Aviation premiums are falling again and underwriters have their work cut out, says Mario Montelatici

The events of 9/11 marked a massive change in the aviation insurance industry. It was the largest loss ever experienced by the industry and became the catalyst for the collapse of Fortress Re and the impetus for increasing consolidation in the market.

That act of terrorism prompted a reassessment of risk, particularly in terms of aggregate exposure and specifically terrorism exposures, which were restricted by the reinsurance market except on a very limited basis.

The recent attacks on London's public transport system re-emphasises many of the lessons learnt from 9/11.

Airlines and product manufacturers saw liability prices soar after 9/11 and as a consequence the favourable rating environment attracted considerable capacity back into the market. Although the airline insurance sector has experienced falling premiums during the last couple of years, with some further reductions expected for 2005, this is mainly due to the exceptional absence of major catastrophe losses since 2002, resulting in some healthy returns for insurers. While the debate continues as to whether the last couple of years represent a genuine trend resulting from improved safety or simply a statistical anomaly, it is vital to keep in mind exactly what can happen given the huge exposures at risk (eg the Air France Airbus A340 loss at Toronto Pearson Airport and the Helios Airways Boeing 737 loss). The market needs the appropriate premium to ensure a healthy return to capital providers and to sustain its ability to provide the required transfer of catastrophe risk.

In contrast, the products insurance arena is still experiencing increases in premium in the last 12 months - and this trend is set to continue.

This sector, being long tail in nature is a good example of where the potential for losses had been underestimated. As a consequence, the market has been affected by a catastrophic deterioration of past claims, especially on some of the so-called smaller accounts. In fact, it is often quoted that the entire products premium for 2004 was only just sufficient to cover the deterioration in 2003 and prior years' claims. This in turn has prompted a number of the market's leading players to undertake in-depth actuarial reviews and adjust their portfolios accordingly. This is a sector towards which Sirius International will have a cautious, yet open-minded approach.

It is likely that the return of overcapacity has not only contributed to the premium rate reductions but also encouraged greater use of the practice of vertical marketing. This involves placing the same account with various underwriters at different terms, in an attempt to drive premiums down. This situation is similar to that experienced in 1997 where aviation insurance capacity was more than twice the limits required by the aviation industry. One other unique aspect of the aviation insurance market is an unusually high proportion of specialist mono-line underwriters who have no alternative source of business to diversify their premium income.

This further undermines the rating environment.

REINSURANCE CHALLENGES

In a period of record low years for aviation losses it becomes a challenge for underwriters to maintain certain equilibrium in the aviation insurance industry's premium base. The pressure for premium rate reductions in the direct market will be transferred into the reinsurance market sooner or later. Total estimated airline premiums were $2.3bn in 2004. What will be the figure in 2005? If the loss pattern continues there will no doubt be further downward pressure on reinsurance premiums. At the same time reinsurers will also face pressure from their capital providers to maintain disciplined underwriting.

As for market demand, we remain cautiously optimistic that the air transportation industry will continue to rely on the insurance and reinsurance market to enable and enhance its operations.

- Mario Montelatici is general manager at Sirius International Insurance Corporation.

Industry developments: Airbus A380

The Airbus A380 (pictured above on its maiden flight) is the world's largest passenger aircraft. Given the projected seating configurations of 600 plus passengers this new generation of aircraft will potentially require even higher liability limits and an enhanced infrastructure at the airports. If, however, liability limits stay at the same level as before, the exposure per policy will increase to reflect the increased passenger levels.