At Capacity: Social Inflation Risk Creates Opening for Quota Sharing in Aviation

By Robert Lombardo

Just as the U.S. trucking industry has been adversely impacted by nuclear verdicts, the aviation industry is reconciling with social inflation — an issue the pandemic only exacerbated.

Social inflation in aviation can be attributed to a coalescing of factors, including increased fly time, higher overall safety costs and more liability cases backed by litigation financing.

This means higher claims and more of them, according to a recent report that analyzed 50,000 aviation insurance industry claims worth more than $16.3 billion.[1] More than half of those claims were due to loss of control while in flight and includes collision/crash incidents such as hard landings, bird strikes and runway contact.

From an insured’s point of view, this amounts to increased aviation premiums, which were up as much as 25% at the end of 2021 and are expected to rise another 10% to 20% in the first half of this year.[2]

With the hardening of the insurance market, businesses and carriers alike are searching for a novel way to mitigate catastrophic risk. While in the past, a quota sharing policy structure was reserved for risks that were more questionable and difficult to write, now, social inflation is creating a wider market for quota sharing. A quota share policy structure is a horizontal placement, where various insureds participate on a risk. This approach enables brokers to get the capacity their insureds need when high limits are required. As an example, if a risk had a quota share policy structure with IAT providing 10% participation and there was a $25 million loss, IAT’s share of the loss would be $2.5 million.

IAT’s capacity when participating in a quota share structure is $10 million liability limit and a $5 million hull limit, which is contingent on the underwriting criteria.

The 5 Ms of underwriting

When evaluating risk for quota sharing, underwriters look for these five elements in each submission:

1. Management — Underwriters want to know who is managing the operation, how long have they been in business, their loss experience and their risk management processes.
2. Machine — The type of aircraft being insured.
3. Man — Pilot or mechanic, depending on the insurance coverage.
4. Medium — Which territory the aircraft is operating. For example, the State of Colorado’s primary operations are in the Southwest United States.
5. Mission — Use indicates exposure, i.e., aerial photography, cargo handling, and the types of services provided (charter, corporate, general aviation, personal use or industrial aid, for example), which will all influence the rate differently.

How to secure the best coverage

Brokers need to keep in mind the five M’s that underwriters are looking for when submitting an account for consideration. Here are four best practices brokers should implement to secure the best aviation coverage for their insureds:

• A good narrative on the submission. Take the time to tell your insured’s story by providing an executive summary that details the specific need including who the owners are and how long they’ve been operating. This is also the time to reveal anything unique about the insured that wouldn’t show through on a standard application. Provide as much insight as possible about the insured so the broker fully understands the business’ operations and related risks.
• Face time with larger risk. Nothing beats face-to-face meetings between the underwriter and an insured. This provides an opportunity to build a relationship and learn more about the business. A narrative and a face-to-face with the insured can close gaps for an underwriter.
• Start early. With increased management scrutiny, underwriters are becoming more selective and asking for detailed risk information. It’s important to understand the key information that insurers will require, and to allow adequate time for negotiation.
• Follow up with your underwriter. If you’ve already submitted an application and haven’t heard back from the underwriter, reach out. When considering action on a new risk, that’s the greatest opportunity.

To better understand how IAT can help you with your risks that require a quota share structure, contact an IAT Aviation underwriter today.

[1] Allianz Global Corporate & Specialty “Aviation Risk 2020. Safety and the state of the nation,” November 2019.

[2] USI “2022 Commercial Property & Casualty Market Outlook” January 2022.