Consolidation continues in the London aviation insurance market just as it does in the airline and aerospace industries themselves. Stacy Shapiro explains.

Consolidation, consolidation, consolidation. Those are the three watchwords in the London aviation insurance market, just as they are in the airline and aerospace industries on which the aviation market depends.

“It is clear this change is going to continue for the foreseeable future,” summed up David Trezies, senior director at Marsh Ltd responsible for development and strategy, aviation/space/marine. “I think this is a major underlying factor for the underwriting business, the client business and the broker business going forward. It is difficult to see too many more broker mergers, but I suspect we will see many more insurance mergers of different types and certainly more client mergers.”

Take the brokers. About 13 years ago there were about 31 international brokers and now there are about nine or 10, according to Mr Trezies, who spoke at the 15th DYP/LLP international airline insurance conference recently.

Ask most informed people to name the major aviation and space brokers in the London market and they probably can mention only five: Marsh Aviation, Aon, Willis Corroon Aerospace, CE Heath and Crawley Warren. In the lead is Marsh Aviation, which is an amalgamation of Johnson & Higgins and Sedgwick personnel, as well as French aviation brokers at the CECAR and Faugere & Jutheau.

Then there are the underwriters. In Lloyd's, there were 13 aviation syndicates last year, down from 19 syndicates in the previous few years, though there may be more composite syndicates writing a range of non-marine risks including aviation.

The largest Lloyd's aviation syndicate is ACE Ariel, which itself is an amalgamation of five syndicates - numbers 960, 48, 925, 998 and 545 - into one syndicate known as 960. Lloyd's boasts that it writes 22% of the world's aviation business. About 10.7% - or £829.3 million - of Lloyd's total calendar year 1997 gross premiums of £7.75 billion are generated from aviation business.

The London aviation company market also reflects some of the amalgamations over recent years in the London and French insurance company markets. For example, British Aviation Insurance Group now includes on its stamp Royal & SunAlliance, which was once two separate entities. Westminster Aviation Insurance Group, meanwhile, includes AGF-M.A.T. which is the merger of French insurer CAMAT with AGF. There also are new players in the London aviation company market, such as Mid Ocean Reinsurance Company Ltd.

Revenue premium for the company aviation market has been dropping significantly over the past few years, according to data from the Aviation Insurance Offices Association (AIOA), mainly because of reducing aviation rates, rather than because of consolidation among the industry. The London company market wrote £545 million in 1995, which dropped nearly 20% to £437 million in 1996 and another 18% to £356 million in 1997.

Meanwhile, London's two main aviation underwriting associations are amalgamating their resources. Lloyd's recently announced that three of its four underwriting associations would fall under the flag of the Lloyd's Market Association (LMA), which was formerly Lloyd's Corporate Capital Association. This includes Lloyd's Aviation Underwriters' Association, which was founded in 1935 and which will now be the aviation technical committee of the LMA.

The Aviation Insurance Offices Association (AIO), a 12 member organisation representing the companies in the London market, voted at its annual general meeting in March to become an affiliate member of the new International Underwriting Association (IUA), although it intends to maintain its own identity and international profile. The AIOA will function as an IUA technical committee, equivalent to the marine committee and property/casualty technical and underwriting executive committee.

All this consolidation in the London market mirrors the amalgamations going on in the airline and manufacturer sectors which place their business in the market. In the airline business, these consolidations are called “alliances” since many governments refuse to allow foreign ownership of airlines. Top of this list is the “oneworld” alliance of British Airways, American Airlines, Canadian Airlines, Cathay Pacific and Qantas.

Brokers and underwriters speculate that it may be just a matter of time before the alliance buys its insurance collectively, as does the KSSAF group of over 50 European airlines. The KSSAF group includes KLM, Swissair and SAS, and suffered a significant rate increase when it renewed its programme last year because of the Swissair tragedy in September that probably will cost insurers over $600 million.

Aircraft manufacturers also have consolidated on a massive scale, including Boeing which merged with McDonnell Douglas, Lockheed which merged with Martin Marietta and, most recently, British Aerospace announced that it will merge with General Electric Co plc.

“The bottom line is that we will have fewer and bigger - bigger than you have ever seen before - clients to deal with going forward,” Mr Trezies adds. “Underwriters and brokers will have to focus on the fact that they will have fewer renewals, fewer major programmes and will live in an entirely different world.”

Stacy Shapiro is editor of LLP's Aerospace Risk newsletter.