February 2nd, 2010

Aviation Sector Renewals

Posted at 10:00 AM ET

During 2009 the Aviation market suffered two significant losses. Colgan Air, a US regional carrier crashed on approach to the Buffalo, New York airport and Air France crashed over the South Atlantic. These losses, which significantly impacted the reinsurance market, together with other losses generally contained within insurers’ retention, prompted the direct market to increase premium and rating levels in the second half of 2009.

Quote spreads from Excess of Loss (XOL) reinsurers, on average, ranged from increases of 5 percent to 7.5 percent for risks with no loss factors and from increases of 10 percent to 20 percent on risks that did include past loss factors. No average changes in commissions on pro-rata treaties occurred.

Major Risks

A combination of potentially significant per passenger awards and overall loss levels led the XOL market to raise prices in the November 2009 to January 2010 renewals.

Direct insurers renewing their reinsurance programs have seen varying degrees of rate increases. The variations were caused by the size of the direct insurers’ participation on one or both, of the Air France and Colgan events, increases in retention levels, contributions to profit over the years and the competitive reinsurance environment. The bulk of the increase has been contained within the primary layers with smaller increases above this level being evenly spread through the rest of the programs.

General Aviation

The underlying market for General Aviation is generally flat but with some sectors, such as commercial helicopters, facing increases following a spate of losses. However, others, such as good quality corporate aircraft risks continue to see reductions. The XOL placements generally followed the performance of the direct market so in some cases insurers will have paid higher rates.

For General Aviation emanating from the US, where a very significant amount of reinsurance is purchased, there has been some pressure from reinsurers to increase rates on Risk Excess business. Reinsurers however, have now accepted that they cannot control the pricing of the original business in this way.

Capacity Available at All Levels

The capacity of the XOL market remains adequate at all levels, although the layers attaching less than USD 300 million Original Market Loss (OML) for Major Risks remain tighter with a more limited number of lead markets. Those reinsurance markets received some paybacks from their clients.

In the area above USD300 million and up to USD2.5 billion, the maximum original limit bought by an airline, the capacity is currently plentiful with a greater number of options offered by leaders and followers looking to increase their shares on the back of a harder market.

The only new market entrant was the Atrium Syndicate, which appeared in time for the late 2009/2010 renewals.

In General Aviation there was more limited market capacity but it became more sufficient at the right price. Most reinsurers prefer to provide capacity in excess of a Hull limit.

Trends and Developments

For those direct insurers writing a full book of Major Risks reinsuring from an attachment level of the equivalent of USD200 million OML, they found it more economic to increase retentions levels to USD250 million OML. In some cases, in addition to the increase in retention levels, there were also price increases. Those insurers focusing on risk business of a more regional/domestic nature or risks operating in a lower liability environment can continue to purchase excess of loss coverage at lower levels of OML.

From a structural perspective there were limited changes other than retentions, where relevant. Most insurers continued to purchase up to 1.5x or 2x their maximum lines to respond to potential clash scenarios.

The global recession has had an impact on the airline industry, impacting passenger numbers, load factors and cycles, and the reinsurance industry is aware of this. However with year on year increases in passenger liability awards the reduced traffic during the recession has had a limited impact on pricing, as severity remains a key component with the reinsurers’ modeling projections.

Outlook

During the last month or so of 2009 the momentum within the direct market towards price increases for airlines slowed. With overcapacity in the aviation market the price rises that were expected did not materialize, especially as the last quarter sees a large number of big premium earning accounts renew.
The XOL market shows no real sign of softening, so in the absence of a major loss, insurers renewing their program in the early part of 2010 should expect their renewals to be similar to those of the end of 2009 and 1st January 2010.

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