The Cause and Effect of Aviation Insurance Rate Increases on Air Transportation

Abstract

After the September 11, 2001, terrorist attacks on the United States, the insurance costs for commercial airlines and college aviation programs rose sharply. The prevailing assumption is that increased aviation insurance costs are the result of an increased risk of life and property loss from additional terrorist attacks. This paper questions the assumption and posits that the September 11, 2001, attacks were a catalyst for and not the cause of increased insurance costs. Two alternative explanations for the increased costs are offered. First, after September 11th, insurance managers became aware that they had not been making the incremental rate increases necessary to maintain acceptable profit margins. Second, sharp declines in the value of the insurance company stock portfolios eroded profits. Increases in aviation insurance cost will be compared to increases in other types of insurance, such as medical insurance, to determine if the rate of increase in aviation insurance cost is significantly higher than in other sectors of the economy. The impact of these insurance rate increases on domestic and international air transportation and commerce is presented.