Underwriters are holding firm on pricing and terms for aviation reinsurance in recognition of the sector's increasing exposure, explains Gary Millen.

Through the simple economics of supply and demand, rates in aviation insurance have continued to fall. Although it can be said that airline income for 2005 was around $2.2bn, this figure is the estimate at "lead prices". It is common knowledge that, within the aviation market, in order for brokers to win airline accounts, they place shares at varying prices. The lead underwriter naturally has the most expensive terms, while some following markets will be offered the business at less favourable prices. The differentiation between "best" and "worst" terms can be significant. It is therefore anyone's guess as to what the actual premium is in this verticalised market. However it would be a fair assumption to say that the $2bn mark will soon be breached.

The continuing lack of large losses since 9/11 has also been a major contributory factor to the softening market. 2005 was once again an exceptional year for insurers. Airline losses for the whole year (excluding attritionals) were in the region of $660m, which, although an increase on 2004, is still well below the average. Actual fatalities were reasonably high at around 800, although most incurred lower awards due to many of them coming from emerging countries' passenger liability claims.

Although insurers have enjoyed several good years with regard to losses, it should be noted that, with the advent of the Airbus A380, passenger capacity will increase to around 600. This coupled with ever increasing liability awards makes insurers' exposure enormous. The $2bn airline income could be wiped out by a single aircraft without even involving a third party claim. Fifteen years ago this type of loss was considered unfeasible without the involvement of two aircraft in a mid-air collision over a major city. If the US legal system continues its upward trend of increased awards then it is only a matter of time before claims in excess of $1bn become par for the course.

Airbus A380

As we all know, the aviation insurance market and, in particular, the airline market is an extremely high profile one. This has been further enhanced by the launch of the Airbus A380. It has meant that at least two airlines have had to increase their liability limit to accommodate the new super-jumbo. The aircraft is not without its problems though. Airports are spending a lot of money upgrading stands to be able to cope. In the US, airports have had to fund this themselves as federal governments are refusing to give financial help. It should also be noted that because of the aircraft's size, there could well be a problem with wake turbulence. This can cause problems with distance separation during take-offs and landings. For example, Heathrow will allow two Boeing 747s to land in the time it takes one A380.

Reinsurance

Despite record low loss years since 9/11, the aviation reinsurance market has tended to take a harder stance than direct insurers when it comes to rating. New technology, coupled with more passenger numbers than ever before, means that exposures are continuing to increase. Despite the ever-increasing safety measures it should always be remembered that aviation insurance is first and foremost a catastrophe business and aviation reinsurers are well aware of this. Unlike the direct market there are no real overcapacity issues. Despite continuing pressure from their clients as well as the brokers, the market appears to be holding firm. If aviation insurers believe that the cost of their reinsurance will reduce in direct correlation to original rates, perhaps they should think again.

Terrorism

At the time of going to press, the recently averted potential terrorist attacks had yet to have an impact on the aviation hull war and liability war markets. Underwriters are careful not to make any knee-jerk reactions however this is an area of great concern and the situation will be monitored closely.

- Gary Millen is an executive within the marine and aviation department of Cooper Gay.