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Hard market for aviation reinsurance to continue: Gallagher Re

14th April 2023 - Author: Kassandra Jimenez-Sanchez

As aviation reinsurance continues to recover from large losses caused by a number of challenges in the last few years, the medium-term outlook suggests that the market will remain hard for some time to come, according to a recent Gallagher Re report.

gallagher-re-logoThe market has gone through a turbulent few years, with the impact of the COVID-19 pandemic, geopolitical shocks and macroeconomic challenges; events that have affected the re/insurance industry as a whole and have caused rates for aviation reinsurance to increase at the most recent renewal.

“The insurance and reinsurance market will always be cyclical, and the aviation segment is no exception to this. In recent years we have seen turbulent cycles that have led to some carriers restricting the amount of aviation business they underwrite, or in some cases withdrawing altogether,” explained André Liebkopf, AXA XL’s Head of Property and Aviation, Reinsurance.

The aviation re/insurance market went through a soft market period which was the result of severe corrections in the early 2000s, following the tragic events of September 11, 2001, and several other large aviation losses; as well as the introduction of exclusions and tightening of terms and conditions.

During this period, many aviation underwriters also began to introduce pricing tools and use more actuarial resources. Around a decade of low claims activity followed, but during the soft market of the 2010’s there were a series of large losses that occurred at a time when rates were low and terms and conditions broad.

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This left many aviation re/insurance underwriters suffering from deteriorating profit margins and lacklustre combined ratios. Then, when windstorms Harvey, Irma and Maria hit in 2017, the reinsurance market sustained large losses. Following these events, and after looking at which lines of business were not returning sufficient profits, many companies withdrew from aviation entirely at that time.

Today, the aviation re/insurance market is facing another set of challenges, which include global and social inflation, coupled with the volatile geopolitical environment.

Despite the large losses aviation has suffered in the last couple of years and months – which have also affected the re/insurance market – the industry is beginning to show green shoots. Now that the demand for air travel is starting to pick up after the difficult years during the height of the COVID-19 pandemic, it is predicted it will return to almost pre-pandemic levels this year, Liebkopf highlighted.

However, there are still a number of challenges for the airline industry, including inflation, rising fuel costs, labour shortages and supply-chain crunches; as well as the challenge and opportunity that is the transition to lower carbon, more sustainable fuel sources and the drive towards net-zero.

The series of unprecedented losses from 2019 to 2021 prompted very different reactions from different areas of the market. The aviation reinsurance market introduced large rate increases. Retentions were reviewed, minimum- rates-on-line re-examined, and coverage restrictions introduced.

Liebkopf pointed out that this move was already underway before the largest renewals took place, with reinsurers warning clients and brokers that this would probably not be just a short-term reaction.

“It’s likely that for the medium-term at least, a hard market for aviation reinsurance will persist,” Liebkopf stated. “In the insurance segment, however, the reaction was somewhat mixed.

“While some insurance underwriters clearly agree with their reinsurance counterparts that a correction is needed, others have pointed to their ‘risks-attaching’ reinsurance programmes and decided that there is no immediate need for change as they still benefit from historic terms and conditions.”

The aviation insurance market currently has ample capacity, and although most cedents seem to indicate that a primary rate increase will happen over the course of 2023, this is of course more difficult to achieve when capacity is plentiful, Liebkopf noted.

This capacity comes from some established players seeking to grow their market share, probably in anticipation of increasing rates in the near future, and some newer capacity with fresh appetite also looking to build market share, he added.

Despite this, Liebkopf warns that market players must do their own analysis as to whether they believe the rates they can achieve are adequate, and check the health of the market for major risks. They need to try to assess whether the market premium income for 2023 will return to somewhere near pre-coronavirus levels, and whether exposures are at a similar level too.

As general costs increase due to inflation, reinsurance rates are also likely to increase or remain at today’s levels for some time to come. Liebkopf said: “Buyers of aviation reinsurance should consider the reinsurer position when it comes to adjustable rates even if direct market premium is not growing at the same pace as the rates-on-line. Nor should a tougher stance on minimum premiums come as a surprise.”

According to the report, one potential reaction of the excess-of-loss market to current conditions could be to change the basis of coverage to losses-occurring; which would then negate some of the argument for delaying rate increases.

The report also noted that there is already a clear reduction in appetite for proportional business, which is typically a sign of scepticism about future profitability and might be driven by rate adequacy or structural issues like unlimited event definitions.

Liebkopf concluded: “We believe that a sustainable market with stable capacity is a healthy market and we hope that the technical analysis of the professional market players will continue and underwriting discipline will return, even if there is more than enough capacity.

“Over history the reinsurance market has not always been the most disciplined and time will tell whether the current market cycle will result in a return to healthy growth. But we believe that learning from the lessons of the past and thinking about the changing risk outlook of the future will mean that the aviation re/insurance market remains in good health for the medium term.”

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