airline - · pdf fileairline insurance market outlook 2014 4 around 80% of airlines enjoyed a...

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A i r l i n e I n s u r a n c e M a r k e t O u t l o o k 2 0 1 3

Aon Risk Solutions

Airline InsuranceMarket Outlook 2014Return of the global trend?

Overview.The aerospace industry continued to defy gravity during 2010, continuing a trend laid down in 2007.Contents.


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Airline Insurance Market Outlook 2014:

Return of the global trend?

Foreword 1

Executive summary 3

Overview 4

Airline reinsurance market 11

Analysis

Quarterly analysis 13

Regional analysis 17

Sector analysis 30

Fleet value analysis 36

Inclusion criteria/notes 38

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Return of the global trend?

Market Outlook 2014.

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014

Of course, it’s not as simple as all that. On the one hand, 2013 was another year with the lowest number of incidents and the lowest number of fatalities in the industry recorded since 1995 (when the Aon Risk Solutions aviation team began scrutinising the data). Insurance capacity also remained high in 2013, creating competition for inclusion on healthy airline insurance programmes.

On the other hand, while they were limited in terms of numbers, the value of hull claims was relatively high. As a result, total hull and liability claims were higher than premium in 2013, the first time that has happened since 2010. The difference between premium and claims was minimal, and the fact that it was driven by a relatively low number of large losses means that not all underwriters will have a negative result on their books. This means that while there is unlikely to be an instant hardening, there is likely to be increased scrutiny.

At time of going to press, details are still limited about the missing Malaysia Airlines flight MH370, but what is clear is that the aircraft carried more passengers than the total global number of airline fatalities in 2013, highlighting the potential for catastrophic loss that the airline sector will always represent.

At this early stage of the year, we believe it is unlikely that this incident will be a catalyst for a shift in current market conditions, however should there be another large loss or a string of losses this could change.

Aon Risk Solutions team of aviation experts stand ready to work with airlines and the insurance markets to deliver insurance programmes that deliver value to our clients.

If there are any aspects of this report that you would like to discuss in more detail, please do not hesitate to speak to one of our team.

For the first time in five years, airlines all over the world seem to be building for growth. The timing is good from an insurance perspective, with prices continuing to fall, driven by strong underwriting competition, a relatively small number of claims and record low fatality levels.

Foreword

2


Highlights:

■■ Average lead hull and liability premium fell 10%

■■ Average fleet values grew by 9%

■■ Forecast passenger numbers grew by 7%

■■ Total lead hull and liability premium was US$1.4 billion

■■ Total incurred claims were US$903 million

■■ Total incurred claims including an estimate for minor losses were US$1.5 billion

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Executive summary

Premium: Total lead hull and liability premium fell by 10% on average for 2013/14 lead hull and liability airline insurance programmes. This follows an 11% reduction recorded for 2012/13 placements. The falls come despite a continued increase in exposures.

Claims: There were 35 incidents and 153 fatalities in 2013 that meet the criteria for inclusion in this report, compared to a long term average of 69 and 583 respectively. The total value of major losses however was US$903 million, nearly three times higher than the total recorded in 2012 (see page 8).

Risk exposures by region: Exposure grew in all regions at the same time as the cost of lead hull and liability fell in 2013. On average, Asia and the Middle East continue to have the most valuable aircraft by some margin (see page 17).

Business sectors: Reflecting a challenging year from a claims point of view, the cargo sector bucked the overall industry trend with a lead premium rise for 2013/14 insurance programmes coupled with a reduction in average fleet value (see page 30).

Fleet: The effect of new aircraft being delivered at the premium end of the airline industry is being seen across the insurance market. Fleets in the mid-range saw the largest growth in average fleet values and passenger number forecasts but also the strongest decline in the cost of lead hull and liability premium as aircraft were replaced (see page 36).

Capacity: Capacity continues to be high in the airline insurance market totalling almost 230% for a non-US airline with a US$1.5 billion liability limit, with underwriters attracted by the relatively low number of claims and the opportunity to diversify their books. This means that pricing is likely to continue to be competitive in 2014/15.


4

Around 80% of airlines enjoyed a reduction in their lead hull and liability premium, the highest proportion of reductions since 2001.

