March 18th, 2010

Aviation Market Struggling to Rebound: Part II, Focus on Asia/Pacific and Reinsurance Market

Posted at 10:00 AM ET

Focus on Asia Pacific

The main concern for the insurance market in the Asia/Pacific region is the frequency of loss, with several carriers having more than one loss occurrence in the year.

There have been 62 incidents in Asia/Pacific in 2009, including eight fatal accidents involving 115 passengers and crew. The total gross hull losses equate to excess of USD310 million.

During the final quarter of the year, Asian carriers experienced the following treatment, (lead premium):

Premium % Change                Premium % Change

                                                AFV >= US$100M               All Accounts


October                                   +48.45%*                                 +44.92%* 

November                               +0.02%**                                 +2.39%

December                                +5.85%                                     +5.98%


Average Q4                             +11.09%                                   +12.09%              

Source: Marsh Ltd.

* Includes two airlines with loss A.P.s, (NACIL & Lion Air).
** Only a single renewal.

The average Fourth Quarter figures for Asia/Pacific premium changes compare favorably with a global average of +19.92 percent for that period. On the whole, the region has been treated fairly benignly in comparison with the rest of the world. Naturally certain loss active risks will have been treated differently, particularly in those areas with a recent history of losses. A number of these accounts can expect to receive a less sympathetic hearing during their 2010 renewal.

While there will be sufficient capacity available at competitive prices for the major Asian carriers, placements for regional airlines with poorer loss records may prove difficult. Capacity may be restricted and placement of this business could require employment of sub-A rated security in order to complete certain risks.

Reinsurance Market

The aviation reinsurance market suffered two significant losses during 2009: the Colgan Air (US regional carrier) and Air France events. A combination of potentially significant per passenger awards and overall loss levels led the excess of loss reinsurance markets to raise rates for the November 2009 to January 2010 renewals.

Following the 2009 losses some insurers were faced with a choice of price or retention increases, or both. For those insurers writing a full book of major risks and with an attachment level of the equivalent of USD200 million Original Market Loss (OML) they found it more economical 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.

Recent loss experience has led reinsurers to increase rates. However, the reinsurers’ pricing decisions will also be impacted by increases in client retention levels, client 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.

Once a consensus between reinsurers and reinsureds on pricing has been achieved the capacity of the excess of loss market should remain sufficient at all levels, although the layers attaching less than USD300 million OML for major risks remains tighter.

There are robust levels of capacity to provide insurers with sufficient reinsurance protection to cover the potential multiple loss event or clash scenario.

Excess of Loss rate changes:
Major risks (loss involved) 10 - 20% increase
Major risks (clean renewal) 5 - 7.5% increase

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 limited impact on pricing, as severity remains a key component within the reinsurers’ modeling projections.

In the absence of a major loss, insurers renewing their programs in the early part of 2010 should expect their renewals to be similar to those of the end of 2009 and 1st January 2010.

Link to Part I, Disastrous 2009 and New Capacity >>

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