December 23rd, 2008

Price Bottoms Out for Aviation

Posted at 1:00 AM ET

Ian Wrigglesworth, Managing Director, Aviation
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The aviation renewal came without surprises and generally without change. After years of cedent-advantaged market conditions, pricing stabilized. Terms and conditions showed little (if any) change, and quoting was timely and disciplined. The market for aviation reinsurance appears to have reached a natural bottom, given the lack of movement in both reinsurance rates and terms and conditions. Neither was influenced substantially by loss history, reinforcing the notion that the pricing floor is natural.

Major Risks: Airline, Product Manufacturers

The aviation reinsurance market renews 65 percent of its reinsured capacity from October 1 to January 1 every year. Most treaties are excess of loss (XOL), with original market loss attachment points typically suited to risk appetites of USD100 million to USD500 million. XOL quoting was timely this year, without any last-minute changes.

Note: Renewals based on insurers’ gross percentage airline lines. Total reinsured capacity 181.6 percent, total capacity 208.5 percent.

Among the market’s leaders, pro rata treaty renewal process was slowed by a very significant reliance on actuarial study and newly-enhanced models. Though rate movements ultimately were marginal, reinsurers requested much more information than usual, and cedents placed increased emphasis on the adequacy of reinsurer security.

On a risk-adjusted basis, catastrophe, risk, and risk excess showed no change. Reductions in overriding commissions on pro rata treaties averaged 1 percent to 2 percent. XOL reinsurers were in tune with cedents and market conditions, as quote spreads, on average, ranged from -7.5 percent to +7.5 percent.

Reinsurance capacity remains abundant for major risks aviation lines, as suggested by the stability of reinsurance rates, particularly for original market losses of USD750 million to USD1.5 billion. Capacity does shrink at lower layers, though.

Despite a slight uptick in airline insurance pricing, there recently has been a substantial reduction in the number of airlines and aircraft operated. This shrinking of the underlying exposure is expected to continue in line with global financial catastrophe.

For non-U.S. major airline insurance coverage, based on an original market liability limit of USD1.5 billion, total capacity was 208.5 percent. Lloyd’s is the largest supplier, at 74.9 percent, followed closely by the rest of the world, with 67.8 percent. Markets in London and France account for 37.8 percent and 21.5 percent of non-U.S. capacity, respectively.

General Aviation

General aviation proportional treaties were renewed with similar panels of reinsurers at the same prices as last year. Reinsurers continued to seek more information from cedents, despite the lack of rate movement. Recent results have varied, with rotor wing business of greatest concern to reinsurers.

Like major risks lines, general aviation tends to be renewed between October 1 and January 1. This year, London-based underwriters used this period to purchase XOL and proportional treaties to protect their coinsurance participations, while those in the United States sought risk excess cover in order to provide 100 percent line capacity.

Cedent Concerns

As usual, price remains the top factor used by cedents to choose a reinsurer, and terms and conditions-which did not change substantially this year-is the second priority. Security/rating is third. After the main reinsurers are selected, cedents use ratings and market security to determine which other markets participate in the program. The spread and domicile of counterparties are last among cedent considerations.

What Comes Next?

The overall aviation reinsurance market appears to have hit bottom, based on signals from recently renewed major risk proportional treaties. Renewal rates were not driven by loss history, as there were no catastrophic aviation losses over the past year. There were several non-catastrophic airline incidents, however, that underwriters did address in the pricing process this year.

Given precarious global financial conditions and the likelihood of tightening access to capital in 2009, it is difficult to forecast the direction of the aviation reinsurance market next year. Loss history, as always, will play an important role in price-setting, as will both access to capital and the amount that markets have on hand already. So, until we reach October 1, 2009, we’re operating in a market where pricing appears to have found the floor.

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