Airline premium, rates on the rise

Airline premium and rates ended 2017 higher than the preceding year for the first time in a decade and the underlying conditions continue to support higher premium and rates in 2018, says David Godley, founder partner of Altitude Risk Partners, a specialist aviation and space underwriting agency.

According to JLT, a group classed as Tier A which includes airlines with lower liability limits/hull values, high fleet/traffic growth and smaller aircraft, has been achieving small rate reductions or “as before” rates, while at the same time moving in direction of a harder market however remaining in the “softer” spectrum, according to the latest edition of JLT’s Plane Talking aviation newsletter Q1 2018.

The Tier B group which includes airlines with high liability limits/hull values, low fleet/traffic growth and mixed fleets/widebody aircraft saw rates subject to “as before” rates or small rate increases, with the segment moving close to a “harder” market.

The Tier C segment which includes airlines with poor attritional loss records, major loss/losses and adverse loss ratios was subject to rate increases, moving to the far end of what JLT describes as a “harder” market.

In 2017 overall premiums and rates rose despite the absence of any new significant airline losses during the year, but the improvement is still not good enough to generate adequate returns on capital, once costs are taken into account, Godley explained in the JLT’s aviation newsletter.

Godley expects upwards pressure for overall market premiums and rates to continue to build in 2018 as a result of factors both internal and external to the aviation market.

For one, premiums in the aviation market are too low and costs are too high. Over the past five years, the aviation market has generated no return on capital, after costs, Godley said, suggesting that 2017 premium and rate increases are insufficient to improve results sufficiently.

Furthermore, attritional losses are consuming a record share (over 50 percent) of the available premium, he added. Once costs are taken into account, margins will be wafer thin – assuming that large losses continue to be favourable, Godley said, suggesting that this may explain why some insurers are withdrawing from the market even as premiums begin to rise. He believes that more are likely to follow.

In addition, the large underwriting losses emanating from hurricanes, earthquakes and wildfires has made management re-think their desire to subsidise loss-making lines. All portfolios are now under review - including aviation.

At the same time, the wider insurance market is consolidating, and it is reasonable to assume that some capacity will be removed from the aviation market via this process, he said.

The pressure to improve underwriting performance coupled with an expected reduction in capacity is likely to mean that premiums and rates will rise at a faster rate than in 2017, Godley suggested.

He also sees evidence in 2018 suggesting that re-pricing is occurring across the portfolio - not just on those accounts with poor loss records.

However, costs need to be addressed too, Godley said. In a class of business where major loss frequency continues to fall, the structural (downwards) shift in long-term premiums is going to mean that a lean cost structure will also be a pre-requisite, even in the better years.

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