Aviation market to harden further

The aviation insurance market looks set to harden further in 2019, driven by consolidation, withdrawals and rising claims costs. Years of falling rates, rising exposures and increased attritional losses appear to have taken their toll on aviation insurers. Mergers and acquisitions, and a determined effort by Lloyd’s and other insurers to weed out underperforming business, have led to a contraction of aviation capacity and price rises in recent renewals. Airlines were already experiencing modest price increases in 2017 and 2018, although attractive risks were able to insure some or all of their increased fleets at no extra cost. However, underwriters’ resolve increased in the second half of last year and capacity steadily declined, driven by consolidation and withdrawals from the market, explained Nigel Weyman, head of Aerospace at JLT Specialty. “There was a significant difference between Q1 2018 and the final quarter in terms of the attitude of underwriters and renewal results. The year became progressively harder – almost every airline now has to pay for growth [in exposure] on top of technical rate increases,” he said. Last year, Aspen, Hiscox, Brit, WR Berkley and Allied World Europe all withdrew from the aviation market. A number of acquisitions have also helped reduce the number of players. AXA’s merger with XL in 2018 was particularly problematic as the two companies represent as much as 25% of programme capacity for some airlines. With fewer aviation underwriters, the remaining lead players have gained leverage and increased their pricing during key fourth-quarter renewals. “In the second half and final quarter of 2018, underwriters showed backbone and strove for visible improvements in terms,” said Mr Weyman. Last year is likely to represent a turning point for the aviation insurance market, according to David Bell, head of Aerospace at AIG. “We believe that the last four years of sustained rate decreases across the specialty classes, combined with loss attrition and rising costs, resulted in a tipping point being reached in mid-2018. The result is that base rate movements are unavoidable if capital is to remain deployed in the sector,” he said. Reduced appetite for certain risks at Lloyd’s, and a withdrawal from certain sectors, has resulted in price increases, especially for general aviation risks, according to Mr Bell. “However, there is some variation by sector and geography. In both the airline and general aviation sectors we are seeing consistent price increases, naturally varying depending on the account and who the lead carrier may be,” he said. In North America, the pricing picture changed quickly from March onwards as a result of fatal tourist helicopter accidents on the East River and the Grand Canyon, according to Mr Bell. “There have been instances where we have seen risks that have struggled to get placed, even with price increases in excess of 100%. This demonstrates that in the current market, pricing alone does not guarantee certainty,” he said. “In the airline sector, the story has been one of increasing rates since the late summer renewals, and the higher limit placements are definitely stretching theoretical capacity and making brokers’ lives significantly more interesting. Although our pricing has been consistent since September, rates on similar risks rose as the quarter progressed, with our analysis showing this has increased even between 1 December and 1 January,” added Mr Bell. Losses have also helped bolster underwriters’ resolve. Following an extraordinary year for airline safety in 2017, 2018 saw the return of fatal commercial airline accidents. According to aviation consultants To70’s Civil Aviation Safety Review, there were 160 accidents in 2018, 13 of which were fatal and resulted in 534 fatalities. By comparison, there were 48 accidents in 2017, with no fatal accidents involving large turbojet-powered passenger aircraft in commercial operation. The airline sector saw a record number of total losses from accidents last year, explained AIG’s Mr Bell. These were made up of ground losses, especially collisions, and heavy or poor-condition landings where damage exceeded any repair options. “These have added up to a relatively sizeable claims total that will eclipse the margin beyond the so-called ‘attritional’ claims level expected, and therefore will give insurers a segment loss in theory,” he said. Despite relatively benign catastrophic losses in recent years, driven by improved airline safety, aviation insurers have struggled to make a profit, said Mr Weyman. Even in the record safe year of 2017, underwriters still lost money, a reflection of rising attritional losses and falling premiums during the past decade. “Attritional losses are a burning issue for the insurance industry. Modern composite materials and more expensive engines have led to an increase in severity of attritional losses; what was once a £1m engine loss is now more like £20m, while deductibles have not kept pace. Many bumps and scrapes no longer fall under deductible levels,” said Mr Weyman. According to Mr Bell, there are some developing themes that will continue the rising cost base of the aviation insurance sector. If insurance values of older aircraft are maintained beyond book value, it will increase the chance of total losses due to the cost and ability to repair to required standards. Secondly, composite technology has great benefits in terms of aircraft performance and efficiency but costs more to repair compared to previous-generation airframe and engine components. Aviation insurance buyers should expect more of the same in 2019, according to Mr Weyman. “We think that the resolve of insurers is very much at the fore. The threat of job losses is real and underwriters know that they must demonstrate to management that they are performing. So many aviation underwriters have lost their jobs that the survivors fear they could be next,” he said. However, buyers should welcome the “measured” response of underwriters, according to Mr Weyman. “Clients continue to get value while not experiencing large swings in rates that throw out budgets or cause distress. Baby steps of improvement will be more sustainable than large increases in rate,” he said. For clients and their brokers, a hardening market requires careful preparation for renewals, according to Mr Weyman. “We prepare clients in terms of budget and presentation of risk, starting dialogue and securing the support of insurers well in advance of the renewal date. If you do not follow these disciplines and do not prepare clients and the ground, you can get into a real crisis in this market. Unrealistic proposals and poor preparation will end up with clients paying more,” he said. While airlines face higher hull and liability premiums, they also need to find extra budget for cyber insurance. A run of airline cyber incidents has been driving demand for cyber insurance, in particular business interruption and data breaches. The 2017 outage at British Airways cost the airline £80m, while Cathay Pacific faces regulatory investigations and class actions in a number of countries after a cyberattack compromised the personal data of more than nine million customers in 2018. “Cyber events, even minor ones, can cost millions of dollars,” said Mr Weyman. A number of airlines purchased cyber cover in 2018, and more are expected to do so this year. “2019 will be the year that airlines come of age and purchase cyber insurance,” he predicted. AIG is one a number of carriers offering a standalone cyber product to airlines, but despite some notable incidents, demand has not been as great as might be expected. “But this may change in 2019,” said Mr Bell. Non-damage business interruption is another area where airlines might be expected to seek insurance. The suspected recent drone incursions at London’s Gatwick and Heathrow airports highlight the risk of non-damage business interruption exposures for the industry. Flights were also grounded at Newark International Airport in the US during January, after two drones were spotted flying nearby. Cover is available for such risks and was developed after ash clouds from an Icelandic volcano grounded flights in 2011, but it is not yet widely purchased, said Mr Weyman.

Aviation market to harden further

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