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Ample capacity helps temper aviation insurance rate hikes, despite big losses

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While many commercial airlines that renew their coverage in the final six weeks of the year will see prices climb for their aviation programs, the premium increases are expected to be significantly tempered by ample capacity for aviation risks.

Airlines' renewal rates are predicted to vary widely from flat to increases up to 50%, experts say. Nearly three-quarters of the world's airlines renew their coverage during the fourth quarter.

Rather than seeking price increases across the board, underwriters are differentiating be-tween risks, said Bill Smith, CEO of JLT Specialty Ltd., a unit of brokerage Jardine Lloyd Thompson Group P.L.C., in London.

Major U.S. airlines likely will see their rates remain flat at their upcoming renewals.

However, Malaysia Airlines, which renews its coverage in December, likely will see a larger premium increase, but isn't expected to be punished for two events beyond its control. Willis, the broker for Malaysia Airlines, declined to comment on the airline's renewal.

Because of the high-profile aviation losses this summer, many industry experts had predicted at least double-digit rate increases at renewal for many airlines. Much of those losses — notably the downing of Malaysia Airlines flight MH17 over Ukraine in July — affected the niche aviation hull and war risks market. Rate increases up to 300% were expected for war risks business in the immediate aftermath of those losses, but those price boosts now are expected to be more moderate, experts say.

During the first half of the year, premiums for airlines declined by an average of 15% to 20%, but by September policies were renewing at an average increase of around 7%, according to a report by JLT Specialty.

While upcoming renewal rates could be up to 50% higher for certain airlines, the increases will not be uniform. Airlines that have racked up high levels of attritional, or expected, losses — those of less than $10 million — likely will see higher rate hikes.

While rates for airlines that already have renewed their coverage have gone up sharply in some cases, these increases have not been as dramatic as some aviation insurance buyers had feared, said Steve Doyle, chief commercial officer for the transportation industry unit at Willis Group Holdings P.L.C. in London.

Mr. Doyle said there is still ample capacity in the market for aviation coverage and that — excluding the extraordinary losses of Malaysia Airlines flights MH17 and MH370, which disappeared from radar and is presumed lost somewhere in the southern Indian Ocean — continued improvements in technology and safety standards have meant an improvement in the industry's safety record which is reflected in the quality of the risk shown to underwriters.

Insurers that have been hit directly by losses this year are under pressure to raise rates to recoup those losses, while those that have not directly suffered losses also are under pressure to halt the long-term decline in aviation rates, Mr. Doyle said.

Underwriters are studying airlines' loss histories and are taking into account attritional losses, which can “substantially erode an airline's premium,” Mr. Smith said.

Insurers are differentiating between airlines based on attritional losses, said Mark Hue Williams, CEO of the international division of Willis Aerospace in London.

“Overall, we see a hardening of the airline market,” said Renate Strasser, head of aviation facultative business at Munich Reinsurance Co. “Underwriters are putting again more emphasis on key factors like loss history, exposure growth, scope of cover and limits.”

But renewals will be varied, Ms. Strasser said.

“We expect to see anything between airline policies renewing flat and rates that might see double-digit increases — in some cases of even more than 50%,” she said.

The recent loss of Virgin Galactic SpaceShipTwo was underwritten by aviation underwriters rather than space underwriters, Ms. Strasser said.

Depending on where the loss falls — whether under general aviation or manufacturers' hull coverage — this could add to pressure for rate increases, she said.

Hannover Re S.E. said it expected to see a broad stabilization in rates for aviation insurance and reinsurance as a result of the losses that took place earlier in the year, specifically as a result of the downed Malaysian Airlines jet and its lost plane plus attacks on planes at Tripoli airport.

Sven Althoff, a member of Hannover Re's executive board with responsibility for specialty lines, said that the first renewals for primary aviation business after the MH17 loss showed signs that rates were stabilizing or increasing.

One major airline, Air France KLM, that already has renewed its program, and for which JLT is the broker, achieved broadly the same coverage for about the same rate as last year, Mr. Smith said.

And Air India, which also already has renewed its aviation coverage, announced that it had received a 15% rate increase — a smaller change in rate than it had expected.