GR talks to avitaion experts to discover how the latest disaster will affect the market
The crash of Germanwings flight 9525 last month killed 150 people and made headlines around the world. The disaster is expected to cost insurers $300m, but GR has interviewed three aviation insurance experts to discover more about how the crash might affect the market.
What impact will the Germanwings crash have on the aviation insurance market in 2015?
Allied World senior vice president Olivier Marre: The original reserve for the Germanwings crash has been set and earlier than you would normally expect; but of course this was an unprecedented situation and it is very difficult to ascertain what the final magnitude of the loss will be. In this instance, the panel of insurers involved in the catastrophe is much larger than usual (and much larger indeed than for the Malaysian losses). This means that most of the major aviation insurers will be affected by the claim and there may be more pressure to increase prices now than there was in the fourth quarter of 2014. In absence of another major event before the fourth quarter, it is widely believed that the market will not turn this year.
Lockton senior vice president Tim Liddiard: These events will no doubt be discussed and analysed by insurers and will produce a new round of questions and answers. Do not expect this debate to be just a moment in time. It brings in to question not just ergonomics but critically something which in many ways what we all take for granted - the health of the crew. The psychological screening and recruitment criteria of crew has taken a leap up the agenda.
It may be argued that the tragic losses over the past twelve months are a significant indicator that the risk profile for airlines and manufacturers is changing, has changed, therefore leading insurers to refocus on their exposures and risk profile.
This tragic loss in itself will not unseat the marketplace to turn it in a different direction. It will however raise new challenges for insurance buyers as insurers focus on the risks that have brought tragedies not just to Germanwings but also to the other airlines that have been widely publicised in the last twelve months.
Aspen Insurance international energy & aviation division chairman David Whiter: The claim costs resulting from the incident are likely to exceed 25% of the total annual airline premium income worldwide. This makes it almost inevitable that 2015 will be the third year running where the industry experiences a negative premium claims balance. However, with the prevailing over-capacity, it is very doubtful that increases are obtainable and a number of risks renewing since the accident have seen further reductions in rate.
The aviation insurance market is currently commoditised with broker facilities. Is this adding value to clients?
Marre: Broker facilities are beneficial to clients in that they reduce the composite price they pay, mostly by creating pressure on the following markets. But this tells only part of the story. Facilities are mainly valuable for the clients with difficult risks to place. One could argue that they have less value when the risk is very attractive to the market as similar results in terms of pricing can be achieved by applying market forces. So the indirect impact of facilities is to reduce the difference between risks of different complexity.
One downside for the client may be that facilities make life harder for smaller following markets, and could eventually reduce the number of players or accelerate concentrations, which will inevitably reduce long-term capacity and choice in the insurance offering going forward.
Liddiard: Clients are currently achieving added and quantifiable value through cost reductions, period. It’s easy to talk as if the insurance market is now a more tradeable commodity like other products, as against a service, but is that really the case? It can certainly be argued that broker facilities which are associated with commoditisation are simply mechanisms which have developed as a result of the high volume of capacity that prevails in the aviation market today. Clients are the litmus test and it would be interesting to see if they believe that the product is really being sold that differently?
What trends have you noticed in aviation insurance buying over the last 12 months?
Marre: Clients continue to take full advantage of market conditions. The larger number of long-term transactions illustrates the fact that the market is really very competitive. But they are also looking for innovation in their insurance offering. For example, we recently worked with Airbus to offer complimentary aircraft hull insurance to airlines that purchase Airbus’ runway overrun prevention system. This prevents runway overruns, which is believed to be one of the most frequent causes of aircraft accidents today. This type of initiative is what clients are looking for, where innovative technology and services meet for the benefit of operators and for aviation safety.
Liddiard: It is clear that many clients have developed a greater understanding on how to access insurance markets. The developing trend is now a marketing endeavour on two fronts: domestic capacity and international capacity. Business is tendered more now than ever. Buying groups remain prevalent by achieving significant benefits of scale. This trend will continue particularly due to high levels of capacity. Trends in aviation buying are a result of many factors however today’s most obvious influence remains global capacity.
Whiter: The main trend has been a reduction in rates from already depressed levels. There has been some relaxation in cover but slips conditions have generally held up well. There has also been client consolidation as large carriers, particularly those from the Middle East, build up stakes in airlines in other parts of the world.
How is the aviation insurance industry adapting to new emerging risks such as cyber attacks?
Marre: I believe the aviation insurance industry is not adapting very rapidly to emerging risks likes cyber but there is no doubt that the threat is real. A cyber attack could generate simultaneous accidents of multiple aircraft and therefore a significant challenge to our industry because coverage, reinsurance structure and pricing foundations are based on the non-correlation of aviation occurrences. So, although people are talking about the subject, there is not much action so far - and it is a difficult and complex area to resolve.
Liddiard: Cyber is one of those occasions when the insurance industry has to respond to a globally unprecedented era of change and wholly changed risk landscape. With the ubiquity of us all relying so heavily on digital tools it is easy to regard the ensuing cyber risks as being a one size fits all. This could be no further from the truth though, with every industry sector needing to look specifically at the risks that affect it and where its real priorities lay. Aviation is by its nature a massively complex industry, both from a logistics and people perspective. Understanding these complexities from the cause and affects data breaches can bring dictates that sophisticated risk modelling is required.