March 17th, 2010

Aviation Market Struggling to Rebound: Part I, Disastrous 2009 and New Capacity

Posted at 10:01 AM ET

Despite the slight rate increases that aviation underwriters experienced in the final quarter of 2008, as 2009 began they could foresee another difficult year ahead.The events of September 11, 2001 left the insurance and reinsurance markets reeling. Immediate rate rises enabled the market to rebound. However, an improvement in aviation operational safety standards and a lack of major liability losses in the intervening years created an environment where premium levels fell, year on year. Aviation insurers had cause for concern.

Additionally the global economic crisis had hit the airline industry hard following a number of difficult years.

Major losses during 2009

 

Date of Loss

Operator

Aircraft Type

Location

11th Jan

Zest Airways

Xiamen MA60

Philippines

19th Jan

US Airways

A320-200

Hudson River

13th Feb

Colgan Air

DHC-8-400

Buffalo, NY

25th Feb

Turkish Airlines

B737-800

Amsterdam

9th Mar

Lion Air

MD-90

Jakarta

20th Mar

Emirates

A340

Melbourne

23rd Mar

FedEx

MD-11F

Tokyo

20th Apr

Royal Air Maroc

B767

New York

8th May

Saudia

MD-90

Jeddah

26th May

KLM / Emirates

various

Amsterdam

1st Jun

Air France

A330-200

Mid Atlantic

9th Jun

Saudia

MD-11

China

30th Jun

Yemenia

A310-300

Comoros Is.

4th Aug

Bangkok Airways

ATR72-500

Thailand

28th Aug

Taag

Spares

Rwanda

10th Nov

Kingfisher

ATR-72

Mumbai Airport

28th Nov

Avient Aviation

MD-11F

Shanghai

 

Major Loss Total (xs $10m) :                         $1,683,384,003

 

2009 to mid December  :                                  $1,862,394,003

 

Source: Marsh Limited

The first major aviation loss to the market was the Colgan Air event, in which 49 people were killed when a Bombardier Dash 8 crashed on approach to Buffalo Niagara International Airport (New York State, U.S.) in February 2009.

Following this event, underwriters sought to maintain the momentum of premium increases that had been obtained in the final quarter of 2008.

However the most memorable event of the year was the tragic loss on 1st June of Air France Flight AF447. En route from Rio de Janiero to Paris the Airbus A330 crashed over the Atlantic Ocean with a loss of 228 lives. This is one of the largest aviation losses to have occurred in the insurance market.

Unfortunately, June continued to be a difficult month for aviation underwriters. Yemenia lost flight IY626, an Airbus A310 with 152 lives.

Since these three events have an approximate cost to the market of USD1,200m, aviation underwriters were confident of a subsequent hardening of the market in the Third and Fourth Quarter renewals. Higher rate increases were expected and applied to loss bearing accounts.   

Insurers have withdrawn some capacity from the airline insurance market in the last 12 months. This has been offset by new entrants, who have not suffered 2009 and prior year losses, indicating that they are hungry for new business. The final quarter was renewal time for approximately 76 percent of the total world airline fleet, accounting for approximately 66 percent of total global premium income to the market. The new capacity, eager to be involved, has dampened the level of expected rate increases.

  • Capacity for a Non-US Airline:              217%
  • Capacity for Far- East Airline:                217%
  • Capacity for US Airline:                         180%
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