The Aviation Working Party

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The Aviation Working Party

• Justyn Harding (chairman)
• David Hart
• Phillip Tippin
• James Widdows
• The working party wish to acknowledge the
  valuable
• assistance provided by
• Richard Power
• Cameron Johnston
• of BAIG

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THE AVIATION AND SPACE INSURANCE MARKET
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The Market

• The market can be split into the following areas
• Airlines
• General Aviation
• Space Risks

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Airline Insurance is Big Business

• Total premium is around US1.4bn
• Hull values up to US225m
• Liability payments can be over US3m per
  passenger
• The total cost of a single incident could
  exceed US3bn
• Over 500 airlines worldwide
• War risks are covered separately

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General Aviation

• Aircraft with up to 40 passengers
• Around 300,000 planes
• Difficult to get an overall view of the
  performance of the market
• More suited to a technical rating exercise

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Product Liability

• Annual premium around US450m
• Dominated by 4 programs
• Claim sharing agreements are common
• Hard to assess true profitability

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Space Risks

• Covers launch and in orbit risks
• Annual premium around US700m
• Overall frequency of launch failure is around
  4
• Loss severity is much more variable

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Features of the Aviation Market

• Rapidly increasing exposure
• Rapid technological change
• Dominance of small number of insureds, insurers
  brokers
• Vertical placement
• Alliances and code sharing arrangements
• Variability of claim sizes
• Availability of reinsurance
• Cyclical nature of business

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Increasing Exposure

• All sectors of the market are growing fast
• Large numbers of increasingly expensive new
  airliners being ordered as fleets are modernised
• Rising freight levels
• Increasing number of passengers
• More flights with smaller jets to provide better
  service
• More frequent flights to wider range of
  destinations
• More satellite launches

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Technological Changes

• Accident rate four times higher for
  non-industrialised nations compared to
  industrialised
• Continuing process, always some accidents
• Will reach safety plateau
• Future Issues
• (a) Privatisation of ATC and possible conflict
  of interest
• (b) Need for secure communications
• (c) Regulation of crew drinking
• (d) Technological changes cameras, radar to
  detect CAT
• Better information is available to the public on
  which airlines and aircraft are safe

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Airline Safety

• New ranking system- Flightsafe
• Non judgmental - allows for past accidents
  (number nature), and ten factors including
  average fleet age, type of planes, maturity of
  airline and the control environment
• Air Canada renowned to be the safest airline,
  with British Airways ranked 9th and all five
  major US operators in the top 20
• Worst operators
• (a) Small ex Soviet Union airlines
• (b) Nigeria Airways
• (c) Myanmar Airways
• (d) Merpati

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Consolidation in Market

• Only three brokers and four major manufacturers
  so have substantial power
• Airlines and manufacturers becoming more global,
  so industry needs to respond
• Merger of European and American insurance
  operations e.g. BAIG and AAU
• This has caused the vertical placing strategy

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Vertical Placing

• Inefficient system that exploits poor market
  information
• Risk placed with following market first who will
  not know lead terms
• Different terms offered to leaders e.g. claims
  handling allowance or better rate
• Many slips for one risk so terms not obvious
• Difference between lead and follow terms can be
  up to 40 for airlines

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Alliances Code Sharing

• Allow greater range of destinations to be offered
• Invisible to public
• Passengers on a flight may be travelling under
  different compensation regimes
• Your paint, your claim adopted in practice

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Claim Size Variation

• To a large extent caused by differing liability
  payments
• Hull values up to 225m
• Liability payments up to 10m per passenger in US
  (3m average)
• Claims often split with products insurers
• Highest overall claim 800m (Swiss Air)
• Largest hull claim 150m
• Will only rise in the future
• Will rise as more operators move to unlimited
  liability working conventional defences

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Reinsurance

• Substantial amount needed to limit exposure
• Reinsurance may end up with non aviation insurers
  - naive capacity
• Naive capacity enters market on back of good
  years for the aviation market and falling returns
  in its own markets
• Someone has to pay claims - this cycle the
  Australian reinsurers, REAC and GIO
• Availability causes extreme cyclical swings

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Cyclical Market

• Rates are turning, particularly for airlines and
  these movements are dramatic
• Thai Airlines recently suffered a 20 rise
  despite its size and having had few losses (none
  in the last year).
• Indian Airlines facing 65 rise after two losses
  last year (A320 at Yangon and 737-200 at Patna)
• This comprises an increase of 14 in liability
  costs and 90 in hull costs

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Airline Trends

• Bigger aircraft
• Unlimited liability
• US Courts Inflation
• More traffic
• Approaching safety plateau
• Code sharing and the deep pockets syndrome
• Overall gt losses to increase

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General Aviation Trends

• More private wealth
• Implies more traffic
• Growth rate gt airline growth 10pa
• Overall gt losses to increase

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War Trends

• Middle East?
• Air rage and pilot suicide
• Hijackings
• Overall gt losses not set to improve

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Satellite Trends

• Cheaper launches
• Lower orbit launches
• Implies more failures?
• US manufacturers losing market share to Chinese
• Ageing satellite population increasing in-orbit
  risk
• Overall gt losses likely to increase

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In General

• Increasing costs
• Market WILL turn
• But retro market will turn first
• Could see a vicious 2000 year for arbitrageurs

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Vertical Placing

• Smoke and mirrors placing
• Maximises opportunity for imperfect information
• Leading to inefficient market results
• Result of too few brokers, too many underwriters

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Lemmings

• Players in the market doing better than average
  by making money from their reinsurers.
• Somebody selling reinsurance too cheaply.
• Ultimately someone will end up sitting on a very
  poorly priced liability as losses work through
  retro layers. This cycle much of losses have
  ended up with REAC and GIO
• Late 1980s saw marine underwriters caught the
  same way.
• There is a macho image associated with aviation XL

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Lemmings

• And still companies start up new aviation wings -
  DP Mann only a month ago.
• Situation is theoretically unsustainable, but
  will last as long as there are lemming insurers
  prepared to throw capital off a cliff.
• The ultimate question is a simple one. Are our
  lemmings dying off too quickly to survive, or is
  this ritual suicide a symptom of a constant level
  of overpopulation?
• For non-US risks last year, available capacity
  equalled 170 of the size of the aviation
  insurance market.
• Who are our next lemmings?

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THE END