The average hull and legal liability insurance rate for a typical airline's risk is lower now than in any year since 1990. Carriers have come to expect a reduction in annual renewal, but there are questions around how long this can be maintained.
Based on preliminary data, FlightGlobal estimates that airline insurance rates fell another 10-15% during 2016, with the global all-risk net written premium in the year coming in at about $1.2 billion.
Written net premiums in 1998 and 1999 were lower, at $960 and $980 million respectively, but airline exposure in the form of the value of the fleet at risk and the number of passengers carried was less than half what it is today, suggesting that rates in 2016 were 40% lower than in those earlier years.
The last time airline insurance rates were this low was probably in 1990 when the much smaller fleet generated net written premiums of only about $350 million.
With insurance rates and the resulting premium continuing to fall, the cost of incurred claims again exceeded premium last year. FlightGlobal currently estimates that the cost of incurred airline all-risk hull and legal liability losses for 2016 was about $1.4 billion, some $200 million more than the written premium for the year and $100 million more than the earned premium (mostly written in 2015).
The estimated cost of the incurred losses in 2016 was about $300 million less than in 2015 and $500 million less than in 2014. However, with the cost of airline claims easily exceeding the insurance market's income from this class of business during the year, 2016 became the fourth year running in which claims have exceeded premiums. The total claims deficit in recent years is now approaching $1 billion.
Apart from a brief levelling-off in 2014, airline premiums have fallen each year since 2010. That year, net written premiums were an estimated $2.1 billion, 40% more than in 2016. During the years since, airline exposure has increased by some 40-50%, so rates are down by about two-thirds.
As well as reduced rates, the market also seems to be providing additional cover for free. Incorporating an "additional cost of working in respect of a total loss" amount, which was probably first introduced to airline hull cover two or three years ago, now seems to be more or less standard on major airline programmes.
FlightGlobal also understands that some insurers are throwing in, at no apparent extra cost, higher liability limits than their probable-maximum-loss calculations might suggest are needed. It could be argued that giving away a higher liability limit than is needed costs nothing, but "it is never a good idea to give the plaintiffs' bar a target to aim for", says one market source.
HARDER OUTLOOK
However, despite the continued erosion of written premiums in 2016, some in the market – insurers and brokers – say they saw signs of the market beginning to harden as the year drew to a close. "A couple of big programmes – large airlines with high limits – only just squeaked through at the end of the year," one source says, while another points to "a widening spread in terms on some covers with some in the following market getting a higher rate than the leader".
It should be noted that similar comments were made at the beginning of 2016 but, it would appear, came to nothing. Nevertheless, we have seen some programmes, with a poor claims experience during 2016, maintain their "core premium" level unchanged on renewal but get hit on top by a significant multi-year loss AP (additional premium), payable only to those insurers who bore the losses.
Insurance is a true market in the sense that there is no airline "tariff" and the rates being achieved reflect the tremendous competition to write this class of business. It is estimated that about 60 insurers are in the market globally to write airline business. For a large airline programme with high limits, say $2 billion, perhaps 30 insurers – 50% of the market – will be needed to provide the required security.
For medium-sized airlines with lower limits, individual insurers are able to take larger lines (a bigger percentage of the risk), so the cover might be completed using only 15 insurers. Simplistically, there is something like 200% capacity in the market for large airline programmes, rising to perhaps 300% for smaller ones.
The market does need more than 100% capacity to function – perhaps 150%. However, current levels of capacity – which, depending on the assumptions made, are the highest for very many years – are driving down the market. Too many insurers are still "writing for their top line [for market share] and have yet to properly address the bottom line", one market source notes.
Premiums cannot continue to fall indefinitely and must bottom out or even reverse at some point. Airline insurance may represent only a vanishingly small percentage of the global casualty insurance market, but a $1 billion-plus deficit is still a billion dollars.
However, with rates and premiums having fallen for a number of years, airline insurance buyers may have come to expect a reduction on annual renewal. It will be a nasty shock for them when the market finally turns but, unless there is a change in external conditions or some other shock causing a withdrawal of capacity from aviation as an insurance class, the status quo is likely to continue in the short term.
Source: Cirium Dashboard
