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Patrick Cove, head of global aviation at Sompo International Reinsurance
23 October 2018 Insurance

Aviation’s profit challenge

Aviation insurers must be prepared to sacrifice market share if they are to achieve a return to profitability, Patrick Cove, head of global aviation at Sompo International Reinsurance, told Baden-Baden Today.

Cove said this is the single biggest challenge facing aviation insurers—but they must hold out for adequate premium rates, even if this means losing business.

“Over the last five years we have seen coverage become too broad, with business being bulked into line-slip facilities with very high levels of deductions and a destabilised market due to reinsurers deploying too much capacity,” said Cove.

“These practices, as always, have come home to roost in the form of unprofitability.”

The so-called Lloyd’s ‘decile 10’, whereby syndicates have been forced to inform the corporation of the worst-performing 10 percent of their business, has served to put aviation insurance in the spotlight as an unprofitable line of business, Cove believes.

Consequently, he noted, there is a new resolve in the sector to get tougher; he has seen active underwriters at the syndicates who write this line of business look to improve rates.

Cove also suggested that losses in niche coverage areas have also impacted rates; these include losses in lines of business such as manufacturers’ hull, non-occurrence grounding and US commercial rotor-wing.

“This has pushed the entire aviation sector into a loss-making position, even at a time when we are experiencing fewer large airline losses,” he explained.

Some other challenges Cove foresees include the way coverage and distribution work in the sector. He identified the conduct and remuneration of the airline brokers as one issue.

“Our clients are seeking to increase the rates received for their product and clarify coverage,” he said. “Also, airline brokers have come to the realisation that to be profitable, they must find a way to get paid by their clients, and not the insurers.”

Sompo International’s strategy in the aviation segment is to engage with industry experts by subclass and geography, with the goal of having enough spread and balance in its portfolio to support individual clients with reinsurance products that reduce their volatility.

Cove suggested some potential coming from the underlying growth in air travel.

“The order book for new aircraft is more than 15 percent of the current fleet value, which in turn, results in more aircraft to be insured,” he concluded.

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