The Aviation Working Party

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

THE AVIATION AND SPACE INSURANCE

MARKET

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

The Market

Total premium is around US$1.4bn Hull values up to US$225m Liability payments can be over

US$3m per passenger The total cost of a single incident

could exceed US$3bn Over 500 airlines worldwide War risks are covered separately

Airline Insurance is Big Business

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

General Aviation

Annual premium around US$450m Dominated by 4 programs Claim sharing agreements are

common Hard to assess true profitability

Product Liability

Covers launch and in orbit risks Annual premium around US$700m Overall frequency of launch failure is around 4% Loss severity is much more variable

Space Risks

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

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

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

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

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

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

Alliances & Code Sharing

Allow greater range of destinations to be offered

Invisible to publicPassengers on a flight may be

travelling under different compensation regimes

Your paint, your claim adopted in practice

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

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

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

Airline Trends

Bigger aircraft Unlimited liability US Courts & Inflation More traffic Approaching safety plateau Code sharing and the “deep pockets syndrome” Overall => losses to increase

General Aviation Trends

More private wealthImplies more trafficGrowth rate => airline growth

10%paOverall => losses to increase

War Trends

Middle East?Air rage and pilot suicideHijackingsOverall => losses not set to improve

Satellite Trends

Cheaper launchesLower orbit launchesImplies more failures?US manufacturers losing market share

to ChineseAgeing satellite population increasing in-

orbit riskOverall => losses likely to increase

In General

Increasing costsMarket WILL turnBut retro market will turn firstCould see a vicious 2000 year for

arbitrageurs

Vertical Placing

Smoke and mirrors placingMaximises opportunity for imperfect

informationLeading to inefficient market resultsResult of too few brokers, too many

underwriters

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

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?

Lemmings

THE END