Insurance premiums are skyrocketing for air carriers, and the number of companies willing to write policies in Alaska has dropped to just a handful in the past few years.
High accident rates and repair costs, a slumping stock market, lawsuits and the terrorists attacks of Sept. 11 are just some of the reasons for soaring insurance costs in Alaska and elsewhere, air carriers and insurance officials say. The bottom line likely will be increased prices for airplane seats, as the costs will be passed on to passengers.
Rates for Alaska air carriers have increased anywhere from 20 percent to more than triple in the past year, depending on the number of company claims, said Mike Salazar, a Ketchikan-based agent with Acordia Northwest, an insurance brokerage firm in Seattle.
"Most air carriers with a clean record had a 20 percent increase,'' said Salazar, adding that those who had claims are seeing rates go up as high as 200 percent or more.
Salazar is not unsympathetic to air carriers. For nearly 30 years before selling aviation insurance, he owned Ketchikan Air Service Inc., a company he sold in 1998.
"Certainly, my time in the industry helped me understand the problems on their side of the fence," Salazar said.
Mike Vanard, vice president of Seattle-based U.S. Aviation Underwriters Inc., said insurance his company offers generally has risen 18 to 30 percent in the last year.
"Insurance is cyclical, it has big, sweeping curves. Right now we're at the opposite (high) end of that curve," Vanard said.
Orin Seybert, president of Peninsula Airways Inc., has been in the commercial airline business since 1956. The longtime Alaska aviator agreed he rates are cyclical.
"I look at insurance like a pendulum, it goes in cycles, every four to six years it goes up,'' Seybert said. "It's been edging up there and it is absolutely the highest I've seen it."
Seybert said insurance accounts for about 10 percent of his company's overall costs.
Vanard's company is one of about five or six companies willing to offer insurance in Alaska. A few years ago that number was at least a dozen, according to air carriers and insurance officials.
Nationwide, there also has been a decrease in the amount of companies willing to insure air carriers.
When selling insurance, companies, whether aviation or otherwise, bet that they will not have to pay out a claim; those buying an insurance policy are betting they may have a claim, said Thomas Turner, an aviation author and former insurance broker based in Cleveland, Tenn.
In the case of aviation, both sides are losing, Turner said, as accidents and claim amounts are up. That also has prompted many insurance underwriters to get out of the aviation business, Turner said.
Key to understanding aviation insurance industry is what is called "loss ratio," the amount of money paid out in claims versus what is taken in by the insurer, Turner said. Aviation insurance companies, which write both general aviation and commercial policies, have paid out as much as $1.25 for every dollar taken in, but the company would still make money -- 30 percent or more -- in investments during a healthy economy, Turner said.
"Until a few years ago, underwriters could operate at a loss, turn around and take the money and invest it in the stock market and make a small fortune out of it," Turner said.
Seybert, who has operated in Alaska for 46 years, said he believes the economy more than claims is what drives insurance costs.
"Rates are not determined by losses as much as on the economy in general," Seybert said.
Simply buying aviation insurance is not the problem, but the amount of coverage offered to many carriers may not be sufficient to cover lawsuits, air carrier and insurance representatives say. Many air carriers in the state are operating at minimum liability coverage levels, but not by choice.
"Some operators are at a $250,000 per person limit, and in this day and age, that is unrealistic. The carrier is exposed," Seybert said.
Most carriers in Alaska, according to Salazar of Acordia Northwest, carry insurance liability minimums of between $500,000 and $1 million per aircraft passenger seat.
"Most attorneys will almost always try to breach that," Salazar said.
The threat of lawsuits scares underwriters, Turner said, and most insurance companies know they'll lose a jury trial.
Out-of-court settlements are typical, he said.
"From a legal standpoint, pilot negligence is easy to prove, because almost all accidents do have some sort of pilot error," Turner said.
James MacPherson is a reporter for the Alaska Journal of Commerce in Anchorage.
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