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State of aviation insurance

Biko Meletse, Aerospace Practice Leader at Willis SA, of the aviation industry, started off the conference by explaining the newly-grim status quo for insurers of all things airborne in 2015:

“There were huge rate increases following 9/11. Since then, there has been a reduction in frequency of losses since 2001. These declining losses in the market up until 2011 – to a certain extent even up until 2014 or so – were good news for us. And then the Malaysia Airlines disasters happened.

“Today, many underwriters faced a 2014 trading loss. Underwriters’ initial reaction to this? ‘The market turn has to occur’, they said, with at least 30% increases imposed. But with all the stiff competition in the industry, what we saw in Q4 of last year is that we only had on average 5% premium increases, so the ‘market turn’ definitely didn’t happen .”

Not that aviation insurance was ever for the faint of heart.

“Running an airline is quite an expensive business, and it’s in hard currency. The industry standard for aviation insurance as a ‘Hull All Risks coverage’, which on average covers up to $400 million in aircraft hull values. Liability limits of $2,250 000 000 are also in place. So as an aviation  insurer, that’s a lot of exposure that they risk, with multiple aircrafts sitting in a hold or an airport, at any one time,” explained Meletse.

Heather Manson, a director at Norton Rose Fulbright, agreed with Meletse in her presentation entitled ‘Planes, Claims and Trends’.

“Aircraft are generally very expensive assets. Companies need to upgrade their aircrafts regularly and, contrary to popular belief, they don’t actually have vast sums of cash lying around. So 90% of aircraft in the industry are financed. Now those financing the aircraft will need some kinds of surety, so they are often the first loss payee and there is also a breach of warranty endorsement put in place. This puts quite a lot of risk on the aircraft companies’ shoulders.”

With such high stakes, things get even riskier when misfortunes –   small or large – occur.

“With complicated and unpredictable liability issues, it becomes really difficult to survive a catastrophe, even a small catastrophe, like leaving an engine on a runway,” commented Meletse, referring to the domestic incident where a Nationwide Boeing 737 plane left an engine lying on the runway during takeoff at Cape Town’s airport in 2007 which, despite no casualties being sustained, led to the closure of the airline.

So, with all of this up in the air, is aviation insurance taking a nosedive? By no means, say the experts.

“There’s a lot of interest in aviation in Africa due to our growth rate,” said Manson. “In jurisdictions like America, Europe and the like, those markets are saturated. So there is a huge amount of international interest in Africa and the Middle East. There are people chomping at the bit worldwide, wanting to finance aviation in Africa, but they need forms of legal consistency throughout African legal jurisdictions for that to happen, so they are in turn placing pressure on the airlines, who are in turn placing the pressure back onto the governments.”

Meletse concurs, but is somewhat more cautious in his verdict, saying that another catastrophe like the Malaysia Airlines one could blow any market favourability out of the water.

2015 conditions still seem favourable to airlines. And that really answers the question for the day. The buyers’ market continues into this new year. But it is still only the 1st quarter of the year.

Large renewal rate increases are forecast for the balance of 2014 and into 2015. Underwriters’ reaction to that again was ‘the market needs to be reinflated by a 300+% increases’. With capacity levels still at only about 200%, once again that market turn did not occur.

So, in 2015 what is the market outlook? There are only three things which will affect the downward trend. Firstly, a reduction in market capacity due to a management dissatisfaction toward current unsustainable premium levels, resulting in complete withdrawal from airline underwriting. Secondly, a significant catastrophe or series of major losses. And thirdly, a significant increase in attritional losses, which erodes underwriters’ net retained premiums and reserves to unsustainable levels.  With that kind of premium, you only need one aircraft to go in one catastrophe to reduce that premium.

“… But having said all of that, I think that the industry remains robust,” he concluded.

It’s all a matter of perspective, with (aviation) fortune favouring the bold, said Simon Colman of SHA specialist underwriters, the ‘liability guy’ and the last speaker for the day:

“Brokers often run for the hills whenever there is the word ‘specialised’ attached. So whether it’s liability or aviation insurance, I don’t think it really matters. You only have to look at the statistics at the ombudsman to see that sometimes there’s a mismatch of what knowledge is expected of the broker and what the client is experiencing. SHA has taken the view that it’s not really right to pass this onto brokers, we all have to do our bit. Specialist underwriting is always a challenge. Often we are not getting the same level of expertise in that field, but also now technology can enhance that experience. The internet provides us with some amazing tools to train people. That is not meant to be replacement for specialists’ knowledge, but a tool to help them increase that expertise. I’m not saying it’s as easy as that in aviation or marine, but if you just let your minds as an industry wander collectively, it is possible for underwriters to fill that knowledge gap.”

What’s more, improved infrastructure could add to the attractiveness of South Africa for the global aviation scene, according to Manson.

“In terms of infrastructure , there are a number of new projects, such as the King Shaka airport project. This project alone promises an increase in the percentage of international tourists coming to South Africa, and growing business opportunities in Africa. There’s a proposed carbon tax in SA put on hold for now but which mirrors emissions tax in the EU. Penalities on airlines to get newer aircraft, which means new financing of fleets… a cycle. The use of drones or UAVs is illegal. There are many operating already, but the fact that they’re operating doesn’t make them legal. So they can’t yet be covered. However, in this country a draft set of regulations for, at this stage, very small UAVs is in the works. They require increased regulation, but it is something that we anticipate will be enforced by the end of this year. This also suggests some opportunities for insurers coming up.

“Also, the Cape Town convention is a relatively new convention. In it, if a particular state has put this into their law, then the airlines on that particular country will get a 10% discount on certain charges. That is huge. Once that project, currently being driven hard through ARSA, is properly incorporated in SA, the positive consequences for our aviation industry will be quite massive.”

COVER Magazine

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