Why airlines should review their insurance policies

09 August 2016

Airlines have experienced years of low insurance rates and easy renewals, but now is not the time for complacency.

The aviation sector continues to defy expectations. Competition may be fierce and costs high, but business is booming. 

And insurance is still being bought at historically low prices, despite widespread global insecurity and some tragic events – exactly the kind of events people were only recently predicting would be game changers for the market. 

For example, over a few short months in 2014 Malaysia Airlines flight MH370 disappeared off the radar with all on board; MH17 was shot down over Ukraine killing all on board and AirAsia Flight QZ8501 plunged into the sea. There were also significant losses in fighting at Tripoli Airport, Libya.

But, against expectations, and because of the capacity available, the market took the hits and carried on. Subsequent tragedies, such as Germanwings 9525 or the Russian Airbus blown up over Sinai have barely affected insurance rates.

In fact, since 9/11 rates have been low despite SARS, Ebola, the rise of Isis, the activities of Al Qaeda, the Icelandic Ash Cloud – and a global economic crisis. 

Changing consumption

Larger planes, much lower fuel prices and increasing passenger numbers have all been factors. But by far the biggest factor is that there are more and more customers every year, as the world grows richer and more people can afford to travel.

By 2030 the world's middle class will more than double in size, from 2 billion to 4.9 billion – according to research by Dr Homi Kharas at the Brookings Institute – and these people will want to get on airlines.

Most of this growth will take place outside the West, spreading wealth around the world and changing fundamentally the geography of consumption from the United States and Europe to Asia. This is where the sector is expected to experience massive growth.

New destinations 

Measured by revenue, the industry has doubled over the past decade, from $369 billion in 2004 to a projected $746 billion in 2014, according to the International Air Transport Association. Much of the growth has been driven by budget carriers, which now account for around a quarter of the worldwide market and have expanded rapidly in emerging markets, especially Asia.

There are also new opportunities coming on-stream for the sector with the opening up of Iran to the world as US sanctions come to an end. 

“They have a very old fleet of aircraft, so they will need to spend a lot to re-equip and they have plenty of money to spend,” says William Smith, CEO JLT Aerospace. 

“I think their economy is good and will only get better when sanctions are properly lifted. It will grow, and that means people will fly.”

Though there are serious global risks facing airlines, their impact on a sector experiencing such overall growth is, so far, not what analysts expected, says Greg Boothright, Partner, JLT Speciality.

“For example, we know that the world is a more connected place for terrorist organisations. They are still very motivated to attack the airline network, simply because so much effort has been made to keep it safe, which means the propaganda of the deed would be all the greater.” 

However, because aviation is a global entity – and, from an insurance perspective, no-one writes the whole market – losses are generally concentrated on specific organisations, so problems can be absorbed and the overall sector is not fundamentally affected.

Reduced losses

Airlines’ safety has generally improved dramatically, and big investment in new technology has paid dividends by reducing losses. Most risk managers are approaching their insurance renewals with good loss experience and a safer fleet of aircraft.

Against this background, risk managers have the opportunity to look at more than just price: with rates at such historic lows, more and more are looking to broaden their coverage.

Inevitably some buyers may be asked by their management: 'Do we still really need to go through a broker?' 

“Despite our obvious bias, it should be clear to all that the answer is a resounding yes,” says Smith. 

Specialist products

It is vital that risk managers don't become complacent, says Smith. While insurance is certainly cheap and it seems nothing will spook the market, risks in the sector are changing and no-one can afford to stop interrogating what they are buying, Smith adds.

“Many aspects of aviation are becoming increasingly complex. For example, although there has not yet been a major cyber event the risk is present and growing. And while safer, more expensive aircraft are helping to reduce losses, repairing them can be costly.”

As a result, specialist products are becoming more important – a trend that will only continue as the sector becomes more international and more high-tech.

Risk managers need to take advantage of their current, fortunate position. They should look at their cover, ask whether it is good value and build long-term partnership with their insurer that may help protect them from unexpected turns in the market.

“All brokers will aim to get the best price with the best security, but at JLT Aerospace that is where the service starts,” says Smith. 

“It is at the bottom of the market that risk managers may need brokers the most. A good broker can ensure risk managers are getting the best service when margins are thin. 

“They can also ensure strong market relations and the best cover, conditions and structure is in place to prepare their risk placement for any turn in market conditions.”

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For more information please contact William Smith, CEO of Aerospace on +44 20 7466 6654 or email william_smith@jltgroup.com

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