Fitch: Aircraft Insurers Should Recover With Rate Boosts

NEW YORK--()--Aviation and aircraft insurers are enduring the most difficult claims experience in years, which will likely reverse declining pricing trends at policy renewals, according to Fitch Ratings. However, competitive factors and abundant underwriting capacity may blunt the magnitude and scope of rate increases across the broader market. Policyholders with attractive safety profiles will continue to see competition for their business.

Following relatively quiet experience in recent years, a spate of tragic events has occurred over the past several months, including the disappearance of Malaysia Airlines flight MH370 in March, and in July alone, the downing of flight MH17 over Ukraine, attacks on planes at Tripoli International Airport, the crash of an Air Algerie flight in Mali, and the crash of a TransAsia Airways plane in Taiwan. We expect airline insurers to begin material reviews of rates, policy terms and conditions, and underwriting risk factors associated with this business following these events.

Aircraft hull losses include irreparable loss of aircraft, while liability coverage addresses death, personal injury and tort-associated losses. War and/or terrorism related losses are typically handled through separate coverage, but the premiums collected are materially smaller, mostly due to the low frequency of incidence that has occurred since the events of Sept. 11, 2001.

Major aircraft insurance providers include Lloyds of London, Allianz and American International Group, Inc., larger entities for which aviation risks represent a relatively modest portion of total premiums. According to analysis by insurance broker Willis, net premiums for hull, liability and attrition losses were estimated to be around $1.2 billion in 2013, far below the $2 billion achieved in 2010 and 2009. The decline in premiums was driven by declining losses in each of the years beginning in 2009 through 2012, leading to significant softness in the market.

Soft market conditions intensified in the first half of 2014. In a recent report, insurance broker Jardine Lloyd Thompson Group indicated that aviation rates in aggregate were down an additional 20%. Delta Airlines noted in its second quarter earnings call on July 26 that it had recently opted out of the FAA insurance program because commercial rates had reached more competitive levels.

US airlines have been receiving war risk insurance from the Federal Aviation Administration through a program that has been in place since September 2001. The program will require passage by Congress to continue past its presently set expiration, set for Sept. 30, 2014. The MH17 Ukraine incident and the recent airports attacks will undoubtedly raise hull rates on war related incidents.

The rate increases expected in 4Q, when traditionally about three-quarters of the airline market renews, will unlikely be enough to recoup losses for several years, even assuming that losses revert to recent averages. Some industry participants have remarked that multiple years of underwriting profit were wiped out in the 2014 calendar year.

One key question is how far premium rate increases will extend across the broader airline market. Policyholders unaffected by the recent losses with attractive safety records and risk profiles will continue to have opportunities from a number of carriers to provide their aviation coverage. These competitive dynamics will require underwriters to weigh benefits of rate increases with the potential for lower account retention in upcoming renewal periods. Wherever the market goes in the near term, global aviation insurance will continue to be a difficult market for underwriters to generate consistent long-term underwriting profits.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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Contacts

Fitch Ratings
James Auden
Managing Director
Insurance
+1 312 368 2061
70 West Madison Street
Chicago, IL
or
Matthew Noll, CFA
Senior Director
Fitch Wire
+1 212 908 0652
33 Whitehall Street
New York, NY
or
Media Relations:
Brian Bertsch, +1-212-908-0549 (New York)
brian.bertsch@fitchratings.com

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Contacts

Fitch Ratings
James Auden
Managing Director
Insurance
+1 312 368 2061
70 West Madison Street
Chicago, IL
or
Matthew Noll, CFA
Senior Director
Fitch Wire
+1 212 908 0652
33 Whitehall Street
New York, NY
or
Media Relations:
Brian Bertsch, +1-212-908-0549 (New York)
brian.bertsch@fitchratings.com