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Monday, January 7, 2008

Airline Insurance Market Expected to Make First Loss Since 2000

The airline insurance market will take its first loss since 2000, according to preliminary data collected by tAon Corporation, which predicted that airline losses will outweigh global hull and liability premiums. While it does not think there will be a major retrenching in underwriting capacity as a result of one poor year, if trends extend into a second year, Aon indicated tougher markets could follow in 2009.
With more than 85 percent of the year's activity now completed, forecasts suggest that the total hull and liability premium in the market will be approximately $1.46 billion for the whole of 2007, but the level of losses will mean that claims will be at least $1.53 billion.
"These preliminary results end a fascinating year in the airline insurance markets," said Doug Peterson, chairman of Aon's Aviation & Aerospace division. "The first three quarters saw significant premium reductions on programs with good loss histories, while at the same time exposures of many airlines grew. As the level of losses has crept up, the market has seen the possibility of an unprofitable year and insurance prices have become less soft in the final quarter as a result. Capacity remains high and the aviation industry is still very much safer than it was even 10 years ago, so we do not expect capacity to plummet overnight."
The company cited a fairly consistent level of losses throughout 2007 rather than a single major loss, despite aviation being a catastrophe market. This has come after a number of years where the frequency of claims has been relatively low globally, said Aon, which added that has attracted a great deal of insurance capacity to the airline markets as global underwriters have diversified portfolios. As a result of the imbalance between premium and claims, Aon expects there to be additional focus on airline insurance portfolios within the market during 2008.
The last three months has seen the airline insurance market settle into a consistent pattern of around 10 percent average premium reductions for lead airline hull and liability insurance, said the company. If this level of reduction continues for the remainder of 2007, the lead hull and liability premium total for 2007 will be around $1.46 billion, compared to $1.69 billion in 2006 and $2.04 billion in 2005.
“An average reduction in the airline insurance market's lead figure of 40 percent over two years is eye-catching enough,” said the company, adding that the more concerning factor, however, is that total premium in 2007 is likely to be below the year's total claims, currently at $1.53 billion. “This suggests 2007 will be the first unprofitable year for the underwriting community since 2000.” It anticipates that premium reductions will be less than the current lead market trend on a market-wide basis for the future. Aon cited the fact that aviation insurance market has been very profitable for the last five years as the reason insurers will not abandon the market. It also cited the underwriting cycle itself given the historical lag from the underwriting year. For example, some losses in 2007 will go against the 2006 underwriting year, complicating the view of whether the market is profitable or otherwise.
The company noted the profitability of the Excess AVN 52 war and terrorism liability risk market as another reason to keep underwriters in the market. “Although the market has declined rapidly during the last 12 months, there have been no claims for the last six years, so it has been a consistent source of profit since it was created in the wake of 9/11,” said the company. “Also, market participants have made significant investments to attract and retain staff, and are unlikely to make a snap decision to pull back from the market. As a result, the market fluctuations will create winners as well as losers in 2007, and the numbers are very rough at this stage, but if the level of claims outweighs the total hull and liability premium paid again next year, it seems likely that the markets will be a significantly tougher place to do business in the medium term. Global capacity providers are likely to pull back from markets that are unprofitable in the medium term.”
It also said that it will not be until April that there will be any realistic chance to quantify market direction for 2008/9 renewals, noting the first quarter of 2007 delivered less than a third of the second quarter lead hull and liability premium. “If there is no reduction in lead hull and liability premium, the first quarter's nine renewals will only deliver around $35 million premium in 2008,” it explained. “This low level of activity will mean that the market figures that we report on will be very susceptible to fluctuation for the first few months of 2008. There is now a lot of evidence that the market is becoming less soft, but this is still based on under half of the expected 68 renewals in December. As a result, there is a lot of focus on what the year's final results will be. In the end, while losses have been high in 2007, there has not been a catastrophic loss for some time, and a large amount of underwriting capacity is still available at the moment.”
The year-to-date loss total, excluding attritional losses, was $1.07 billion at the end of November, around 20 percent above the $0.8 billion reported for the same period last year, said Aon, adding that taking a pro-rata figure for an annual estimate of attritional losses into account, the overall loss total is currently $1.53 billion, compared to $1.23 billion last year.
“There have been three significant losses impacting the airline insurance market,” Aon reported. “On November 9, an Airbus A340-600 wide-bodied jet belonging to Iberia, registration EC-JOH, sustained substantial damage after running off the runway at the end of a flight from Madrid, Spain, to Quito, Ecuador,” said the company. “None of the 349 people onboard were seriously injured, but the aircraft, which had a maximum value of $200 million, has been declared a partial loss. It had a reserve of $79 million. On November 30, an Atlasjet Boeing MD-83 hybrid jet, registration TC-AKM, crashed on approach from Isparta following a flight from Istanbul, Turkey. All 56 people on board perished. The aircraft was valued at $8 million. Finally, on November 15, an Airbus Industrie A340-600 suffered significant damage during testing. The aircraft had not been delivered to the buyer at the time of the incident and as such is likely to have more impact on the aerospace insurance market going forward, but it is included here for completeness sake. No valuation is available.”
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