HAI/Phyllis Utter Illustration
Why does your insurance cost so much, and what can you do about it?
After a decade of low insurance rates, rotorcraft operators are feeling the gut punch of soaring premiums. The painful truth is that rates aren’t going down soon, if ever. While several factors have converged over the past few years to spur high insurance costs, understanding the aviation insurance ecosystem offers important clues for how operators can reduce the hurt.
Market Size Matters
One factor affecting costs is the small size of the aviation insurance market. Some 1,500 insurance companies in the United States serve automobile owners, but just 15 underwriters insure aviation operators.
Each insurer has its own appetite for liability limits, risk, and types of operations. Some handle helicopter operations better than others. Some won’t insure them at all. Some only work with private operators. Others prefer the commercial sector.
Moreover, with today’s higher liability and hull values, insurance companies sometimes spread the risk by requiring a quota share where two or three providers come together to insure one operator, further reducing the pool of insurers competing for your business.
“The market gets very small fast. The more specialized you are, the smaller it gets. So many times, helicopter operators have only one option, maybe two at the most,” says Jim Gardner, who has 20 years of experience in the insurance industry, including as owner and president of the James A Gardner Co., an aviation insurance broker based in Marietta, Georgia.
“The general aviation industry is also not large. There may be $5 billion to $6 billion in total revenue worldwide, with about $2 billion to $3 billion in the United States. If you look at the rest of the property and casualty world, that’s a very small fraction. There may be $3 billion worth of property and casualty premiums in Atlanta alone,” he says.
In an industry built on acquiring a large group of customers whose premiums subsidize the payout for those with claims, the relatively small size of the helicopter industry works to keep premiums high.
“The insurance world works on the law of large numbers of homogeneous units putting money into a pool,” says Gardner. “That money goes to pay the claims in aggregate of everybody. In aviation, the law of large numbers doesn’t work. The industry just isn’t large enough.”
The Insurers’ Perspective
Turns out, those gloriously lower insurance rates that began in the late aughts and lasted through 2018 were destined to climb. Operators today are feeling the impact of that unreasonably soft insurance market.
“The entire aviation insurance industry was losing money hand over fist—15 to 20 cents on every dollar they collected. That wasn’t sustainable,” says Gardner. “We started seeing insurance rates rise dramatically in 2019, 2020, and 2021. Even so, I would say that the losses are still unacceptable. Over the past five years, the losses may be as much as $600 million to $700 million from just general aviation.”
When a new underwriter entered the aviation insurance market in the first quarter of 2022, many hoped the additional capacity and more competitive underwriting atmosphere might help lower rates. Gardner, however, doesn’t believe it will have much impact on rotorcraft operators.
“I see the trend still moving toward higher rates. On top of inflation, the cost of claims is going up and accidents aren’t going down appreciably, which puts pressure on the insurance companies. However, I don’t think we’ll see the 30% to 100% increases in premiums that we’ve seen over the last couple of years,” he says. “My average client right now is staring at a 10% to 20% increase, depending on the quality of their operation.”
To the bottom-line question that every helicopter operator asks their aviation insurance broker, “Will my rates ever go back down to the 2018 rate?” the answer is no. The insurance companies have returned to underwriting practices that emphasize risk management. In other words, they’re vetting their customers a whole lot more closely.
How the Other Guy’s Accident Affects You
Safety advocates often say one person’s accident is everyone’s accident—that we are all affected by the level of overall operational safety in our industry. And when it comes to insurance, that’s certainly true: each accident payout affects the premiums for other operators.
“You can be the best, safest operator in the entire world and yet your insurance rates are going up 10%. It’s because of all those other guys out there. If someone has one total loss, how many policies would the insurance company have to sell at the same premium to make up for that one total loss? It’s humbling,” says Gardner.
Aviation insurance companies don’t share details about how they calculate premiums, but other organizations do track and report accident information. The US Helicopter Safety Team, the group of government and industry volunteers working to improve safety in US civil helicopter operations, examined 10 years of helicopter operations data from January 2009 through 2018. The chart below presents the team’s finding by industry sector.
