Aviation Insurance Claims Costs are Rising. Here’s Why.
Pilots, operators, and other aviation stakeholders have observed that aviation insurance claims costs trend upward. Understandably, many ask why that is the case. While there is certainly a “cost of living” component to this increase, it often seems that the rise in claims costs outpaces that index. What, then, is the reason? The answer is that there are multiple factors involved.
Aviation Insurance Claims: Covering the Cost of Progress
One factor driving aviation insurance claims costs higher is advancing technology. For example, some newer aircraft engines have designs that make them more efficient and lighter in weight, but also make them more expensive to repair.
In particular, many newer engine compressors are cast as one unit (blades included) and unrepairable damage to any area means the entire unit must be replaced at significant cost. Plus, in general, the composite materials used in modern engines are generally more expensive than the traditional materials they replace.
Newer engines are also being built to tighter tolerances. Consequently, it takes less damage to cause an internal engine component to fall beyond repairable limits set by the manufacturer. When this occurs, a full replacement of the damaged component is required.
The new-generation aircraft engines used in airline applications can cost upwards of $38 million. While extensive repairs may be possible given the high value of the engines, operators are sometimes reluctant to undertake them, preferring to replace the damaged engine instead.
Composite material used in newer aircraft structures is a significant factor in aircraft weight reduction and generally stronger than aluminum. However, damage to a composite structure or component can be difficult to detect, and more costly to repair than aluminum used in most aircraft.
How Changing Aircraft Manufacturing Practices Affect Repairs
Another factor in the upward trend of aircraft insurance claims costs is the impact of changing aircraft manufacturing practices and parts inventory. In order to operate more cost-effectively, many manufacturers today keep very little parts inventory on hand. Many older aircraft are no longer manufactured and replacement parts availability for these aircraft is limited. In these instances, the part may have to be remanufactured at a very high cost. For newer aircraft, if a component part is needed for the repair process, often the part is not in stock and may have to be pulled from the assembly line.
Resolving this dilemma, of course, takes longer than simply obtaining the component from an aircraft manufactures’ inventory and sending it to the repair facility. Consequently, the aircraft needing repair may be out of service longer.
The good news is that manufacturers have been able to adopt this approach largely because improvements in a wide range of areas — from technology to training — have resulted in fewer incidents and less aircraft damage. The bad news, however, is that the reduction in parts availability leads to higher repair costs and greater inconvenience.
Aviation Insurance Claims: The Effect of Insureds’ Repair Preferences
Aviation insurance policies typically state that repairs will be made with components of “like kind and quality.” Although this phrase is widely used in aviation and elsewhere, creative arguments have been made about its meaning. In the past, aircraft operators were more accepting of repairing damaged components.
Utilizing new parts during the repair process significantly increases the repair cost when compared with repairing components using methods designed and approved by the Original Equipment Manufacturers’ (OEM) engineering department. Aircraft operators also want to minimize the potential for a diminution in aircraft value when they sell their aircraft by utilizing new parts whenever possible.
The limited availability of core exchange pricing for new parts has also increased the cost of repair. Historically, manufacturers would discount the cost of a new part in exchange for receiving the damaged but repairable part. The manufacturer would then repair the damaged part and place it in their refurbished parts inventory. However, many aircraft manufactures are reluctant to accept core exchanges (especially for new aircraft) since the damaged part they get in return could potentially sit in storage for years after it is repaired, increasing their carrying costs and delaying the return on their investment. Therefore, the availability of certified refurbished parts has become limited.
How the Move Away from Certified Repair Facilities Increases Costs
Another factor pushing insurance claims cost higher is the desire by some operators to have the repair performed by the aircraft manufacturer, rather than an MRO (maintenance, repair and overhaul) facility. This in spite of the fact that MRO facilities are fully authorized and qualified to perform the repairs, and may even be able to return the aircraft to service sooner.
However, many owners have concerns that when they are ready to sell the aircraft, a potential buyer would learn that certain repairs were not performed by the manufacturer and could use that as leverage in purchase price negotiations. Thus, many owners opt for a manufacturer repair. Of course, in some instances the manufacturer is the only entity authorized to perform the work.
Controlling Aviation Insurance Claims Costs: An Ounce of Prevention…
As technology continues to advance, it will surely get more expensive to repair a damaged aircraft, and aviation insurance claims costs will continue to be largely outside the control of aircraft owners and operators. However, safe operation of the aircraft is, and will always be, something within their control.
There are many steps that pilots, maintenance personnel, and operators can take to mitigate risk, avoid incidents, and prevent the resulting repair costs. These include:
- Proper maintenance. It is critical that aircraft are maintained in accordance with the aircraft manufacturer’s recommendations. Airframe or engine failures, especially in flight, can have significant financial ramifications.
- Training. Recurrent training for pilots and mechanics is critical to ensure the safety of flight and maintenance operations.
- Responsible operation. Weather-related incidents in particular are a major source of expensive repair costs. For example, hail damage and lightning strike repair costs have been known to exceed $1 million in damages and result in lengthy down time to accomplish the repairs and return the aircraft to service.
- Capitalizing on the Global Aerospace SM4 Safety program.This program provides a wide range of resources including information on airmanship skills/upset recovery training, human factors, risk management and flight training for UAS operations, safety regulations, and more.
Ultimately, the time and effort invested in these measures is well spent, as every incident prevented is a claims cost avoided.
If you have questions about claims costs or want to learn about our aviation insurance products, please contact us at your convenience.