scenario, cover is specified as ‘pilots and/or uses as approved by the insured’, stipulating no such limitations for pilots; this grants the widest cover and assumes the potentially least attractive risks. The imminent release of ‘Very Light Jets’ moves this issue even further into focus, especially with regard to owner-flown operations.

Whilst a certain extent of price erosion on a given risk may impact cost ratios and bottom line results, this is quantifiable, and, if correctly managed and temporarily applied, need not necessarily threaten the security of the supporting capacity. In fact, taking into account a number of base risk improvements in the U.S. General Aviation sector, including the up-grading of transitional pilots from old analogue avionic systems to new glass cockpits, rating arguably remains within acceptable ranges; combined ratios are in the low 90’s in many segments, which is where they need to be to produce a sustainable underwriting return. In contrast, failing to maintain underwriting discipline, or worse integrity, as regards risk selection and coverage scope is a far more dangerous path to embark upon. High cost ratios can be a nuisance, but insufficient loss ratios can cost one’s future.

On the plus side for market viability, and not surprising given the potential for sky-high indemnity awards, ­intelligent limits management in the U.S. has held strong. Some insurers are also effecting overall limit reductions in line with reduced risk quality and/or applying sub-limits. This may help to dampen the impact of widened covers, but is neither a quantifiable nor reliable counterbalance to writing unsustainable risks.

Regained confidence
U.S. General Aviation premium income is now assumed to be in the region of U.S. $1.8 billion, which is almost the same as the whole of the global Airline sector. Due to rate erosions, the estimate for 2008 is U.S. $1.6 billion. Considering natural unit growth and constant technical improvements, the market clearly has a solid future, but as is typical for our industry, new capacity can spark instant revisions of risk acceptance process and framework. The problem is that when this happens, the market begins a very bumpy ride which will ultimately force General Aviation into a ‘Controlled Flight into Terrain’.

By not losing sight of limits and coverage management, and by reverting to sound, technical rating of risk, confidence can be regained in spite of competitive underwriting and the market will be able to resume its strong course, reliably supporting this expanding sector in the U.S. and around the world.