Airline Insurance Market Overview
The first half of 2013 has seen no change in the downward direction of market premiums and therefore the balance of power in airline insurance purchasing remains firmly in favour of the buyers.
The low loss levels combined with abundant capacity and growth in exposures continue to provide perfect conditions for buyers and challenges for underwriters, with little sign of a change in any of the market drivers and as a result the downward slide in premiums looks set to continue unabated. The loss of an Asiana B777 aircraft, whilst global news, will do little to alter the downward trend of the airline insurance market. It is a further high valued hull loss with, thankfully only a very small number of fatalities.
Premium levels have reduced by 5% in the first half the year which equates to US$13 million dollars being eroded from the overall market premium. The growth in exposures remains in the mid single digits and as result rating levels continue to decline with average hull rates down 11% and average liability rates per passenger down 13%. This has resulted in the overall insurance cost per passenger reducing by 12%.
It is worthy of note that for a catastrophe market we are now four years since the last major catastrophe! This clearly reflects the significant improvements in safety that the industry has made.
Second Quarter Review
The airline insurance market activity increased following a quiet first quarter. April had 13 renewals that fell within our reporting criteria, three of which also feature in our Willis 50 analysis. IAG was the largest programme to renew in April, with a average fleet value (AFV) in excess of US$40 billion and estimated annual passengers carried of over 160 million. April also saw the renewal of Hainan Airlines, which was the second largest airline to renew with an average fleet value in excess of US$17.5 billion and passenger numbers of over 53 million.
April saw a 6% increase in AFV and a 5% increase in passenger numbers, with a 8% reduction in hull rate and 11% reduction in passenger liability rate. This equated to just under a 5% reduction in premium for the month.
May had 15 airline renewals with significant variety in their risk profile. Two of the largest low cost carriers, easyJet and AirAsia, renew in May. easyJet renewed with a small increase in exposures, with an AFV of approximately US$5.5 billion and passenger numbers just under 60 million. AirAsia continued its rapid growth grow, with fleet exposures increasing 37% and a 42% increase in passengers. AirAsia added 40 aircraft to its policy in 2013, taking its total average aircraft numbers to 157.
As a whole May generated a 9% increase in AFV and a 15% increase in passenger numbers, with a 20% reduction in both hull and passenger liability rates. Highlighting the significance of individual renewals at certain times of year, when excluding Air Asia the exposure change reduces to 0% in respect of AFV and 7% for passengers. May premium levels were down 10%.
June experienced the largest level of percentage premium reduction of any month since December 2012 but again this only resulted in a small volume, US$4.4m, of premium being eroded. The largest renewal of the month was Eva Air which developed modest growth in exposures and received a single digit premium reduction. There is a diverse range of airlines and therefore risk profiles that come to market in June and therefore develop a range of experience. A number of renewing programmes witnessed significant downturns in exposures which clearly reflected the mixed economic conditions being experienced by airlines in different parts of the world.
First Quarter Review
There were a small number of renewals in Q1, fewer than last year due to two airlines being added to larger group placements, two have fallen under our reporting criteria, one ceased operations and one extended from March until June. This equated to a total of 16 airlines which renewed, bringing just under US$50 million into the Aviation market which is approximately 3% of the total for the year. Rates were down 8% on the hulls and 5% on liabilities. The premium increased by just over 7% when looking at Q1 as a whole.
• January – 43% increase in total premium largely due to one of the airlines exposure increasing by over 200%. This 43% increase in premium only equates to US$2.4 million in actual premium terms.
• February – just three renewals and also shows an increase in premium, but this is again mainly due to one airline paying a loss AP this year due to a large loss in 2012. When this is excluded the premium is as before.
• March – the busiest of the three months with ten airlines renewing. The premium reduced slightly by 1%, exposures were up 17% and 9% for Hull and Liability with rates reducing by 14% and 10% for hull and liabilities respectively.
2013 Net % Premium and Exposure Movements (Hull & Liability)
Losses for the first six months of the calendar year are currently US$488 million including an estimate for attritional losses.
There have been eight airlines which have had loss reserves over US$10 million. The largest loss of the first half of the year was the Lion Air loss which occurred in April. There were no passenger fatalities, which means that the impact on underwriters in respect of liability claims will be minimal.
As shown below the premium and claims for the first half of the year show a premium income of US$237 million, with a claims figure of US$488 million. This equates to a loss ratio of over 200%, but this is a common picture at this time of year due to a relatively small number of airline renewals and premium.
World Wide Airline Hull & Liability Premium and Claims on a Calendar Year Basis
Working Market capacity and risk appetite will continue to be different in 2013 between Airlines with high limits and wide bodied exposure and Airlines with lower aircraft values and limit requirements. For the carriers with lower values and limits there is significantly more of the available capacity being deployed as for insurers these risks do not present ‘peak’ catastrophic elements to their underwriting portfolio. Most underwriters who can participate with a small share on an airline with wide bodied exposure and a high limit can write a much larger share for airlines with a lower limit. This creates a separation and will affect the level of reductions airlines can expect.
To further illustrate this two tier market environment the chart below provides renewal details for airlines that have renewed within our criteria in 2013 but only those with Combined Single Limits of US$1 billion and above. As is evident from this analysis the premium movement in the major airline segment is less than for airlines with a lower CSL.