It’s been a bumpy couple of years for the aviation re/insurance industry. Is there turbulence ahead, or clear skies? Bermuda:Re+ILS reports.
You never know what to expect when, on a flight, you’re told to return to your seat and put your seatbelt on. The aviation re/insurance market has faced its fair share of ‘return to your seats’ warnings over the past two decades, with the aviation industry itself hit by pressures that range from terrorism to high fuel prices.
Crashes have not helped, with recent high profile events including the shooting down of one passenger plane over the Ukraine, the mysterious loss of another in Asia and the crash landing of a Boeing 777-300 at Dubai’s international airport.
According to Tim Griffiths, head of global aviation, Endurance Re, there could be some bumpy weather ahead—depending on which section of the market you’re looking at.
“Achieving the right business mix is critical to profitability and Endurance Re has written a profitable portfolio since 2002." Tim Griffiths, Endurance Re
“The aviation insurance market has polarised into three segments. First, those specialists and leaders who are able to influence and achieve the best terms available in a verticalised market,” Griffiths says.
“Second, the facility underwriters who are writing following lines mainly subscribing to brokers covers which can mean giving their pen away. The third position, in the middle ground between the leaders and followers, is an expensive and difficult position to maintain.
“The reinsurance and insurance markets have a similar mix in that there are leaders and following markets. Most reinsurers have some control over the price being charged for the exposure. However, the prevailing market prices are extremely competitive and selecting the right client with the right mix of business is essential.”
A curate’s egg
Griffiths says there is no straightforward answer to the question of whether the aviation reinsurance market had hardened or softened. “Airline hull & liability insurance is losing money and requires significant correction by way of increased premium. Liability premium is subsidising hull, US airline premium is subsidising international and aviation hull war insurance had its margins eroded because of the unprecedented loss activity in 2013 and muted reaction from the market,” he says.
“Aerospace insurance—products and manufacturers—is making money notwithstanding that the 10 highest paying risks make up 45 percent of the entire aerospace premium. General aviation insurance appears to be profitable however, as the make-up of the GA portfolio is diverse, the experience of individual players varies considerably and it is a challenge to obtain an overall view.
“Generally the aviation insurance market is in an unhappy state albeit that in recent years the burden of large losses was moderate. Most aviation insurance and reinsurance underwriters in the developed markets realise that the current downward trend would lead to a loss-making year even without a major loss. Consequently, we are now seeing a more resistant and disciplined market which is concentrating upon improving the loss ratio.
“Aviation insurers are making a more pronounced differentiation between the renewal terms. Those airlines that have lost money for insurers over recent years because of major losses and/or poor attritional results are no longer being granted reductions and we are finally seeing some increased rating. Airlines requiring major limits that have a good record are generally being offered flat renewal terms. However, the market is still soft for airlines requiring lower limits which can be directly attributed to overcapacity in the market.
“Achieving the right business mix is critical to profitability and Endurance Re has written a profitable portfolio since 2002. Our conservative approach in the latter years has paved the way for growth to protect and increase our profitability by improving risk selection, balance and spread. We are able to use the strong Endurance brand, underwriting knowledge and relationships to maintain existing clients and attract new clients who wish to differentiate between lasting and transient reinsurer value in a market where capacity is abundant.”
A report by Aon Risk Solutions on the state of the aviation insurance market in 2016 points to a number of regional differences. Looking at North America the report claims that airlines in the region performed fairly much in line with the market averages and that despite maturity of the market there, airlines in the region have forecast a 4 percent increase in passenger numbers as well as a 5 percent increase in average fleet value. Aon Risk Solutions claims that average aircraft value is expected to rise by 14 percent, although North America has the lowest average value of aircraft by some margin.
“North America has the highest five-year credit balance of any of the regions, suggesting that there it still some way for prices in the region to fall before the bottom of the market is reached,” the report says. “It should be pointed out however that liability awards are generally very high in the region (even if other parts of the world are catching up) and, if there is a catastrophic loss, credit can move into deficit very quickly.
“North America has the lowest average aircraft value of any of the six regions, highlighting the challenges that the industry has faced in the region. The fact that it also has the lowest insurance cost per passenger also underscores the region’s maturity from an aviation perspective.”
The report also claims that Europe had an “unusual year”. It points out that the average lead hull and liability premium change was
-3 percent, well short of the -10 percent global average. Exposure growth was also relatively weak, with a 1 percent improvement in average fleet value and a 6 percent projected increase in passenger numbers. It was also one of only two regions where the average aircraft value actually declined, the other one being Latin America, which fell slightly.
In addition, looking more closely at the individual numbers the report claims over 70 percent of European airline insurance programmes enjoyed a reduction in their lead hull and liability premium. Over 80 percent of those reductions were of 10 percent or greater.
Lurking in the clouds
Aon Risk Solutions points out that the aviation industry has focused on improving safety and that while aviation can never be risk-free, safety is vastly improved compared to 20 years ago, and improved data and data analysis means that the industry is now able to learn from the majority of incidents.
Griffiths agrees that the overall mechanical safety record of the aviation industry has been continuing to improve in recent years.
“Improvements in technology, in the air and on the ground, together with initiatives to improve operational excellence have made air travel safer than ever before. With very few exceptions most of the larger airplane losses in recent years have not been caused by technical problems.
“Moreover, the airlines and plane manufacturers continue to work on increased safety standards and technology enhancements to prevent accidents and improve tracking and recovery,” he says.
Aon Risk Solutions does point to one particular possible threat ahead—something that the re/insurance industry as a whole is becoming more worried about across the wide range of topics and lines as the world becomes more interconnected—cyber attacks.
“The threat of a cyber attack is fast emerging as the greatest risk management challenge for the aviation industry,” Aon Risk Solutions warns in its report. “Progress in aircraft design in recent years has dramatically reduced the risk of mechanical failure. Now carriers have shifted their attention to cyber, with the International Air Transport Association, the International Civil Aviation Organisation, Airports Council International, the Civil Air Navigation Services Organisation, and the International Coordinating Council of Aerospace Industry Associations publicly aligning their efforts on cyber threat.”
Aon Risk Solutions points out that the aviation industry is “extremely reliant on computer systems and, with paperless tickets and online booking, the number of entry points is set to grow even further in the future”, adding that it is important that industry bodies do join forces as otherwise they are even more vulnerable to attack.
According to Aon Risk Solutions there haven’t yet been a wealth of cyber attacks against airlines but it does point out that in 2015 one was mounted against Polish national airline LOT, which lasted five hours, delaying 12 flights and cancelling 10. The attack disabled the system LOT uses for issuing flight plans and afterwards the chief executive warned that no airline was safe from this type of attack.
“The reliance on convertible tickets between Star Alliance members means that a cyber attack on one company could indeed have a knock-on effect on other members,” says the Aon Risk Solutions report. “The theft of customer data during a cyber attack is also a factor that carries a significant reputational risk as well as the potential for hefty fines from regulators.
“Along with other key risks such as the loss of business-critical data and the impact an attack could have on the supply chain, it is becoming increasingly clear that standard insurance policies are not comprehensive enough to cover against these evolving risks. For instance, under a standard policy, general liability only covers bodily injury and property damage, not economic loss.
“Data is also not covered under property as the loss must be caused by a physical peril while perils to data are more likely to be viruses or hackers.”
Endurance Re, Bermuda, Tim Griffiths, Aviation, Insurance, Reinsurance, Asia-Pacific, Liability