Aviation Inflation Hardening a Hard Market

Kristen Suarez, Executive Manager, BWI Aviation Insurance Agency, Inc. AIA Director-Elect, Agent/Broker Division

We all know that aviation insurance plays a critical role in mitigating the risks associated with owning and operating aircraft. As inflation continues to rise, the landscape of aviation insurance has undergone significant changes as the industry adapts.

Inflation is a sustained increase in the general price level of goods and services in an economy over a period of time. During inflation the prices of goods and services rise and the purchase power of money decreases. Inflation is usually measured as an annual percentage increase in the consumer price index (CPI). For example, during August 2021 the CPI showed a 5.3% increase compared to the previous year — the highest level since 2008. As insurers were beginning to correct for the years of soft market conditions and significant industry losses, we experienced broad-based inflation, which exacerbated an already hard market. This has challenged insurers to achieve and sustain profitable loss ratios due to the factors we’ll explore below.

Inflation can have a significant impact on aircraft values, parts, and aircraft repair costs. With technological advancements and market demand, aircraft values have been steadily increasing. As the general price level of goods and services in an economy rises, the cost of manufacturing aircraft, acquiring aircraft parts, and conducting repairs also increases. This, in turn, affects various aspects of the aviation industry, including aircraft values, repair costs, and ancillary expenses.

Firstly, inflation affects the value of aircraft. When inflation is high, the purchasing power of money decreases, leading to an increase in the overall price. This results in higher prices for new aircraft, but also influences the resale value of existing aircraft. Aircraft owners will find it particularly difficult to replace older aircraft that have been highly modified with upgraded avionics and technology, as the cost to purchase a similar vintage aircraft and make similar modifications may now be exponentially higher.

Suppliers are now charging higher prices for parts to cover their increased production and operations costs. Consequently, aircraft repair costs rise as the cost of parts increases.

In addition to the direct impact on repair costs, inflation can also result in higher ancillary claim costs, such as when an aircraft undergoes signification repairs and is grounded for an extended period. This situation can lead to additional expenses, such as payments for temporary replacement aircraft.

Secondly, inflation affects the costs of aircraft parts. Aircraft require regular maintenance, and parts replacement is often necessary to ensure their safe operation. With inflation, the cost of manufacturing and distributing aircraft parts increases.

Inflation can make the cost of leasing or renting temporary replacement aircraft more expensive, adding to the cost of the overall claim. Similarly, the need for temporary replacement parts during repairs can also lead to increased costs.

If certain parts are not immediately available, temporary replacement parts may be used to ensure the aircraft’s continued operation during the repair process. In an inflationary environment, the cost of these temporary parts may rise, further driving up the ancillary claim costs.

Third-party liability claims, particularly in cases involving bodily injury, can directly be impacted by an inflationary environment. Inflationary pressure can contribute to the concept of “social inflation,” which refers to the rising costs to settle liability claims. As the overall cost of living increases, individuals may have higher expectations regarding appropriate compensation for bodily injury. This can lead to higher settlement demands from claimants, as they seek to cover medical expenses, pain and suffering, lost wages, and other damages.

To address the impact of inflation, insurers have been forced to implement various adaptations to their underwriting philosophy. A few ways we have seen the market adapt are through implementing more risk assessment underwriting and offering risk management solutions.

Insurers rely on advanced risk assessment techniques including comprehensive analysis of aircraft records, safety measures and requirements for formal aircraft appraisals to accurately underwrite high valued aircraft. These resources allow insurers to determine appropriate premiums and coverage limits based on the unique risk profile of the insured aircraft. To manage and mitigate losses insurers continue to implement rate increases, reduce the ancillary coverages, and implement stricter underwriting by looking more deeply at pilot experience and enforcing additional training requirements.