With continuing reductions in the direct airline market and capacity in excess of 200 percent, primary insurance rates will continue to drop in 2011. This will lead to more pressure on the reinsurance market to offer reductions, except in the event of a major incident or a substantial drop in capacity.
Airline rates continue to fall because of over-capacity in the market and intense competition among insurers to obtain the best terms available. Exposure drove rate activity, as airlines with significantly increased exposure were able to secure greater rate reductions than their peers with moderate-to-flat exposure changes. Insureds with significant loss ratios sustained rate increases, and in some cases, underwriters were able to write business at their own terms. Meanwhile, insureds with limited loss activity were able to negotiate minimal rate reductions.
The underlying aviation market clearly has been impacted by the recession, mainly in Western Europe and the United States. Insurers are conscious of reduced passenger numbers and other business activity, but with the year-over-year increases in passenger liability awards, severity remains a crucial component within modeling systems.
The airline segment has incurred significant net losses to the portfolio again this year, with no major incident impacting the excess of loss market to date. This will be the third year the airline insurance industry has incurred a loss ratio above 100 percent - the most significant losses in 2010 were sustained by Afriqiyah Airways, Air India Express, Saudi Arabian Airline spares warehouse and the first major loss to the Airbus A380 operated by a commercial airline.
With no sign of capacity falling this year, primary market rates could continue to decline for accounts renewing in the first and second quarters of 2011. Consequently, it is difficult to predict if the airline market is at the bottom of the cycle.
In February the general aviation market incurred its largest insured loss of the year: the collapse of the Dulles hangar, which damaged high value corporate/executive jets. To date the incurred loss reserve is greater then USD200 million, which has impacted both the general aviation risk excess facilities and major excess of loss programs. After this incident, the reinsurance market started reviewing the general aviation risk excess rating mechanism used to rate this business, and throughout 2011, insurers will seek to apply premium increases on all hull and liability risk excesses, which in turn will increase the underlying direct rates in this sector.
Insurers affected by the Dulles hangar, Saudi Arabian Airlines spares warehouse and Afriqiyah Airways losses in 2010 - or the two major losses in 2009 - have seen varying degrees of increases, depending on loss participation size. The majority of increases have been contained within the primary layers.
Insurers not impacted by these losses have seen substantial rate reductions across all layers. With no major incident hitting the lower layers and sufficient capacity available at all levels, insurers have been able to retain their current risk participations.
The capacity on the excess of loss market remains plentiful at all levels, although the layers attaching less than USD300 million original market loss (OML) for the major risks remains tighter with a smaller selection of lead markets.
The market and available leaders for general aviation are more limited and is reviewed
Following the Dulles hangar collapse and the two major airline losses in 2009, some insurers who write a full book of major risks have been faced with a choice of price or retention increases, or both. For insurers with an attachment level of the equivalent of USD200 million OML increased their retention level to USD250 million OML for economic reasons and cost savings.
From a structural perspective, there were limited changes, other than higher retentions applied where insureds were impacted by losses. However, most insurers are continuing to purchase up to 1.5 times or twice their maximum lines to address potential clash scenarios.