Airlines see clear skies ahead

Airline insurance premiums will continue their slow descent this year as a result of increased capacity and an excellent loss record.

But not everyone wants to compete with prices falling and at least one major aviation underwriter, Global Aerospace Underwriting Managers Ltd., says it will withhold some of its capacity until the market hardens again.

During 2006, worldwide airline hull and liability insurance premiums, excluding excess hull war, decreased by 17% on average, with many airlines in the last quarter receiving 20% to 25% premium reductions, brokers say. The airline accident rate was the second-best ever, with hull and liability losses from jetliners totaling about $1.4 billion.

Premium reductions of between 20% and 25% have continued during the first quarter of 2007 and several major airlines, such as Virgin Atlantic Airways Ltd. and British Airways P.L.C., are about to renew.

"While premium levels seem low at first glance, historical analysis suggests that there is scope for further declines on 2007/8 policies," said Aon Corp.'s recently published "Airline Insurance Market Review 2006."

"The simple reason for this is that while the average lead premium in the airline insurance market has fallen at a breathtaking rate over the last quarter," said Doug Peterson, Aon's aviation global practice leader, "it potentially still has some way to go before it reaches the bottom when capacity in the airline insurance markets, the contribution of the excess third-party war coverage, technological and safety improvements and the renewal cycle...are taken into account."

Based on these premium prices, the average insurance cost per passenger in 2006 was 73 cents, compared with 98 cents in 2005, Aon noted.

Only a major catastrophe could upset this scenario, most brokers, underwriters and airline risk managers say. However, the safety record of the airline industry is improving all the time, with new audits and safety systems being implemented regularly, so claims may remain low.

But airline hull and liability insurance is just one part of the aviation insurance market. Aircraft manufacturers, airports and air traffic controllers also buy insurance and the market for them is somewhat different.

For example, airports are experiencing smaller reductions up to 10% during this year's renewals, according to Marsh Aerospace's "Aviation Review 2006," and air traffic controllers also are renewing with close to 5% premium reductions.

"The airport and ATC provider portfolio has suffered from lack of capacity and therefore has not been able to enjoy the level of reductions obtained by airlines," the Marsh report said.

According to Marsh, the market actually has been tight for aircraft manufacturers' product liability insurance, and underwriters will continue to maintain the current premium levels this year.

Last year, underwriters applied an average premium increase of 4% to aircraft manufacturers' programs, and the total premiums paid in the sector was just over $1 billion. The increase reflected underwriters' concerns about deterioration on losses during prior years, which led to a $1.69 billion increase in loss reserves over the past 48 months. "Even though 2006 looks likely to be a profitable (year for underwriters), we will not know the true profitability of the book until 2009," the Marsh report said.

Airline insurance, however, is still the most talked-about sector of the aviation insurance market, totaling just under $2 billion in total premiums in 2006.

The state of the aviation insurance market is still one of the most important issues for airline risk managers. Ralf Oelssner, director of corporate insurance for Lufthansa AG, sums up airline risk managers' current priorities as:

• Available capacity for airline insurance programs.

• A "respectable" price, given the lack of major airline claims.

• Claims payments.

Indeed, there has been a huge increase in capacity in the past year, up by over 200% by some estimates, which has led to a very competitive marketplace. Although there was a "short sharp" increase in prices following the terrorist attacks of Sept. 11, 2001, profitability and competition returned quickly, said Stephen Riley, executive director of Global Aerospace Underwriting Managers Ltd. in London. "But over the last 12 months, we have seen that accelerate with new capacity coming into the market."

The most significant development in the market has been the introduction of almost a dozen new aviation underwriters in the past year, according to Marsh.

"There are at least 70 people who have moved in the last year or so in the aviation insurance industry in London and the United States," said Mr. Riley. "So it's a time of fairly significant change, and some of it seems to be for opportunist reasons...and some of it for strategic reasons," he said.

"So we're all entering a more competitive landscape and that is most visible from a pricing point of view in the airline insurance market, where premiums have been reducing since 2002, though the rate of average reduction accelerated last year," Mr. Riley said.

As a result of the premium reductions, Global Aerospace has reduced its airline business capacity to a maximum of 12.5% of an airline's insurance program, down from 17.5%, he said. "We're not in the business to write insurance which we think is likely to produce a loss."