We are pleased to summarize key year-end 2022 financial results for domestic U.S. General Aviation (USGA) admitted market insurers. This review includes data from the “Aircraft (All Peril)” line of business within the statutory annual statement obtained from S&P Global Market Intelligence, along with other sourced information. We excluded insurers with surplus line eligibility or domestication, which comprise the majority of the market for U.S. large aviation risk, such as airline and major product liability. As a result, we believe the data we reviewed provides the best publicly available snapshot for the performance of the USGA market. We have compiled various metrics for the industry, categorized by:
- Written premium
- Underwriting results
- Incurred losses
As a note, “incurred losses” within this report includes both loss and defense and cost containment expenses (DCCE). Additionally, we modified the admitted market’s incurred losses for select insurance companies that reported favorable development due to the takedown of reserves from the terrorist attack events on September 11, 2001 (9/11).
USGA written premium for 2022
The USGA admitted market reported $2.7 billion in written premium in 2022 (see Figure 1). This is a 10% increase from 2021 and contributes to a 70% cumulative surge from the $1.6 billion reported by insurers in 2018. This growth period represents the largest increase in written premium for the USGA market since the era immediately following 9/11. The rising tide has yet again lifted most boats, as nearly 90% of admitted carriers who wrote at least $1 million in 2021 reported higher top-line revenue in 2022. Furthermore, 45 states along with DC experienced a year-over-year increase in premiums written.
Figure 1: Direct written premium ($ billions)
The pace of premium growth is declining, however, with this year's 10% rise coming on the heels of three consecutive years around 15%. Looking ahead to 2023 year-end results, we anticipate that this slowdown will continue. A review of second-quarter 2023 statutory financial data suggests that USGA premium volume could grow between 5% and 10% over the full year.
Aviation insurers recently benefited from more significant increases in certain segments, like large commercial managed fleets, which were historically written on a 100% basis by one insurer and are now more commonly placed in the subscription market, where several insurers write a percentage of the policy. In certain other segments, like private business and pleasure (PB&P) and unmanned aircraft system (UAS), the premium and rate increases were lower. Notably, the 70% premium growth over the last four years may actually understate the scale of increase, as some large USGA accounts that previously went to the subscription market may now be written in part by European insurers or via surplus lines capacity. Also, some major risk premium may be included in these amounts, and this may have increased between 2020 through 2022 due to the recovery in airline passenger movements.
The USGA market has also seen significant increases in ceded premium to the reinsurance market over the past few years. Between 2004 and 2016, the market consistently ceded about 40% of its direct written premiums to outside reinsurers (i.e., excluding any pooling or other transactions within an insurer’s own group). The past five years have witnessed this ratio steadily climbing to 50%: consequently, the recent 70% growth in USGA admitted market direct written premium translates to a 54% growth rate in premium retained by the initial writing company (or insurance group). We suspect the growth in premiums ceded to outside reinsurers stems from a combination of unprofitability in recent years along with concerns over emerging claim severity as discussed below.
USGA underwriting results
Reviewing the USGA market underwriting results over the last few years helps to explain the recent firming of the market. From 2016 through 2020, the market lost approximately $700 million on an underwriting basis (i.e., excluding investment income), as displayed on Figure 2. In 2019 alone, the market lost nearly $300 million on $1.8 billion in premium. This period of unprofitability led to the recent rate firming, which in turn guided the USGA market to small underwriting profits in 2021 of $92 million and $100 million in 2022.
Figure 2: Underwriting results ($ millions)
From a longer-term perspective, the post-9/11 rate increases led to 14 consecutive years of underwriting profitability for the market (2002 through 2015). Thus, after nearly $700 million of losses between 2016 and 2020, the underwriting profits in 2021 and 2022 were a welcome reversal, showing that profitability is once again trending in the right direction for long-term sustainability and solvency. It should be noted, however, that the market’s 4% profitability level in both 2021 and 2022 (measured as a percentage of earned premium) lags materially behind the USGA admitted market’s post-9/11 historical average.
Underwriting expenses in recent years are higher across the board (see Figure 3). Certain of these expenses—agent commissions, brokerage fees, and taxes—are tied to premium volume and help to explain the recent rise in costs. Increases to other acquisition and general expenses were more modest, however, which effectively reduced the underwriting expense ratio (as a percentage premium) during these past two years to levels that are four percentage points lower than the ratio experienced during the unprofitable years. A return to long-term sustainable profitability levels must therefore be centered around incurred losses.
Figure 3: Underwriting expense ratio
USGA incurred losses in 2022
Incurred losses in 2022 were higher than all other recent years, continuing a trajectory that has witnessed losses more than doubling since 2014 (see Figure 4). Over this period, the steady increase in USGA losses along with premiums that essentially held steady through 2018 led to loss ratios that were well above pricing targets. Figure 4 also shows loss ratios between 65% and 70% for the most recent two calendar years, which are improved from 2017 through 2020 but are still somewhat higher than years prior to 2014. This pattern mirrors the above discussion regarding underwriting results and profitability levels.
Given that the COVID-19 pandemic caused a reduction in flight activity, it was expected that accidents in 2020 and 2021, and resulting claim costs, would have been significantly lower than losses in prior years. Instead, the incurred losses in 2020 through 2022 provide further evidence that USGA claim costs continue to be a challenge for the industry. Rising incurred losses are caused by increases in exposure, claim counts, and/or claim severity, so which component is driving the losses?
