In the latest edition of Plane Talking, re/insurance broker Gallagher noted that as the aviation reinsurance and retrocession markets approach the final quarter of 2023, they continue to grapple with a range of complex challenges and evolving market dynamics.
In its Q3’23 edition of Plane Talking, Gallagher noted that one significant issue plaguing the industry is the growing divergence between the direct and reinsurance/retro markets.
Direct markets have faced pricing challenges due to an oversupply of available capacity and a benign loss environment, driven in part by the COVID-19 pandemic’s impact on flying activity.
While this may benefit end insured clients, it has put pressure on insurers who struggle to achieve pricing adequacy. The resulting softening of rates is a particular concern given that more than two-thirds of airline business renews in the final quarter of the year.
In contrast, the reinsurance market has experienced a different trajectory. Excess of Loss premiums have surged more than threefold since 2019, with increased retentions, typically at a minimum major risk original loss attachment level of around USD 250 million.
Capacity for Quota Share placements has become more selective, emphasising improvements in treaty terms and conditions. This shift has also seen a focus on reducing ceding commission levels to address profitability concerns.
While the high double-digit rate adjustments of the past year in Excess of Loss placements are not expected to continue into 2024, rates are anticipated to continue their upward trajectory, particularly in middle to top (catastrophe) layers. These rate increases could range from mid to high single digits on a risk-adjusted basis.
Retrocession, a crucial aspect of the reinsurance market, reflects a similar pattern with reduced capacity following market retrenchments and exits. Pricing movements are expected to mirror first-tier Excess of Loss pricing for reinsurance.
However, reduced limits are available until increased pricing attracts new capacity. This situation has placed additional pressure on reinsurance markets, which pass on these rising costs down the value chain.
One major unresolved issue casting a shadow over the aviation reinsurance market is the aftermath of Russia’s invasion of Ukraine.
Claims related to approximately 400 Western-owned aircraft in Russia have sparked a wave of litigation, encompassing Hull War policies and All Risks placements.
These disputed claims, totaling as much as USD 10 billion, are currently under review in various courts, including those in the UK, Ireland, and the US. Insurers are contesting these claims on various grounds.
Despite ongoing disputes, there have been recent developments, such as Dublin-based AerCap’s partial settlement with Russian state-owned insurer NSK, reducing its original claim from USD 3.5 billion to approximately USD 2.75 billion.
Discussions regarding claims under the insurance policies of other Russian airlines are ongoing. Lloyd’s CEO John Neal called this settlement “good news,” but fresh claims from aircraft lessors, including subsidiaries of Dubai Aerospace Enterprise, have emerged in London in recent weeks.
This suggests that the dispute and its uncertainties will continue to influence the market for the foreseeable future.
