2019 aviation insurance market outlook

15 January 2019

In this feature we interview Nigel Weyman, Aerospace Global Executive at JLT Specialty on the current trends and market conditions in the aviation insurance market.

2018 experienced a tougher trading environment than in prior years, why was that?

There are a number of factors that have led us to this toughening market but perhaps the most influential of all has been the contraction in capacity. Not only have we experienced a reduction in the total number of markets in the aviation class through withdrawals but insurer consolidation (including most recently AXA/XL and AIG/Validus) has also been a significant factor. 

Over the past three years alone we have observed some twenty insurers exit the class or withdraw from specific business lines and at the same time we have witnessed the merger of some of aviation’s largest capacity providers. Reductions in typical line size participation and risk appetite has also further added to this contraction. 

Each insurer will have their own reasoning behind these decisions but profitability is a key driver. All insurers are under intense pressure both internally and externally, to address or cut their worst-performing lines, which for many include aviation. Lloyd’s of London for instance imposed strict new measures on its syndicates in 2018 with the aim of reversing underperformance.

Subsequently some syndicates did not have their 2019 business plans approved and have withdrawn whilst others have had to commit to reduced premium income targets in order to continue to write certain classes. The aggregated effect of all this activity has been a change in the landscape of the market and that has made available capacity all the more precious.

In conjunction with this reduction in capacity another compelling factor to this toughening market has been the threat of, and actual loss of, jobs on the underwriting side. Indeed during the past 12 months we have seen more underwriters lose their jobs than in any time I can remember. While many of these individuals and teams have fortunately gone on to find employment at other organisations, there are still a number of talented aviation specialists looking for work. This threat has served to give the ‘survivors’ added determination to strive for higher rates with an eye on survival.

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What effect did this have on overall pricing?

We have highlighted in previous editions of Plane Talking that several consecutive years of airline claims exceeding premiums on a worldwide basis would inevitably drive rates in an upward direction. We first experienced the early stages of change in 2016 (the first ‘baby steps’) and this developed with further hardening throughout 2017. The first half of 2018 seemed to reflect the trend of 2017 with modest increases and underwriters still allowing some fleet growth free of charge. 

However, in the last quarter of 2018 the combined impact of reduced capacity and job losses helped to shift leverage in favour of underwriters and this led to acceleration in the rate increases demanded.

As a consequence we have seen some distinct changes in the market environment; firstly, the vertical gap between the leader and the ‘composite’ terms has narrowed dramatically as following markets push for higher pricing (although this is also partly driven by buyer security requirements and preferences) and secondly there is now a real focus by insurers on the core technical rates required. 

This is compounded by the fact that growth in an airline’s exposures now has to be paid for in addition (in all but the most exceptional cases) to the rate increase.

The three-tier market that we have highlighted in past editions remains evident, however while capacity remains higher for tier A operators the variation between the results of tiers A and B has narrowed significantly. Airlines with a good loss record can still receive favourable treatment, however in the current market they are still now likely to experience some level of rate increase. Airlines with high attritional losses and or major losses remain subject to adverse treatment in comparison.

While we have seen a visible upturn in the average trend line, it has to be said this still barely hands back the equivalent of one year’s rate reductions previously enjoyed by buyers almost every year since the aftermath of 9/11!

We witnessed a notable reduction in aviation capacity levels in 2018 so do you expect a further reduction in 2019 and if so what impact could this have?

It is true we witnessed a significant reduction in aviation insurance capacity in 2018 and despite a visible increase in rates and a toughening market, additional exits and consolidation could still

happen in 2019. As previously mentioned many insurers and Lloyd’s syndicates are under close scrutiny to meet their business plans and know they may not survive if they don’t deliver.

Further capacity reduction would affect the supply versus demand balance even more and that could have an adverse impact on the future rating trend. Looking ahead the situation remains finely balanced.

What is happening in other aviation segments?

The majority of aviation insurers participate across multiple segments so those underwriters specialising in general aviation (GA), aerospace and space are under the same pressures as their airline colleagues to focus on improving profitability. 

In the GA segment results have been tainted by some headline grabbing liability awards, while the aerospace segment has also had a pretty torrid time with some extraordinarily large losses from the major airframe and engine manufacturers (some of which resulted from non-occurrence coverage enhancements). 

In the space segment, despite the market suffering several losses which will result in 2018 delivering a significant loss to the market as a whole, there is still ample capacity available and competition remains high for the majority of launch and in-orbit risks. Pre-launch risks however, are under significant pressure due to a large reduction in available capacity as a result of continuing losses across the general cargo portfolio.

This loss activity has ended the cross subsidy that these formerly profitable areas of the business had once provided and consequently we are now experiencing upwards movement in rates in these other segments. You could say in summary that in terms of losses across all segments we have probably experienced the perfect storm of poor results!

What can we expect in 2019?

As 2018 looks like it will be a technical underwriting loss for many insurers, it is reasonable to anticipate that 2019 will mirror the last quarter of 2018 and we could see some further upwards movement in rates. Some of the accounts that renewed early in 2018 are likely under threat of some ‘catch up’ increases having received fairly conservative treatment compared to those that renewed later in the year.

At the moment there is no sign of any weakening in the resolve of the average underwriter and unless those currently unemployed are back in the business the fear factor amongst the survivors is likely to continue to make for some tough negotiating behaviour. 

Looking further ahead continued improvement in the underwriting results could attract both new capacity and dormant capacity back into the aviation market and this could potentially bring a counterbalance to the upward trend.

What do you see as the biggest threat to the aviation insurance market?

While we have seen some tragic losses in 2018, we have not for a number of years, experienced what the insurance market would consider a truly major aviation catastrophe. In the current environment such an event could cause a strong market reaction, although given we have had such a sustained positive period of safety there would likely be a degree of tolerance. 

Probably the biggest threat therefore is the withdrawal of another major aviation insurer or further consolidation, either of which results in the loss of capacity or the control of a major market share falling into a single underwriting authority. Such a scenario could push us from a hardening market into a full blown hard market.

Similarly, where do you see the biggest opportunities?

A hard market environment will always reveal the true strengths and weaknesses in any operation and insurance broking is no exception. With the investment that JLT have made in building our talent pool and depth of resource we will have a great opportunity to really demonstrate our abilities in this testing environment. While changes to the market produce a number of challenges, JLT will always look for opportunities to create innovative solutions and minimise the impact of whatever lays ahead.

Do you have any advice for insurance buyers in 2019?

As we advised our clients last year, our advice is to engage with your broker and insurers as early as possible. Early preparation will lead to better quality dialogue and assist in achieving the best renewal outcome. It will also help remove some of the stress and allow for more accurate budgeting. 

Our strategies, long-term structures and other programme innovations served our clients well in 2018, and led to some extremely competitive results that pushed market acceptability to the limit. We remain well prepared for the year ahead and look forward to being tested!

On a separate note, from an airline’s operational point of view, we suggest a focus on attritional losses with an objective to minimise these with all necessary risk management initiatives where possible. As we have highlighted previously, it is these losses which are now having the biggest influence on an underwriter’s judgement of your risk.

Finally, be wary of those false promises of delivering the undeliverable; remember if it is ‘too good to be true’ it probably is, and it could end up costing your company a lot more.

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<p>For more information, please contact Phil Gingell, Executive Chairman, on 312-235-8203.</p>