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Sun 1 Apr 2007 04:59 PM

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Ask the expert: Steven Doyle

Question: How strong is the current market for airline insurance and what are your predictions for 2007?


How strong is the current market for airline insurance and what are your predictions for 2007?


Steven Doyle

Manager, global practice group, AON

Benefits to airlines

The airline insurance market is, and for the foreseeable future will be, a buyer's market with the primary market drivers of capacity and claims creating a favourable position for airlines.

The multitude of aviation underwriters aggressively chasing good business means that there is an abundant supply of risk bearing capacity, which is approaching double that required for the ideal airline. When combined with an exemplary industry safety record, and therefore low claim levels, buyers have been rewarded with consistently reducing premium levels.

Airline insurance is cyclical and it must be remembered that premiums rose to unprecedented levels after the 9/11 2001 attacks and the activity in recent years has seen something of a return to a balanced market position. The profits generated during this period have contributed to the attraction of a new underwriting capacity.

Premium trends

Whilst the aviation insurance market is high profile, it is also relatively small in terms of the major insurers overall portfolio. Capacity has therefore entered the market to create diversification of portfolios away from a reliance on property casualty business.

The underwriters that have recently entered the market are likely to remain committed for some time as a result of their personnel and capital investments.

These factors have led to the change in insurance premiums accelerating from a steady 7% reduction from 2004 to the first three quarters of 2006, to fall over a fifth during the final quarter of last year when the majority of programme renewals and premium volume came to the market. The indicator, from the first three months of 2007, is this downward trend is continuing.

Influencing factors

The airline insurance market remains finely balanced with the global market premium levels for all covers approaching the US$2 billion level - it is matching the limits of cover that are offered for the world's largest airlines. These limits obviously being reflective of the potential level of catastrophe that could face the airline industry and as a result the insurance market.

With premium levels at their lowest level for five years a catastrophic loss could therefore change market conditions swiftly and dramatically. This brings uncertainty to the future insurance buying process. Analysis of historical data shows that the longer and further the market falls, the more significant and rapid the market reaction or hardening is when the catalyst of change comes into play.

The market balance is also impacted by the changing risk profile of the industry. The global fleet is expanding rapidly and therefore aircraft and passenger exposures are increasing.

The geographic contribution to this global exposure profile is also changing with the growth of the low cost model across the world and the highly litigious North American arena becoming less influential due to its own contraction and rapid growth elsewhere.

Relative insurance rates

This rapid exposure growth has thankfully not translated into claims and this is largely attributable to the more technologically advanced aircraft and the increased use of technology in training and risk management. The challenge remains for insurers to charge appropriate and consistent premiums, which truly reflect the exposure faced when the industry is developing so quickly.

The airline industry has also seen significant consolidation, which has been reflected in the respective insurance programmes of the airlines involved. Economies of scale are being rewarded to the largest insurance programmes: 28 programmes with fleets valued at more than $5 billion that contribute to 55% of the market premium, received an average -22% reduction on their lead hull and liability programmes during 2006. By comparison, the 91 programmes in the $150-500 million band saw premiums

fall by a mere -2% on average.

Future thoughts

While 2006 saw limited activity, 2007 is already hinting at a significant amount of full corporate merger activity. As a result, the airline insurance market will increasingly be driven by fewer and larger programmes.

What this all means for 2007 is that while 2006 witnessed significant declines, there is little indication that the buyer's market will fade in the short-term. The long-term view, as ever, is more difficult to ascertain. One thing is for certain, that the airline insurance market has and will continue to be there to meet the developing needs of the industry and therefore will continually evolve to deliver in a cost effective and efficient manner as the industry requires.

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