As the second quarter closes, we are experiencing an acceleration of the upwards rating trend and hardening market environment.
Aviation Market Report

Insurers, under pressure, remain resolute in returning to underwriting profitability and we are seeing price firming across the entire aviation class.

While conditions may be more prominent in some lines or sectors of the business, virtually all renewals are experiencing increased rates and premiums, some significantly.

The upwards pricing trend continues

The aviation insurance market continues to display upwards movement in rates and our analysis of the second quarter results indicates that the average level of increases has accelerated from that seen at the start of the year. Differential pricing to the lead has, in most cases, contracted significantly and this is a key factor in the overall results. All insurers are under strong pressure both internally and by external influence, to address their worst-performing lines which for many include aviation. With underwriters increasingly having to justify more and more of their decisions to higher management, this has led many to adopt a more selective stance. Following markets are now seeking to deploy their capacity at their own prices with far less regard to the leader’s price. This is a significant shift in market dynamics and ultimately it is adversely affecting the composite terms for clients.

Looking at the individual renewal results it is clear that a threetier market position exists with variation in the treatment of those operators that fall within each tier. With the markets tolerance for losses extremely low, those accounts that have high loss ratios or suffer frequent attritional losses, will undoubtedly experience significant capacity restraints and a higher level of increase. Similarly high-limit operators are also experiencing capacity restraints due to their larger line size and market participation requirements. Additionally, it must be noted that the overall market appetite for these accounts has reduced and underwriters, no longer driven by account prestige or status, are quoting far higher pricing for these operators than in the past.

The strongest market appetite remains reserved for those low-limit buying risks, particularly the low cost carriers operating narrowbody aircraft. However, while underwriters are often willing to write larger lines and be more competitive on pricing this business, in the current market environment, it remains the fact that these risks will still experience some degree of upwards movement in rates.

This trend of upwards rate movement is evident across all aviation coverages including Hull War, Excess War and Deductible. Aviation insurers are under pressure to improve profitability across their whole portfolio and therefore they continue to look at all lines in which they participate in order to improve their income and offset losses.

Capacity is contracting

There has been significant movement in the insurance industry during the past 12 months, in terms of both merger and acquisition (M&A) activity and also key underwriting personnel movement.

In the aviation class, we are experiencing the impact of some of this activity and it is clear we are witnessing a shift in underwriting appetite in 2019 with an overall tightening of pricing and underwriting requirements. Profitability is the primary target.

While there is still sufficient capacity in the market, if managed and brokered correctly, overall levels have contracted significantly and a large portion is now unavailable or unacceptable, either quoting significant increases or requiring select criteria to be met before it is deployed. For some accounts, particularly the loss active and high-limit carriers, the overall sum of market capacity actually available (at an acceptable price point) can now leave little room for negotiation, making early market engagement all the more important.

Another factor that is reducing capacity is premium limitations on how much business insurers can write per annum. Lloyd’s for instance, introduced strict measures on its syndicates for 2019 and many reduced capacity in their business plans in order to gain approval to operate. However, with market premiums currently trending upwards, it has been reported1 that around 40% of all active syndicates are already close to exhausting these budgets and have submitted requests to Lloyd’s performance management directorate (PMD) to increase their capacity so that they can continue to write business, without constraint, throughout the remaining months of the year.

We would expect many of these requests will be approved, however should they not, some markets may be forced to start declining business and or reduce their line sizes, which could have an effect on capacity levels as we reach the final quarter. While these factors paint a fairly negative picture for insurance buyers, it must be said that a continuation of the current upwards trending could encourage new capacity to enter the market and this will provide new opportunities and, to some degree, should help to stabilise the rating trend. Indeed we have already seen new start-up - Convex - enter the market this year and there are rumours that others are planning and recruiting staff in preparation for entry in the fourth quarter or early next year.

Losses continue

As the second quarter comes to close, loss activity has continued to be significant with insurers suffering further high-profile and expensive losses, across the airline, aerospace and general aviation sectors. These losses come at a time when insurers are still calculating their exposure from the Ethiopian Airlines crash and the subsequent worldwide grounding of the Boeing 737 Max fleet, which we estimate could cost aviation insurers over USD1bn combined. Major claims are however, only one element of the overall loss experience and the trend of smaller and more frequent ‘attritional’ claims continue to offset against upwards movement in premium and affect insurers’ bottom lines.

Hull War developments

It has been reported¹ that following extensive arbitration between the respective lead insurers, the aviation war market will now absorb the full value of the hull claim (over USD100 million) in relation to the disappearance of Malaysia Airlines flight MH370 in 2014. This loss, which until recently had previously been reserved 50/50 between the hull and liability and war market, now looks set to wipe-out a substantial portion of the annual hull war premium further compounding what has already been a poor year for the aviation insurance market.

Increased focus on coverage

In the current market, requests for new or expanded coverage on renewal are likely to face additional charges and in general, there is now greater underwriting scrutiny towards insurance coverage with limits, conditions, excesses, exclusions and extensions all within scope. More specifically, elements of wording and the interpretation of language in relation to aircraft software, cyber, and grounding are being closely reviewed, following recent high-profile losses.

Another area which some insurers are reviewing is deductible cover and in recent weeks one major insurer has started to quote renewal business with increased deductibles. Underwriters have long viewed the standard market limits as out-dated, having not kept pace with today’s rising aircraft values, and therefore it is possible that in the coming months we could see a more concerted push with others following suit.

For now however, any immediate change in coverage and or revisions to standard market clauses and limits, would seem some way off and any efforts from insurers will likely be met with strong resistance. We continue to monitor the situation closely.

Looking ahead

Looking ahead, all indications seemingly point to a continuation of the current trending and a challenging marketplace for the remainder of 2019. Future claims activity and capacity levels will however, ultimately be the key influencing factors in how conditions progress as we continue through to the latter stages of the year.

While a changing market and increased pricing can be difficult for aviation insurance buyers to understand and plan for, after having become accustomed to year on year rate reductions, most buyers will still be paying less for their aviation insurance than they did five years ago, while likely having grown their operation and exposures significantly.

As our Lead Lines author comments “it is important to understand that the changes we have seen thus far in the market environment have been driven largely by the unprofitability of the business over a number of years”. Indeed, the poor performance of the aviation insurance class in recent years is highlighted by the number of capacity withdrawals and underwriting job losses we have witnessed, particularly in the past 24 months. Ultimately, had the soft market environment continued unchanged, we would have continued to see further casualties, reduced competition and increased selectivity, all of which would have likely led to a far more extreme pricing environment than that which we are currently experiencing.

We are well prepared

Whilst a changing market produces challenges, for an experienced broker it should also present an opportunity in which to really demonstrate the strength, value and expertise it brings to its clients.

At Gallagher we are well prepared. Our aerospace team is made up of some of the most experienced insurance practitioners in the industry who have decades of first-hand experience in navigating the most challenging market conditions and delivering results. We are confident that we can really demonstrate our abilities and value in this current testing environment and we are ready with some great strategies, innovative solutions and tools on hand to mitigate cost for your organisation.