AON Recounts Insurance Record for Regionals, Industry

Regional airlines have remained virtually static in terms of lead hull and liability premium percentage change compared to 2006, according to Aon Insurance. “This is despite solid increases in exposure, with Average Fleet Value (AFV) growing by 10 percent and the number of passengers being carried by...

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Regional airlines have remained virtually static in terms of lead hull and liability premium percentage change compared to 2006, according to Aon Insurance. “This is despite solid increases in exposure, with Average Fleet Value (AFV) growing by 10 percent and the number of passengers being carried by the sector increasing by 13 percent,” said the company, which noted North American regionals take advantages of the economies of scale provided by their major partners. “The sector recorded similar increases in exposure between 2005 and 2006, when AFV grew by 10 percent and passenger numbers grew by 16 percent, although, between 2004 and 2005, AFV and passenger numbers surged by 32 percent and 37 percent, respectively. As a result, the relatively static average lead hull and liability premium is likely to be the result of the market catching up with the growth of the industry over the last couple of years.”
Aon noted that the regional sector is dominated by operations based in Asia and Europe, which jointly represent 17 of the 25 operations that comprise the regional sector. “The cost of insurance per passenger declined by the smallest amount in the industry during 2007, but it fell by the highest amount in 2006, nearly 30 percent,” said the company in its 2007 briefing.
The company reported conflicting signals for 2008 citing the fact that fatalities last year were low despite the fact that the value of hull losses was high. “There continues to be a lot of capacity available in the airline insurance markets,” it said, “but could easily contract over the next year if hull losses are high again.” It said events during the early part of the year will determine rates and capacity for the rest of 2008 depending on the number of losses in the first half.
Doug Peterson, Aon Aviation & Aerospace practice leader called 2007 a pivotal year. He noted that compared to 2006, premiums have fallen by 11 percent, while fleet values have grown by nine percent and passenger numbers have risen by eight percent. In the early part of 2007, he said, average reductions were around a fifth owing to high capacity and low losses.
“The market does appear to have moderated premium reductions over the last few months, but at the same time, hull exposures have risen during 2007 after being pretty static during 2006,” he said in his report. “Equally, from a hull insurance point of view, 2007 was the most expensive year in half a decade and the market at this stage has made a loss. These factors are influencing the market to become less soft. From a liability claims point of view it appears that 2007 was close to average, although the nature of liability claims means that the full amount often takes a long time to reach the market. Despite this, the preliminary results from independent industry bodies, as well as Aon’s own data, suggest that there were fewer than the average number of fatalities in the year just ended.”
Peterson cited the investment made by industry in hardware, software and human resources which have yielded steady improvements in safety.
Total recorded lead hull and liability premium for 2007 was $1.51 billion. Total incurred claims, including hull, liability and an estimate for attritional losses, amounted to $1.72 billion. As a result, the likely loss in 2007 was the first loss since 2000 (excluding 9/11), said Aon.
North America’s AFV is smaller than both Europe and Asia, which had virtually identical average fleet values according to Aon’s criteria, said the company, despite the lower passenger number in the latter two regions. .
“From an airline safety point of view, 2007 is something of a mixed bag,” said the company. “The main news is good: the number of fatalities is around 10 percent below the average number of fatalities recorded between 1995 and 2006, which means that liability claims, which form around 70 percent of the total lead premium, will continue to be good. From a hull insurance point of view, however, the value of the losses is 13 percent higher than the average claims made between 1995 and 2007.” The company reported that the overall loss total is $1.72 billion, compared to $1.29 billion last year.
This means that 2007 saw the third highest value of airline losses since 1996, with only 2000 and 1999 having more losses, excluding 9/11. “Despite the high hull insurance value of the losses that occurred, the number of fatalities, and as a result the liability claims, was relatively low,” said Aon. “In 2006, there were 579 fatalities resulting from incidents that matched our criteria, while in 2007 there were 627, not a massive increase in comparison with the rise in hull claims. Looking at the average number of fatalities since 1995, the average is 708, although the five-year average is 553.
While the relatively high value of the losses that have occurred is bad from an airline hull insurance point of view, the fact that the number of fatalities is below the 12-year average suggests that the improvements in the way that aircraft are operated, the technology that supports them and the training of the staff that manage and maintain them continue to deliver results.”

Cargo
The cargo sector is the only one that had a significant average increase in lead hull and liability premium during 2007, said the company citing the sector’s long-term loss history. It also said that consolidation within the insurance industry is quickly gaining on losses as the reason for price increases. The two programs that saw their premium increase by the highest amount have been involved in adding cargo operations to their group placements, which also explains much of the reduction in the number of operations in the sector renewing.
Another key factor in the changing fortunes of the cargo sector is the significant investments that are being made to improve cargo fleets globally, with the introduction of brand-new, cargo-specific aircraft, rather than the traditional hand-me-down aircraft from the passenger airlines industry, “which some suggest have occasionally had implications for mechanical failures leading to incidents,” said Aon. “The continued growth of the low-cost carriers and the introduction of the new generation of larger passenger jumbos will both increase the number of potential slots available to pure cargo carriers globally.”