Despite the spate of high-profile aviation disasters, insurance rates for airlines rose only modestly. Insurers had to walk the tight rope of balancing underwriting priorities with the need to guard market share. So what gives?
Despite talk of double-digit premium increases following high profile airline losses in 2014, aviation rates on the whole only rose slightly during the January renewals as excess capacity ensured that it remains a buyer’s market out there.
“There is significant excess capacity in the aviation insurance market and that has driven significant competition and has therefore depressed the level of increases that underwriters are able to achieve,” said Mr Steve Doyle, Willis Aerospace Business Development and Sales Director, in a recent report.
In that report produced prior to the AirAsia crash on 28 December, Mr Doyle said that rates have only moved up in the “single digit” despite earlier optimism that the market was at an inflection point after the extraordinary loss events recently.
“Following the unfortunate and tragic losses that took place earlier on in the year, insurers were calling for significant premium increases as we approached the renewal season. Those increases have not materialised and many programmes are now being placed with single-digit premium increases,” said Mr Doyle.
Rate increases to be selective despite costliest year
Given the extraordinary losses last year, 2014 is set to be the costliest year for aviation claims since 9/11. Lloyd’s mentioned in September that while the global aviation hull war market accounts for US$65 million in annual premiums, total claims faced by the industry could already exceed $600 million.
Aside from the disappearance of MH370, aviation disasters in the second half of the year included the shooting down of Malaysia Airlines plane, flight MH17, above eastern Ukraine in July; attacks on Tripoli International airport; the loss of an Air Algerie flight in Mali and the crash of a TransAsia Airways plane in Taiwan.
But even with the most recent AirAsia crash in December, many still doubt it would be enough trigger a broad market hardening.
“Perhaps we can see significant increase on some of the airlines that’s been paying relatively low premiums, but there is still a lot of capacity out there,” Mr Tony Seakins, Vice-President of Aerospace at AIG (APAC) told Asia Insurance Review.
“For subsequent renewals, I think it’ll take more than the latest crash before we see signs of change,” he added.
In JLT Group’s latest report titled “Plane Talking”, Mr Paul Hayes, Director of Air Safety and Insurance at Ascend, wrote that while rates are up, increases would differ on an individual basis amongst carriers and that those with “normal risks” would receive a “relatively minor increase”.
“From our analysis it remains evident that there is a significant variation between each airline’s renewal results. Those smaller accounts and/or those with poor loss records seem to be attracting higher increases than others.
This is a primary factor that we expect to continue for the foreseeable future,” he said.
Evidently, the excess capital in the market has held a stronger sway on underwriting sentiment compared to the exceptional losses in the past 10 months.
Capacity continues to be high in the airline insurance market, with a non-US airline that has a US$1.5 billion liability limit seeing offered capacity totaling almost 230%, according to an Aon Risk Solutions report.
Equally, underwriters are under pressure to maintain their premium income at a time when competitors are having a look in as part of efforts to diversify their books.
“There is no let-up in the availability of capacity, this is driven by lack of return elsewhere, and the need for insurers to diversify their risk for Solvency II which in part also supports the underwriters’ focus on maintaining or growing premium income,” said Mr Hayes.
Despite the tragic accidents in the past year, the safety profile of the airline industry has never been better today than at any point in aviation history.
Allianz Global Corporate & Specialty’s (AGCS) report on aviation safety shows there are currently fewer than two passenger deaths for every 100 million passengers on commercial flights, compared to the early jet age of the 1960s where there were 133 passenger deaths out of every 100 million passengers.
Hence, this has played a part in premiums becoming lower and lower as underwriters respond to technological enhancements that have made aircrafts safer than ever before. At the end of 2013, around 80% of airlines enjoyed a reduction in their lead hull and liability premium, the highest proportion of reductions since 2001, according to Aon Risk Solutions.
In fact, the amount of lead hull and liability premium for airlines has been falling year on year.
“A decade ago, there was significant discussion about the ramifications for pricing if the total annual lead hull and liability premium fell below $2 billion. This floor was breached in 2006 and total premium has been below $2 billion each subsequent year,” Aon’s report noted.
The report also added that with total global lead hull and liability premium falling a further 10% on average for 2013/14 insurance programmes, total lead premium for the year was approximately $1.4 billion, while total claims in 2013 was in the region of $1.5 billion.
Capacity needs to be withdrawn
So while rates for airline insurance were hovering at record lows, the pricing recovery, while welcome, has not been as strong as initially anticipated.
In order for the market to turn around, there needs to be a withdrawal of capacity from aviation – something which might not happen too soon, said Mr Doyle.
“Aviation is a class that gives diversity to an insurer’s overall portfolio and therefore has tended to attract and retain capital and capacity in the sector which has benefited buyers.
Until that sustained global economic recovery is achieved, it’s likely that the aviation insurance market will remain a buyers’ market and that market conditions will remain similar.”