Figure 4: Incurred losses ($ billions)
Exposure and claim counts
Federal Aviation Administration (FAA) data1 shows that, while overall flight activity was lower in 2020 due to the pandemic, general aviation traffic recovered more quickly than the commercial airlines. This explains why an expected material drop in USGA admitted market incurred losses for 2020 and 2021 did not occur, although the rising costs issue remains.
National Transportation Safety Board (NTSB) U.S. data2 shows that both fatalities and severe injuries have generally trended lower since 9/11 (see Figure 5). Assuming the 2020 nadir stemmed from reduced exposure, the slight uptick in fatalities and severe injuries in 2021 and 2022 is still materially consistent with the NTSB data’s long-term downward trend trajectory.
Figure 5: NTSB number of aircraft fatalities and severe injuries
Focusing on 2014 and subsequent years (i.e., the period in which we noted incurred losses having more than doubled), NTSB data shows that U.S. fatality and severe injury counts are notably flatter than the long-term trend. The use of NTSB head counts as a proxy for liability-based frequency is reasonable, and this data suggests that the frequency of liability-based events is not driving the recent increases to incurred losses.
Besides liability, USGA policies typically cover the cost of repair or replacement of aircraft due to adverse weather events, such as hurricanes, tornadoes, hail, wind, and heavy snowfall. These hull claims certainly affect the market’s profitability (e.g., damage to dozens of aircraft at North Perry Airport in Florida stemming from 2022’s Hurricane Ian), but alone they do not explain the multiyear upward trend in incurred losses.
Severity on liability claims
Claim inflation continues to be a problem for the insurance industry and the aviation market is not immune from these trends. Given the relatively high policy limits provided in certain general aviation segments, the risk of social inflation (e.g., an increased tendency to punish those who cause injury to others) is of particular concern. U.S. juries have been awarding significantly higher sums in recent years. The median value of a single-fatality award by U.S. juries3 has gone from $2 million to $5 million over the last few years (see Figure 6), and of particular note is that the timing of acceleration in the chart mirrors the period in which USGA incurred losses saw rapid growth.
Figure 6: Median value of awards in the United States of single fatality ($ millions)
Insurers are also experiencing an increase in the frequency and severity of runaway verdicts. The aviation market has not been immune to this trend either; with multiple nine-figure verdicts in recent years, including:
- $116 million awarded to families of three crew members who perished in a cargo flight in Afghanistan4
- $148 million awarded to a person paralyzed at O’Hare Airport5
- $352 million awarded to a United Airlines employee paralyzed at George Bush International Airport6
These judgments have had a spiraling effect, with past verdicts leading to routinely higher demands by plaintiffs, and increased costs of settlements. Some of the claims that are impacted are those that have occurred in the last few years. These claims had previously been reserved using historical loss values but may be under-reserved based on recent claim trends. Changes in reserves on these claims are likely also having an impact on the 2022 profitability, as any adverse reserve development on claims in older accident years will suppress profitability levels in the current year.
Severity on hull claims
Newer-generation aircraft are made with composite materials that are much more expensive to repair than aircraft of previous generations. They require proprietary bonding techniques and specialized equipment that significantly reduce the number of entities with the expertise to make the repairs. Recent inflation, labor shortages, and supply chain issues have impacted the aviation industry as well. Figure 7 displays the monthly increase in aircraft costs relative to 12 months prior.7
Figure 7: Producer price index for aircraft and aircraft equipment (monthly)
USGA market: Looking ahead to 2024
The USGA insurance market has been very competitive for a number of years, with USGA policyholders benefiting from reduced premiums and competitive rates up until around 2019, at which point rates in the market began to harden. Even with the substantial increase in premium achieved over the last few years, the 2021 and 2022 calendar years reported only a small underwriting gain. A number of factors such as increasing severity trends and the broader liability environment continue to be significant challenges for insurers. We expect these factors will likely extend into the near future. Taken together, our analysis indicates that the USGA insurance market is heading in the right direction but needs to continue to increase premiums to return to historical levels of profitability.
1 FAA data retrieved September 18, 2023, from https://www.faa.gov/data_research/aviation_data_statistics/general_aviation/ and from https://www.faa.gov/air_traffic/by_the_numbers/media/Air_Traffic_by_the_Numbers_2023.pdf.
2 NTSB accident data retrieved September 18, 2023, from https://data.ntsb.gov/avdata/.
3 Source: Advisen, a Zywave company.
4 Nolan Law Group (June 30, 2017). Jury Awards $115.75 Million to Families of Flight Crew Killed in Afghanistan Cargo Plane Crash. Retrieved October 29, 2022, from https://www.prnewswire.com/news-releases/jury-awards-11575-million-to-families-of-flight-crew-killed-in-afghanistan-cargo-plane-crash-300482616.html.
5 Wojciechowski, C. & Orlando, T. (August 24, 2017). Jury Awards $148M to Dancer Paralyzed in O'Hare Shelter Collapse. NBC 5 Chicago. Retrieved October 29, 2022, from https://www.nbcchicago.com/news/local/verdict-reached-in-case-of-dancer-paralyzed-by-ohare-shelter-collapse/22562/.
6 Langford, C. (October 26, 2021). Texas jury awards $352 million to family of paralyzed airport worker. Courthouse News Service. Retrieved October 29, 2022, from https://www.courthousenews.com/Texas-jury-awards-352-million-to-family-of-paralyzed-airport-worker/.
7 Source: Federal Reserve Bank of St. Louis; see https://fred.stlouisfed.org.