Aviation insurance and reinsurance: Clouds on the horizon – a bumpy ride ahead
The global aviation insurance industry is facing challenging times, according to Swiss Re's Wayne Murphy at a presentation to a London audience. Swiss Re's UK head of Aviation was addressing a lunchtime lecture organised by the Insurance Institute of London, held in February at the Lloyd’s building.
Mr. Murphy began by asking whether there was a clear sky ahead for aviation insurance. He referred to the profitability of the industry in 2006 and was upbeat that accident rates have become significantly better during the past decade – improvements driven mainly through technology and by the efforts of the International Air Transport Association (IATA). But he also warned that, based on experience in 2007, accident rates are also capable of increasing again.
Commenting on rates and capacity, he observed that – like claims – rates are highly cyclical.
"Since the World Trade Center tragedy, rates have seen a steady decrease, and are now on a par with the mid 1990s. WTC is also a benchmark because it took some years after the event for capital providers to regain confidence in aviation. But the market is now experiencing a fair influx of capital," he told participants.
Much of this additional capital comes from new players in Asia and the Middle East, alongside prominent reinsurance players such as CV Star, QBE and Max Re. In combination, rates, capacity and claims are set, he warned, to create a "parameter cocktail" similar to the circumstances in the 1990s which led to heavy underwriting losses.
Turning to insurance exposures, according to Mr. Murphy "there is only one way: up". With a global fleet that has doubled in size in since 1992 and now worth around USD 650 billion, growth is set to continue. According to IATA, passenger growth is set to rise by 5% per annum between now and 2011.
"Hull exposures present a particular challenge," he said. "At 9% per annum, claims growth for attritional hull losses is outpacing growth in liability claims, and this trend is eating up the risk premium available for large claims. Large increases in policy limits also represent a bigger level of exposure for the industry. In this area liability is outpacing hull, with limits reaching USD 2.25 billion per aircraft."
In this context, Mr. Murphy noted that recent incidents such as the ones experienced by Brazil's TAM and Kenya Airways demonstrate that relatively high settlement amounts must be expected. Finally, he said, the threat of terror attacks remains present and large – exposures need to be managed according to realistic disaster scenarios.
In his summing up before taking a range of questions from the audience, Mr. Murphy stressed that the increased severity exposure now facing the industry makes it essential that top quality capital is available to support insurance and reinsurance programmes. He also warned that increased costs erode the risk premium available to cover claims and that rating models need to reflect this adequately.
"The market is clearly cyclical. Everyone needs to learn from the past and there is no excuse to repeat mistakes of the past," he concluded.
Note: Wayne Murphy was speaking in place of Rudolf Flunger, Swiss Re’s global head of Aviation & Space, who was unwell on the day of the seminar.
