Aviation insurers brace for complex 2021 renewals
Negotiations around aviation insurance renewals will remain complex in 2021 as the world enters a second year of the pandemic with all the challenges that brings, according to ‘Plane talking’, a quarterly report by Gallagher covering the aviation sector.
The report, covering Q1, notes that last year, the aviation insurance sector was unquestionably a challenging marketplace, driven by the COVID-19 pandemic and the uncertainty it presented around operations, income and a host of other factors.
“As we enter year two of this pandemic, there are signs of optimism but a return to normality is still some way off. From an insurance perspective, it is clear that we are set for another complicated round of negotiations in 2021,” the report said.
It noted that in 2020, the insurance rating environment continued to harden even though the majority of the industry was running substantially reduced operations due to the pandemic. As 2020 concluded, some rate deceleration could be seen in certain segments and perhaps signs that the rating trend was stabilising.
“That’s not to say that rates were reducing or the overall market conditions had changed, as they hadn’t, but the average rate increase in the fourth quarter was slightly lower than recorded in the preceding months,” the report states.
“As the first quarter concludes, a traditionally quiet period for aviation insurance in terms of overall renewal activity, data would suggest that the underlying trends have continued into 2021. Rate increases are at a similar level to that seen in Q4 last year and this would suggest the upwards trend has stabilised.”
The report also warned, however, that 2021 data is limited and there remains significant variation in the results by risk and segment of operation. “As renewal activity increases in the coming weeks and months we will have a far clearer picture and assessment. With the weighting of the majority of aviation renewals toward the end of the year much of what happened in 2020 in terms of claims and premiums actually impacted on the 2019 year of account for insurers.”
It also noted that despite a notable reduction in attritional losses there were several major losses in 2020, across the airline, general aviation and space sectors. Several aviation insurers reported an underwriting loss on the 2019 year of account, partly as a result of their exposure to these major losses but also due to the erosion of their premium base due to COVID related returns and the adverse development of some existing claims. Increased reinsurance costs also had some impact on direct insurers. While some aviation insurers faired better than others with their results, all suffered direct and indirect impacts from the pandemic which were evident in their overall reported company results.
Overall, the report stressed that the general response from the aviation insurance market in 2020 to clients’ situation was positive, albeit not uniform amongst the different segments with airlines receiving substantially more aid from underwriters than their aerospace manufacturing, airport and service provider colleagues. “Insurance policies are structured differently in the aerospace segment which played some factor in this, as did losses,” it noted.
The report stressed that aviation insurers find themselves going into the 2021 renewal negotiations in a better position, having achieved higher technical ratings levels in 2020 across all sectors and having introduced minimum premiums on a large portion of their business. “These factors will provide greater certainty around potential future income levels which is a luxury that insurers didn’t have this time last year.”
The report added: “In some segments, there is an argument to suggest that the high rate increases achieved by underwriters in 2020 have seen accounts reach underwriters desired technical positions in terms of rating adequacy. While this hasn’t yet translated to target premium adequacy, as pandemic restrictions ease and operational levels increase this will organically deliver higher premium without the need for further substantial rate increases. It’s going to be a gradual process but we believe that there are now strong arguments to be made for insurers to adopt a longer-term view, and this provides a meaningful starting point for constructive negotiations in 2021.”
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