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As the commercial aviation sector approaches its busiest renewal period, insurance rates are set to increase — with the war risk portion jumping by up to 300% — following a series of major losses, including the Malaysia Airlines flight shot down over strife-torn Ukraine.
The losses look to end a prolonged soft market for aviation insurance buyers that has lasted for at least eight years, according to experts, though they say the size of the increases will depend on an airline's underlying risks.
About 75% of the world's airline fleet renews its coverage in the final quarter of the year, including Malaysia Airlines, which is certain to face higher rates (see related story) due to two major losses in recent months.
Malaysia Airlines flight MH17 was shot down July 17 in Ukraine en route from Amsterdam to Kuala Lumpur, killing the 283 passengers and 15 crew aboard.
While no group has claimed responsibility, U.S. and other officials said pro-Russia separatists shot the jet down with a surface-to-air missile.
In a statement, Richard Harries, CEO of London-based Atrium Underwriting Group Ltd., whose Lloyd's of London syndicate 609 leads the war risks policy for Malaysia Airlines, said it had agreed to settle the hull war loss portion of the loss.
The commercial hull war loss from the tragedy is likely to be about $97 million, sources said.
Malaysia Airlines' insurance program is brokered by Willis Group Holdings P.L.C.
The downing of flight MH17 followed the March disappearance of Malaysia Airlines flight MH370 with 239 people presumed killed, the mid-July attacks on planes at Tripoli International Airport in separatist fighting, the loss of an Air Algerie flight in Mali during a sandstorm killing the 118 aboard and the late-July crash of a TransAsia Airways plane in Taiwan that went down trying to land in typhoon conditions and killed at least 48.
According to several London underwriters, the MH17 loss will affect the aviation war risks market, which could filter to the aviation hull and liability market.
“For a number of years, abundant capacity has placed considerable pressure on pricing, as well as terms and conditions, across all aviation lines,” said Catherine Thomas, director of analytics at A.M. Best Co. Inc. in London. “At the beginning of 2014, rates were significantly below peak levels,” and the market still was profitable, despite some large losses, until the recent crashes.
“For the niche war risk market, losses this year will considerably outweigh premiums written, and insurers are expected to react with substantial rate increases,” Ms. Thomas said.
Annual premiums for the global war risk market were about $60 million for 2014, sources said.
In total, so far this year the commercial hull war market has suffered losses of between $500 million and $600 million, sources said.
Those losses include at least $108 million from Malaysia Airlines flight MH370, as much as $500 million from the attacks on planes at Tripoli airport, and about $97.3 million from the loss of flight MH17, experts say.
The losses probably wiped out about five years' of aviation war risks premiums, said a London underwriting source who asked not to be named.
“While the losses will be spread, there will be a correction” in rates, he said.
Since the 2001 U.S. terrorist attacks, most insurers underwriting war risks have reinsured that book of business, one source noted.
Given the recent losses vs. premiums collected, that would suggest aviation insurance rates in general will increase, said Dominic Burke, CEO of London-based brokerage Jardine Lloyd Thompson Group P.L.C. However, “the aviation market behaves in its own distinctive way,” he said.
In a conference call, Chris O'Kane, CEO of Hamilton, Bermuda-based Aspen Insurance Holdings Ltd., said the recent losses will put upward pressure on aviation rates. He said Aspen will look for rate increases around 100% for primary aviation war risks, while rates for aviation war risk reinsurance could increase 200% to 300%.
“In the aviation hull and liability insurance market, there will be a reaction in terms of pricing levels, but at this point it is too early to say what that will be,” said Philip Smaje, London-based global head of transportation broking and CEO of aerospace at Willis. “The abundance of capacity could limit the extent to which insurers can hike rates.”
Sources said that for 2014, worldwide primary hull and liability premium, excluding hull war and excess third party liability, totaled about $1.35 billion.
For aviation war risks, some underwriters may boost rates by as much as 300%, Mr. Smaje said.
The recent losses also are expected to affect rates for aviation hull and liability insurance, sources said.
Insurers likely will approach underwriting in a rational manner and will not overreact to the recent losses, so sweeping rate hikes are unlikely, said Garrett Hanrahan, Dallas-based U.S. aviation practice leader at Marsh L.L.C. Underwriters will need to re-examine their books of business and price according to the underlying risk of an airline, he added.
But plentiful capacity could blunt increases, Mr. Hanrahan said.
According to an Aon P.L.C. report, lead premiums in the global aviation market totaled about $1.4 billion in 2013.
Commercial aviation rates will increase, but the increases will not be uniform, said Nigel Weyman, chairman of the aerospace division at JLT in London.
“We are hoping that the recalibration of the market, when it happens, will be quite measured,” he said.
Underwriters likely will more strictly differentiate between risks, examining factors such as the types of aircraft in a fleet and the liability they might face, Mr. Weyman said.
While the attack on flight MH17 in particular will prompt underwriters to re-evaluate the risks facing airlines, surface-to-air missiles have long been a threat, said Marsh's Mr. Hanrahan, such as the 1983 case of a Korean Air Lines Co. Ltd. flight from New York to Seoul that was shot down by a Russian interceptor aircraft.
“So these types of risk are out there,” and rerouting flights to avoid dangerous airspace is one risk mitigation strategy, he said.
Airlines' vulnerability to ground-to-air attacks has always existed, but the aviation market deals in catastrophic risks and will not exclude such attacks, Mr. Weyman said.
While Malaysia Airlines has suffered two catastrophic losses this year, the aviation insurance market likely will not unduly “punish” the airline with untenable rate hikes when it renews in November, sources say.