The team found that while air ambulance helicopters flew about 16% of the industry’s more than 31 million flight hours during that period, they accounted for only 7% of all rotorcraft accidents. Also ranking in the top three sectors for fewest accidents per share of flight hours were police/news-gathering/aerial observation flights and air tour/sightseeing flights.
On the other hand, private pilots operating personal helicopters accounted for a full 22% of accidents—a staggering number given they fly only 3% of all flight hours. However, these pilots typically face numerous challenges: they may be less experienced, and their operations often lack the safety infrastructure and layered decision-making of larger operations.
Helicopter operators working in aerial application as well as those supporting utility and construction operations also had higher rates of accidents than others because of the challenging environments they operate in, including flying in the obstacle-rich low-altitude airspace.
“Helicopter operators fly lower and slower. They put the helicopter in a lot more hazardous positions than most fixed-wings. For helicopters, it’s not just where they fly but where they could fly,” says Gardner. “Plus, as the old saying goes, when it comes to helicopters, there’s no such thing as a partial loss.
“Consider this: you do a successful autorotation and clip a tree on the way down. Everybody lives, nobody gets hurt, but you may have destroyed a rotor blade, rotor head, or maybe even a gearbox, and what you didn’t destroy requires inspection,” he says. “Insurance companies look at all of that and say that the cost of repairing helicopters is high. Whether it’s a fixed-wing aircraft or rotorcraft, you’re going to be rated on the ship you fly and what you do with it.”
Surely, if they could, insurers would shout from the rooftops, “Want lower rates? Stop having accidents.” Actually, myriad factors feed into an underwriter’s premium-setting equation, especially in today’s market.
Even as premiums rise, the cost of a claim is rising too, from 30% to 150%, according to Gardner. Pandemic-fueled supply chain issues make parts difficult and expensive to obtain. Advanced technology, from composite materials to state-of-the-art avionics, is expensive to repair and replace. Third-party–backed litigation is driving up legal costs. And like other businesses, insurance companies are raising their premiums to offset inflationary pressures.
“We have several converging black swan events—the pandemic, the Ukraine war, and the fact that Russia has impounded several hundred airplanes. The insurance companies are looking at a very large potential payout,” says Gardner.
Operators: How to Lower Your Insurance Costs
Given this increasingly difficult insurance landscape, can helicopter operators do anything to lower their individual premiums? Yes, to a degree, says Gardner, who recommends that operators take various steps to reduce their operational risk.
“The better your maintenance, the better your pilots, the better your training, the better you are at making operational decisions, the more command and control you have, the more standardization you have, and the more adherence by your senior management to those standards—all these factors can lower your risk and make you a better risk to an underwriter,” Gardner says.
As an example, private pilots could dramatically reduce their helicopter accidents, and eventually their insurance premiums, by adding structure to their aeronautical decision-making through the use of a flight risk assessment tool.
Private and commercial rotorcraft operators could make major strides in mitigating risk by improving their safety culture and implementing a robust safety management system (SMS). HAI members should visit rotor.org/safety to access a variety of affordable SMS options and flight risk assessment tools.
Another path to reducing risk is to institute a more meticulous maintenance program. For example, Saleh et al. found that, from 2005 to 2015, flawed maintenance and inspections were causal factors in 14% to 21% of US civil helicopter accidents, according to their February 2019 article, “Maintenance and Inspection as Risk Factors in Helicopter Accidents: Analysis and Recommendations” (available online at https://bit.ly/3QgPDWh).
“Will all those things pay for themselves by reducing your insurance rate? No, but what they will do is help you avoid an accident,” says Gardner. “Anyone who’s ever had one knows that the cost of an accident goes far beyond what the insurance company pays for.”
In addition to minimizing their operational risks, helicopter operators should develop a relationship with an underwriter rather than try to chase lower premiums, recommends Gardner.
