Better news for marine and aviation risks

During the pandemic, premiums went down in both aviation and marine insurance as planes were grounded and the transportation of cargo by ships reduced dramatically. At the same time, loss ratios improved thanks to the generalised lack of activity. For their part, buyers were hit in their balance sheets while the overall insurance market went through a dramatic hardening period, which did not bypass airlines or shipping companies. In 2021, however, the world is moving again, and the insurance market looks less unfavourable for buyers in the aviation and marine segments, according to sources speaking to GRM. Aviation Tarcan Erisen, head of aviation and space at broker Price Forbes, believes that early signs of optimism can be spotted in the airline market, for instance. “Insurers have been sympathetic to the tough times clients have experienced, easing pressure on premium rating increases in light of the probability of enduring difficulty in travel conditions,” he says. “The insurance market is now experiencing a deceleration of rate increases into single digits.” One of the keys to this change has been the arrival of new capacity in the market, attracted by a couple of years of consistently higher rates. “This has resulted in final market supporting levels in excess of 100% of limits required, improving programme composite premiums,” Mr Erisen says. Gary Millen, class underwriter for general aviation at International General Insurance (IGI), points out that the expansion of the capacity pool has taken some of the tension off the aviation market, which had previously gone through three years of insurers getting out of the segment or reducing the size of their lines. “In a hardening market it was difficult for brokers to place risk, but that has changed this year,” he says. “Capacity has gone up and there is now slight overcapacity for good risks. Over the last three years, the market has seen 20%-40% rate hikes on good business, but now it has between 5% and 10%.” Mr Erisen has also spotted brighter times in the general aviation market, which is reflecting the deceleration in rate increases observed in the airline segment, while the parties try to solidify current conditions with an eye on the long run, especially on major risks. “The old adage of ‘size and volume of premium matters’ has seen a return of long-term agreements, which were not seen for some five to ten years,” he says. Some challenges remain though. There is still limited capacity for lighter-class general aviation as insurers require minimum premiums for each risk, Mr Erisen remarks. “This has inevitably increased prices for operators and in some territories above local treaty levels,” he says. Looking forward, the question is whether rate increases and lower loss levels have done their job, helping insurers feel comfortable with current market conditions so that the hardening process can come to an end. “Because half of the aircrafts are not flying, hence there are fewer losses but fewer premiums, we have yet to work out if we have reached rating adequacy,” Mr Millen says. “The general aviation market had a good year in 2020-2021, even with slightly less income from premiums than the previous year. We should be on course for making a profit.” He notes that, with three new reinsurers entering the aviation market this year, the rating momentum may be slowing down. “Three or four years ago, general aviation faced challenging conditions and struggled as a class, with rates rising continually. It wasn’t sustainable,” Mr Millen says. “The market is starting to correct itself now, with the hardening levelling off. We’d like to keep the rate increases to around 5%.” He adds that buyers have adapted their programmes to the toughest conditions, sometimes reducing the purchase of non-mandatory products to focus on legally required liability covers. “Some of the big South American insureds have restricted government budgets and can’t afford to buy hull insurance for all their aircrafts, so may only self-insure for half of them,” Mr Millen says. Marine Marine insurance also seems to be close to stabilising, with the arrival of new capacity heralding less aggressive rate hikes in future renewals, according to Toby Kayll, a managing director at Amwins in London. He says that, in 2021, insurers had to temper their rate rise aspirations after three years of significant increases. In the early-year renewals, hikes were limited to between 5% and 10% for businesses with good loss histories. “Going into 2022, with nine new entrants in the cargo market for example, I have no doubt that flat to 5% rate reductions will be the norm,” he says. “If brokers feel the incumbent pricing is not reflective of their individual risk’s exposure, we can secure the clients better terms and conditions through remarketing the risk for our client.” Underwriters may not settle so easily, though. Sundeep Khera, head of marine UK and Lloyd’s at AXA XL, says that capacity with experience, credibility and the ability to provide premium services still comes at a price, and rates will continue to go up in the near future. He warns that the reduction of loss ratios observed in the past year and a half may not be reflective of secular market trends and newcomers may be surprised when claims go back to normal levels. Although