Marcus Alcock asks whether aviation re/insurance is entering a nosedive

As the aviation industry approaches the crucial 1/10 renewals, it seems that this could finally be the period insurers and reinsurers have been waiting for, witnessing a halt in the downward slide in premiums.

Although a continuing benign loss experience is adding to the pressure for premiums to continue to fall, capacity remains unchanged and relatively concentrated. If one player were to exit the market soon, then the long decline in rates could be dramatically reversed.

The prospect of a major player exiting the market is not merely idle speculation. After all, rates continue to remain depressed, with Aon's Airline Insurance Market Review of July indicating that hull rates reduced by 19% in the second quarter, while liability rates decreased by 15%.

According to Aon, the average hull rate change for the year is a 17% drop, with a 14% decrease for liability lines. Even given the increased exposures which the market is seeing, this still indicates an annual premium decrease of some 9%, according to the report. Indeed, alluding to the poor state of the market, rating agency Standard & Poor's suggested earlier this year that it would not be surprising if reinsurers decide to cut back in aviation hull.

What this means for the beleaguered aviation insurance sector is that the end of the soft market could happen quite dramatically. With the current downward rating movements dependent on stable capacity, the feeling amongst the aviation community is that this is far from a stable environment, with many in the market privately conceding that further withdrawals remain likely. "There is currently enough capacity, but not that many underwriting units," explained one leading London market aviation broker, who added that the decision of one player now carries a lot more weight than it would have done a few years ago. "The ones who pulled out of aviation previously were smaller to medium-sized players, but if a player pulled out now it would cause a major ripple."

Not everyone is convinced that the market will witness withdrawals as players lose patience with continuing poor rates, however. Russell Nevard, head of Willis's aviation reinsurance practice in London, accepts that there are now fewer direct insurers and fewer reinsurance clients, but stresses that those that are left are necessarily "bigger and stronger" with the reinsurance side "quite buoyant at the moment".

"If someone big pulled out it would certainly halt some slippage in prices," he accepted, but he pointed out there is no real evidence to suggest that such a withdrawal is imminent and that in any case the market has been "jittery" ever since 9/11.

According to Mr Nevard, the most predictable likelihood for the all important 1/10 renewals, where approximately 80% of the year's airline business is conducted, is further reductions in premiums. "Proportional treaties are still in vogue, but the bulk of buying is excess of loss and for that there's still too much capacity and a lack of losses."

The benign claims experience is all important here, he suggested, with no major loss to trouble the market since that of Flash Airlines' Boeing 737-300 in January this year. "The big question at the moment is, are we running into a period where trends have changed?" he asked. With regard to claims: "In the past couple of years things have been changing for the better, and is there a trend for increased safety?"

Not all sectors of the aviation industry are experiencing poor returns at present, however. According to Tony Garret, Senior Director, aerospace at broker Arthur J Gallagher, although rates are coming down on airline business, product liability rates for service suppliers to the aviation sector are actually increasing and look likely to continue to increase.

Yet despite this heartening news, such sectors form a relatively small component of the wider aviation insurance sector, with airline hull and liability rates continuing to remain depressed while stable capacity remains and the catastrophe experience stays the same. As one broker dryly pointed out: "There have been very few losses and it's been a very good year from the claims experience. People are still making money, so don't get too excited that rates will change dramatically."