4 September 2013Re/insurance

A troubled flight path?

At 11:28am on July 6, 2013, Asiana Airlines Flight 214 clipped its landing gear and tail on a sea wall on final approach to San Francisco. As a result 181 people were injured and three died. While relatively mild compared to incidents involving crash landings, the Asiana incident remained headline news for weeks. The aviation industry is under intense public scrutiny, and that scrutiny is serious business for the aviation reinsurance market.

There’s something about aviation—and aviation disasters in particular—that fascinates. The commercial aviation industry will celebrate its 100th birthday on January 1, 2014, and for a relatively young industry it has wormed its way into the public consciousness in a way that few others have managed. Commercial aviation has made travel incredibly fast and relatively cheap, opening up the globe. But it has also experienced a handful of disasters so shocking that they’ve been stayed in the public memory for decades.

According to Kevin Clouter of Aon’s aviation reinsurance team, the recurrence of something like the Tenerife disaster—in which 583 people died when a 747 attempted to take off without clearance, colliding with another plane—is extremely unlikely. “In 2012 the net reinsurance loss for Lloyd’s was 1 percent,” he said. “There have been very few major aviation incidents. Aviation reinsurance has been very profitable.”

Safety first

Tony Tyler, the general director and CEO of the International Air Transport Association (IATA), told members of the association in his 2013 state of the industry address that there was not a single hull loss with a Western-built jet among the association’s 240 members in 2012. According to figures from the same association, in the last 10 years there has been a 77 percent improvement in the accident rate.

But just because there are fewer accidents doesn’t mean the public isn’t looking out for them. Mark Hiller, aviation reinsurance underwriter at Atrium Syndicate 609, explained: “You know about a big loss for the aviation reinsurance market when it hits the front page of the newspaper. The industry is so high profile. The public has been in love with aviation from the beginning, but we’ve reached a state of engineering where accidents are not tolerated the way they were in the 1960s and 1970s.”

The public’s concern has pushed the industry towards ever-stricter safety standards, Hiller says, and a careful regime of self-regulation to protect the perception that air travel is a supremely safe form of travel. “I remember 15 years ago when the IATA said that if accidents continued at the current rate there would be one reported every week. Suddenly airlines were aware that they couldn’t continue to have that number of losses and stay in business; they responded by self-regulating at an international level.”

Tyler said, “Each accident re-dedicates both industry and governments to making fl ying even safer.”

He cited the example of Africa, where hull losses per million reached as high as 9.94 in 2009. “Geographically the biggest challenge is Africa, where the accident rate is 18 times worse than the global average. With the Abuja Declaration, African governments have committed to achieving world class levels by the end of 2015.”

Hiller tends to agree. “The industry’s efforts at self-regulation have been very successful. Things have changed,” he said.

These safety initiatives are making the aviation reinsurance market a surreal place to be. As Clouter explained, “As airlines get safer and safer, we’re seeing reduced pricing but increased exposure. There are more planes in the sky than ever before and they’re fl ying more and more. If the pricing keeps declining, but we know there’s more exposure, it creates sensitivity to loss.

“When there is a loss, how will the market deal with it? Well, it’s going to lose more money than it would have a year ago. But is it going to be one loss? Is it going to be a series of losses? It’s impossible to know.”

View from the top

The lack of losses has shaken up the risks and rewards of writing aviation reinsurance. Where the industry once had to worry about incorrectly repaired parts failing in mid-air—as it they did on Japan Airlines Flight 123 in 1985, which crashed into a mountain, killing 520 passengers and crew—a greater worry now is that planes won’t even make it into the sky.

"It will take more than a few grounded 787s or a loss like Asiana flight 214 to shake up the reinsurance industry."

The industry has been abuzz with talk of groundings and battery problems, particularly where the Boeing 787 is concernced. Clouter commented on the interest, saying: “There’s a concern about the way technology has been pushed forward faster and faster, particularly in terms of safety and repair issues. In older aircrafts you would have replaced specifi c parts; we’re not sure yet how this will happen with an aircraft which has a composite hull.”

“Grounding is something that’s very real out there,” Hiller said. “The grounding coverage we offer is being reviewed because we don’t actually give very signifi cant limits. When you’re offering a service you want to try to give clients a coverage they feel comfortable with.”

The dearth of losses has also affected the way crises are dealt with after the fact, Hiller says. “It’s apparent with the recent Asiana loss.If that had been on an old aircraft it’s likely that everyone on board would have been killed. This reduction in accidents must be impacting capacity in the legal profession too.”

There are more direct impacts on the industry, as well—pricing has declined in the region of 7.5 percent.

Hiller added, “The real downward driver of prices is the fact that losses haven’t happened. Where the direct market is dropping the prices really quite severely in response to losses there is inevitably some pressure on the reinsurance market. We’ve probably held relatively firm by comparison.”

Hiller continued, “Also, aviation is a small market and there is generally suffi cient appetite.”

Clouter said, “Depending on the type of risk a reinsurer is writing, they could be at 200 to 300 percent capacity. A lot of players out there are writing a quarter of what they could because of the soft market. When you’ve got a fantastic book of business that’s making a signifi cant amount of money it’s diffi cult to pull away. There are traditional Lloyd’s underwriters who have pulled back in the last few years because they felt they might become overexposed at the current pricing levels.”

Winds of change

According to Clouter, growth in aviation reinsurance is only going to come from the industry itself. He says, “If you look at long-term forecasts from Boeing and others, the world is going to fly more and more. There will be exponential growth for the next 30 to 40 years, and that’s growth for aviation reinsurance as well.”

But what happens if and when there is a loss? Surely the profi table present can’t go on forever, but according to Hiller it will take more than a few grounded 787s or a loss like Asiana flight 214 to shake up the reinsurance industry. “I wouldn’t think that one large loss would do the trick. It would be a series of losses that would change the market, or a perceived alteration in the rate of accidents due to some of the new aircraft. Something of that nature. Something unusual,” he said.

The threat of another aviation disaster for the history books is always present. But with an entire industry obsessed with ensuring that such an event never happens, there is good cause to hope for clear skies.