For the first time in a very long time, we have reached what I will call “aviation insurance duality” (AID). The term “duality” in this context means “a situation that has two states or parts that are opposed to each other.”1 So what is the duality we are discussing today? Answer: the disparity between aviation risk and aviation insurance rates.
IATA (Air Transport Association) reported on March 12, 2012, that the global accident rate reached a new low. This is not just a “new low”; it is the lowest global annual accident rate on record. The AIN Air Transport Perspective stated “Statistics published last week by the International Air Transport Association show that western jets registered their lowest accident rates in history in 2011, besting their previous record set just one year earlier. The 2011 global accident rate (measured in hull losses per million flights of Western-built jets) finished at 0.37, the equivalent of one accident every 2.7 million flights, amounting to a 39 percent improvement over 2010, when the accident rate of 0.61 resulted from one accident for every 1.6 million flights.
Read the full report here.
Aviation losses during the past 12 months have fallen below, or have only caused a partial loss to, the lower layers of reinsurance bought by the market, which has enabled reinsurers to return a profit. Reinsurers have, therefore, responded to the pressure put on them by the primary market to reduce rates being charged.
There have been some significant losses in recent years, so why are prices under pressure? There is still significant capacity in the market, in both the reinsurance and primary markets. We feel this is because insurance is still regarded by investors as an attractive and secure alternative to other types of investments. Whilst this overcapacity still exists, rates and premiums will be under pressure.
Overcapacity continues to remain an issue. We are seeing premium increases where there have been known losses, but without wishing to generalize too much, we are seeing flat to slight reductions in pricing. In the current rating environment, if we take as an example a new order where an airline buys ten new airplanes, we might see a significant rise in exposure, but only a modest rise in the premium.
As far as the aviation sector is concerned, we have seen no material impact from the disasters of the last 12-18 months. Certainly as far as the Thai floods go, the water level does not appear to have risen to a level that would cause a significant loss. And as far as Japan goes, the Japanese had covered most of the risks within the Japanese insurance market, so there was limited impact on the international aviation market.
What will it take to turn the market? Everybody has different views on this, but we think it is safe to say that it would take a pretty big event to create a hard market in aviation. In strictly aviation terms, it would probably require a $2 billion loss. Of course, another loss on the scale of 9/11 or Hurricane Katrina that impacts global levels of insurance capacity could have a knock-on effect, but this subject is always open to speculation.
Against the backdrop of a continuing economic downturn impacting many leading economies around the world, most sectors of the aviation insurance market remain highly competitive.
In the airline sector, with only around a quarter of 2011 renewals completed, average premiums have increased by around 1 percent. Passenger movements are up by around 15 percent, and fleet values by around 10 percent, fuelled by major investments in new aircraft by airlines in Far East and Middle East countries. In this context, a 1 percent increase amounts to a significant reduction in rate relative to exposure. Read more of this article »