he also stresses that the unbalances that have characterised the marine insurance market during the protracted soft cycle and the meteoric hardening period have been mitigated. “Today there is a balanced market between supply and demand,” Mr Khera says. The shipping industry had a horrid period between March and June last year but has recovered since, and the insurance market followed the trend. The International Union of Marine Insurance estimates that global premiums in the segment increased by 6.1% in 2020, compared to previous years. Higher rates due to the hard market helped to compensate for losses of volumes, according to analysts. Mark Trevitt, class underwriter for marine at International General Insurance, notes that there has been an abundance of new capital in business lines such as ports and terminals, as well as marine liabilities, cargo and marine trades, but rate rises continue to be seen. He advocates that marine insurers and buyers should look for a measured approach that can avoid the extreme peaks and depths reached by the segment in the past. “If you have incremental increases year on year, you’re more likely to persist over a reasonable period, whereas if you go for incredibly high increases, say two or three times a premium, then in our opinion it is not sustainable,” he says. “In terms of market performance, we’d like to see rates continue to harden and prefer a measured approach be taken by all. We are confident that the space we occupy – ports and terminals, marine liability and cargo – will continue to offer opportunity and prospects.” Mr Trevitt points out that IGI has the ability to exert some control over rates as it leads most of the business that the company writes. But it is still a challenging market for both buyers and carriers, he stresses. “We are still seeing split slips with different rates, which is a sure sign of a disjoint between those carriers who focus on top-line growth, and those with their heart set on bottom-line profitability. This is not ideal for any marketplace and is not sustainable,” he says. “If we do not see an abnormal claims period between now and the rest of the year, particularly in the Gulf of Mexico and Caribbean, and if there isn’t a huge influx of further capacity, I don’t see a softening of the market in the foreseeable future within the marine sphere.” “Indeed, depending on the ultimate marine loss resulting from Hurricane Ida, and if the remainder of the Atlantic season is as active as some predict, I think we will likely see an increased hardening of rates,” Mr Trevitt adds. Digitalisation A less dramatic market in both aviation and marine does not imply, however, that buyers and their insurers will have a smooth road ahead. Just like other segments of the insurance industry, both face significant challenges, especially in the field of digitalisation. Mr Millen, for instance, warns that the aviation insurance market may fall well behind its clients if it does not up its game in this area. “Digitalisation is not happening in the aviation market,” he says. “Placing platforms are not used in the aviation market. whereas in marine they use them all the time. We still use the traditional methods of signing slips and sending them back. We need to digitalise.” In marine, technologies like AI and machine learning have made noticeable inroads, according to Mr Trevitt. “Along with the rest of the marine broking insurance fraternity, we’d already started to embrace pricing platforms,” he says. “The pandemic accelerated the digital transformation process to the extent that well over 95% of all our placings are now on an electronic platform. This brings the advantages of speed of response and accuracy.” The industry is now moving towards implementing more advanced applications of new technologies, such as robotics and hyper automation, he says. But the spread of digitalisation means that cyber risks have become much more of an issue for all parties concerned. “Cyber is different, as it evolves as the aviation and global logistics industries’ reliance on IT infrastructures and networks technology increases, with the propensity of a cyber loss increasing,” Mr Trevitt says. “Many marine and aviation insurers have cyber exclusions. There are specific markets for both cyber and pandemic – contingency and cyber – which is where those losses should rightly sit.”

Better news for marine and aviation risks

In the first stages of the Covid-19 pandemic, the transportation of goods and services came to a halt around the world, impacting the insurance industry in negative and positive ways, according to Rodrigo Amaral

Want to read this article?

Read Next

Growing nat cat risk in Asia

Parima Conference returns as in-person event in Singapore

China: Competitive market opening up

Parametric potential but work still to do

Captive potential growing in Asia-Pacific

Growing nat cat risk in Asia

Parima Conference returns as in-person event in Singapore

China: Competitive market opening up

Parametric potential but work still to do

Captive potential growing in Asia-Pacific

Want to read this article?

Read Next

Growing nat cat risk in Asia

Parima Conference returns as in-person event in Singapore

China: Competitive market opening up

Parametric potential but work still to do

Captive potential growing in Asia-Pacific

Related Articles