2011 was a relatively quiet loss year for the global aviation sector. The airline sector did not experience any major losses involving significant loss of life. British Airways and Iberia merged to form International Airline Group (IAG), one of the largest airline groups in the world.
The primary insurance sector of the global aviation market continues to be soft. Capacity remains the key driver for the reductions in the airline market. Renewals have seen average premium reductions of 8 percent on expiring policies that have not had major incidents in the 2010/2011 underwriting year. If market conditions and capacity levels remain static, airlines with renewals in the first quarter of 2012 could see a level of premium reductions similar to those seen in 2011. Importantly, fewer renewals occur in the first quarter so renewal trends for the period are not an indication of trends for the rest of 2012.
Looking at aviation reinsurance renewals from October to December, including a sample of early January placements, the trend was towards a reduction in cedent spend. The percentage spend of subject premium was reduced by approximately 4 percent to 6 percent. There has been a lack of loss activity from the airline sector affecting the excess of loss market, although certain losses did occur in the general aviation sector that are covered under general excess of loss programs. There is some potential for these losses to contribute to reinsurers’ activity once reserves are established. The excess of loss market does continue to be profitable even though some primary layers have been loss active. Ample capacity does exist in the middle to high layers with little influence coming from losses in other classes. Main exposures and premium changes are generally aligned between the primary and reinsurance market. Requests for sanction clauses have been more widespread on placements this year.
Loss-free excess of loss programs saw an average rate on line reduction of approximately 5 percent. Few programs experienced any loss activity, and for those experiencing losses there was an associated increase in price. A small number of cedents chose to increase retentions where loss activity had an impact on pricing. In the working areas capacity is still tight with sufficient amounts available at the right price. Within the middle layers there is significant over-capacity with many reinsurers vying for market share. On the higher layers capacity is plentiful. However, as rates on line drop below 2 percent, reinsurers’ appetites diminish.
Proportional treaty saw mixed trends with companies both increasing retention and ceding more risk. The decision to retain or to cede additional risk is often a decision that is made as part of a company’s overall corporate philosophy. It is also a decision made around balancing volatility and matching decisions made in each separate portfolio.
A further trend in 2011 regarding proportional treaty on major airline risks business saw reinsurer resistance to changes in commissions. For other aerospace lines such as space business or aviation war, cedents have been trying to gain increased ceding commissions and/or profit commissions where results have been significantly profitable.
Proportional treaty capacity has been fairly static for major risk business. Additional capacity, however, is available in general aviation or space business for those cedents that can demonstrate a consistently good track record.