Capacity decline supports aviation sector rates
As the renewal season approaches, the airline insurance market is showing definitive upwards movement across all business sectors, according to the latest JLT Aviation newsletter.
Underwriters are sustaining the pressure they have built throughout 2018 and are now pushing for increases in premiums for all renewals, according to the report.
Underwriting discipline and risk selectivity remain key contributors, but the continual decline in capacity levels by way of consolidation and market withdrawals has ultimately helped support this position by affording underwriter’s greater leverage in their renewal negotiations, JLT said.
Management pressure and year-end profit expectations as well as the steady flow of losses seen throughout 2018 have also motivated underwriters to remain resilient.
Looking ahead to Q4, JLT expects market conditions to continue the current upwards trending. Given the volume of renewals and subsequent premium income available, underwriters are likely to push harder on pricing in the final quarter, and therefore it is probable that we will see some uptick in rates, according to the report. However, capacity is likely to return if rate increases become too high, therefore, JLT expects underwriters to continue to take a measured approach.
In terms of losses, the current year to date position in hull and liability looks poor in comparison to the same point last year, JLT noted.
The airline market has observed a steady flow of losses throughout the year, some of which have produced a number of fatalities. The third quarter (Q3) followed suit bringing with it further expensive hull claims and repair bills. There were two fatal losses in Q3, one of which will impact on both the hull and liability and hull war markets due to the circumstances of the incident.
While airline safety may appear to have deteriorated, this is somewhat misleading, the report said. Although 303 commercial airline fatalities have been recorded to date versus 39 in 2017, the actual number of fatal accidents to date (7) still remains below that recorded last year (9) and the five-year average (10). These figures, which include both jet and turboprop aircraft, are some of the lowest on record for commercial airline travel and must therefore be viewed positively.
Further incidents have been observed in the hull war market during Q3, two of which involved airline equipment. These were the crash of a stolen Q400 turboprop in Washington, USA and an A320 aircraft in Saudi Arabia which is reported to have sustained damage from a rebel-operated drone. At present claims values following these incidents are unconfirmed.
Airline losses aside, there were also several hull war losses in the general aviation sector, involving rotor wing aircraft, which have left underwriters with some costly claims, the report noted.
The fourth quarter (Q4) is the most significant renewal period for the airline insurance market in which a significant portion of the world’s major carriers and airline groupings are placed.
Approximately 70 percent of the annual airline insurance market premium is generated by the renewals of the fourth quarter and it will be this period that largely determines the year end results for aviation underwriters.
Year to date figures confirmed underwriters are succeeding in maintaining momentum in pushing up rates, JLT noted. With the Q4 renewal negotiations and underwriting discussions also underway, early indications and general market consensus suggest a continuation of this theme, the report added.
Underwriters continue to differentiate between risks but are now targeting rate increases across all airline business in order to increase their individual premium income in hull, spares and liability, according to the report.
Airlines with large liability limits/aircraft values and or those affected by losses are being targeted for higher rate increases. More attractive placements, such as those with low liability limits/values and no losses continue to achieve better terms and renewal results comparatively.
Hull war is currently one of the most pressured lines of aviation business, the report noted. Loss frequency has notably increased over the past five years and the market is in a clear loss-making position. Premium levels are now widely regarded by underwriters to be insufficient and this has led a number of markets to withdraw from the class, reducing capacity levels. Renewal negotiations are challenging and pricing is showing clear upwards movement with underwriters pushing hard to increase rates. Those accounts which purchase high-limits and or operate in or fly to geographical ‘hot spots’ are experiencing the greatest pricing pressure and underwriting scrutiny.
While capacity for hull deductible remains plentiful, there are now only really a handful of markets that solely specialise in hull deductible. Most participating markets quote this business alongside other areas of the programme such as hull and liability and will only be competitive on pricing if participating on a wider basis, JLT said. The deductible product in its current format is considered to be out-dated and so underwriters may seek to increase limits and introduce other changes in the longer term.
Most insurers who participate in excess liability typically also write hull war business, JLT noted. Therefore, unsurprisingly with hull war underwriters under pressure to increase rates a knock-on effect on this class is now starting to be witnessed. Renewal negotiations have subsequently become tougher in recent months with underwriters now focussing on terms and pricing levels in order to subsidise their other poor performing lines of business.
Capacity has gradually declined throughout the year, across all coverages, and continues to have a significant influence on current market conditions. Aspen recently became the latest high-profile player to withdraw from aviation, joining a notable list of other departures including Hiscox, WR Berkley, Allied World Europe and Ortac. Capacity also continues to reduce by way of consolidation, despite some of these new entities being able write larger percentages after combining their respective lines. Ultimately, with fewer active markets available, underwriters, especially those with higher stamp capacity, have gained greater leverage and have hardened their pricing attitude accordingly. Underwriters are fighting hard to dictate their own terms and pricing and this is having a notable impact on negotiations across all placements and coverages, JLT said. Those carriers which have adverse loss ratios or which purchase high-limits and therefore require a greater level of capacity, are those most likely to experience pricing pressure. With additional mergers and acquisitions looming on the horizon, the potential for future volatility cannot be ignored.
With a number of factors in play, JLT expects that market conditions will continue the current upward trending. It is likely we will experience some higher rates in the coming months, as underwriters focus on meeting their year-end goals, but we believe if capacity levels remain stable and there are no significant market events or major losses this will be moderate.
The measured approach which underwriters are taking has been successful in reversing the previous downwards market trend and soft rating environment, JLT noted. Aware that capacity will return if rate increases become too high, JLT expects underwriters to maintain their discipline during the final months of 2018 and into the new year.
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