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Aviation rates reduced up to 30%

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Plentiful capacity and low losses combined to push aviation insurance rates significantly lower at the latest renewal, brokers say.

Airlines with good loss records were able to attract rate reductions of up to 30% during the last quarter of 2006, said Alan Webb, managing director of London-based insurance broker Heath Lambert Ltd.'s aerospace division.

As many airlines now have bigger fleets and more mileage, this resulted in premium rate reductions that averaged about 20%, he estimated.

"Capacity is plentiful," said Mr. Webb, with new insurance capacity around the world, including the United States, Bermuda, the Far East and Europe.

The fourth quarter of the year traditionally is the busiest renewal time for airlines, noted Steve Doyle, manager of aviation and global practice leader at Aon Ltd., the London-based unit of Aon Corp.

"Capacity has flowed into the market, the loss record of the industry continues to be excellent and premium reductions have been significant," said Mr. Doyle.

Premium reductions have averaged about 20%, while fleet values have increased 5% and passenger numbers grown 10%, Mr. Doyle estimated.

"We have seen rate reductions for a number of years now. In the first nine months of 2006, premium reductions averaged 9% to 10%, but during the last quarter premium reductions increased to an average of 20%," said Brad Ottolangui, divisional director of aerospace research for Willis Group Holdings Ltd. in London.

The reductions have come about partly because a period of benign losses has made the aviation market more attractive to new capacity, said Mr. Ottolangui.

Airline losses for 2006 through the beginning of December totaled some $1.25 billion, he said.

"This is slightly higher than it has been in the last few years, but less than the previous average," he said, noting that safety records for airlines have increased dramatically in recent years.

"Unless there are some major losses, underwriters will still make a profit this year, so rates will not rise during 2007," Mr. Webb said.

While the U.S. government continues to provide terrorism coverage for its airlines, there is plenty of war risk capacity now available in the market for non-U.S. airlines, the brokers agree.

"Airlines can get up to $150 million of third-party war cover in the general market and $850 million excess of $150 million is available in the specialist market," Mr. Webb said.

Meanwhile, the market for airports and aerospace products, and manufacturing also remains attractive for buyers, say the brokers.

An "increase in insurance capacity for aerospace manufacturing, particularly in the United States, is putting a little pressure on rating. However, the longer tail involved means that the drop in rates is not as significant as the airlines business," according to Mr. Webb.

Airports, many of which renew their coverage in January, are seeing premium reductions of about 10%, he said.

"I do see the aviation market in general continuing to fall next year," Mr. Webb said.