“The best insurance rate is going to those who are not just the best risk but who are also cultivating a relationship with the underwriter. In the long run, you’ll get the best results by staying with an insurance company that fits your operational style, understands your pressures as an operator and manages that, and writes it in accordingly,” he says.
Another strategy is to increase your deductible. Insurance companies look at an operator’s claims ratio, which is generally the number of claims over the past five years divided by the total amount of the premiums paid. If an insurance company pays out on hangar rash and other small claims, an operator can quickly become underwater in their claims ratio.
“Even the little stuff hurts. It’s not unusual to see a deductible of 5% to 10% or even more,” says Gardner. “For easy math, consider that if you have a $1 million helicopter and 10% deductible, you’ll pay the first $100,000 of damage out of your pocket. It tells the insurance company that they don’t have to deal with the smaller claims, which can add up. Plus, the insurance companies know that’s a lot of incentive for you to be extra careful.”
In an effort to help its member operators better navigate the current insurance climate, the HAI Board of Directors recently initiated the formation of an insurance working group to address the issue of rising premiums. (For more on this, see “Looking for Answers,” below.)
“HAI can help insurance companies identify operators who are doing a really good job with their training and safety culture versus those just operating to minimum FAA standards,” says Chris Martino, HAI’s senior director of operations and international affairs. “For those implementing best practices and going the extra mile, insurance companies can then say a discount is in order.”
Creating a Sustainable Industry
Gardner cautions against operators comparing their premiums with those of other operators, because what might seem similar on the surface actually isn’t. “Every risk is unique. Your operation is different. Your airframe is different with different equipment. Your pilot has different skills and experience.
“Ultimately, all of us who fly need a sound and solid insurance industry,” Gardner continues. “If everyone did everything they could and accidents were just a bad day rather than self-induced, then insurance rates could potentially level off or even come down. But those years between 2008 and 2018, those were abnormally low rates. We’re now getting back toward what is normal and sustainable.”
Gardner encourages operators to look at how the insurance and rotorcraft industries are linked by their mutual interest in improving safety. “The bigger the bucket with less payout, the stronger the insurance industry and the less the likelihood of some catastrophic event upsetting the applecart. We’re truly all in this together.”
Looking for Answers
HAI launches the HAI Aviation Insurance Working Group.
During its June meeting, the HAI Board of Directors identified the need for an aviation insurance working group to address the issue of rising premiums for rotorcraft operators. Over the next several months, Chris Martino, HAI’s senior director of operations and international affairs, will head the search for participants.
HAI members interested in learning more about the Aviation Insurance Working Group should contact Chris Martino at [email protected].
“The skyrocketing costs of insurance across the entire aviation industry have people concerned. The board believes that by providing industry with a way to work closely with insurance companies, we can address concerns and provide some relief to rotorcraft operators,” says Martino.
The board intends for the working group to include a mix of insurers, brokers, and operators as well as representatives from every industry sector, including air ambulance, utility patrol, construction, aerial firefighting, and others. The diversity of rotorcraft operations poses challenges for insurers when it comes to assessing risk.
“Not all insurance providers are the same, and not all insurance issues are the same for all operators. For example, someone lifting timber out of the Pacific Northwest with a big helicopter may have completely different insurance needs than a tour operator with a smaller helicopter. We want and need a variety of perspectives,” Martino says.
“By bringing the two groups together, there’s an opportunity to bridge some knowledge gaps and help insurers feel more comfortable with the risk they’re taking to provide insurance,” he says. “Through the working group, we can identify key factors that tie directly to a culture of safety and allow an insurance company to say, ‘We see you’re operating at this level, and therefore you’ll get this discount.’ ”
In addition, Martino hopes to get answers for rotorcraft operators, including the effect on the helicopter industry of big payouts on behalf of large, commercial fixed-wing operators, as in the Boeing 737 Max accidents. Underwriters typically hold that type of information closely, but the hope is that they’ll share more details in the collaborative atmosphere of the working group, where everyone has the same goal: reducing the risk of incidents and accidents and providing affordable insurance solutions for helicopter operators.