Overview

2009 2010 2011 2012 20130%

2.0

1.0

3.0

USD

bill

ion

-US$0.62bn

-US$0.09bn

+US$0.59bn

+US$0.66bn-US$0.09bn

PremiumClaims

Total premium 1982-2013

USD

bill

ion

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1982 1988 1994 2000 2006 2012

Source: Aon data *to-date

Total premium and claims (including minor claims estimate 2009–2013) Total premium 1983–2013

Source: Aon Risk Solutions/Aon Benfield Source: Aon Risk Solutions


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Total global hull and liability claims for 2013 are likely to be in the region of US$1.5 billion once an estimate for minor losses has been added to the US$903 million recorded major claims. With total global lead hull and liability premium falling a further 10% on average for 2013/14 insurance programmes, total lead premium for the year was also around US$1.4 billion.

With the value of claims exceeding the total lead hull and liability premium, is the airline insurance market now likely to harden slightly? The short answer is that this seems unlikely at this stage.

The longer answerUnderwriters tend to look at the results of a book of business over five years.

Comparing claims with lead hull and liability premium over the last five years, we would estimate that the airline insurance market overall has made a US$0.89 billion profit. While this may not sound slight, it does not take into account running costs and the fact that the profits have been divided between a number of underwriting organisations. Equally, the difference between premium and claims is so marginal that not all underwriters will have enjoyed a positive return on their airline books of business if they were involved in a claim.

Despite this, the amount of lead hull and liability premium in the airline insurance market continues to fall year on year. A decade ago, there was significant discussion about the ramifications for pricing if the total annual lead hull and liability premium fell below US$2 billion. This floor was breached in 2006 and total premium has been below US$2 billion each subsequent year.

Proportion of airline programmepremium movement

Source: Aon market data

2001 2005 2009 20130%

50%

100%

Perc

enta

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Increase

Stable

Reduction

Proportion of airline programme premium movement

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Source: Aon Risk Solutions

6


There are a couple of secondary reasons why 2013 results are unlikely to lead to an instant (and some underwriters might suggest overdue) hardening of the airline insurance market.

The most obvious of these is that the 2013 hull claims figures were dominated by a single incident which represented over a third of the hull claims total for the year. To put it simply, if an underwriter was not exposed that specific insurance programme, 2013 will be recorded as a good year for the aviation book.

This highlights however that while there have now been three good years from an insurance loss point of view, the airline industry still represents considerable risk. As the value of aircraft continues to grow and the expectations of liability claims become more even around the world, the risk of a major incident and subsequent market moving claim increases.

It should also be pointed out that in the main, losses for 2013 will be paid against policies that incepted in 2012. As a result, it could be argued that we should compare the estimated losses for 2013 against 2012 premiums. This makes the loss amount of US$1.4 billion in 2013 comparable with a premium of income US$1.6 billion for 2012, a far healthier ratio. As ever, the conditions are complicated.

Parity of liability

A decade ago there was a very clear dichotomy between liability claims in North America, and to a lesser extent Western Europe, and the rest of the world. To put it exceedingly simplistically, the liability values of passengers in either of these two locations was significantly higher than elsewhere in the world.

While US awards remain the highest by some margin, with increasing global economic parity, the cost liability claims following individual fatalities is equalising. As a result, a major loss involving significant liability claims anywhere in the world could have significant ramifications for the airline insurance market.

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Changing fleetsComparing average fleet values between 2007 and 2013 provides further proof of the changing balance of the world. In 2007, the AFV of the North American fleet represented 31% of the global fleet, with Asia Pacific representing 30%. In 2013, North American AFV is estimated to be 20% of the global fleet, with Asia Pacific representing 37%. The Middle East has risen slightly from 7% to 10% over the same period.

Confidence is highFor the second year in a row, nearly 70% of airlines forecast an increase in their AFV during the course of their 2013/14 hull and liability insurance programmes. This suggests improving confidence in the industry.

Ultimately, as the industry invests in up to date hardware, insurers respond by bringing down the cost of insurance, because technological improvements and simple wear and tear means that, in the main, new aircraft are safer than the ones that they replace. Even when there are major technical issues, there are far more back-up systems to ensure that an aircraft lands relatively intact.

As a result, while new aircraft are a more expensive investment and can often carry more passengers, from the point of view of the underwriter, the risk is diminishing. Again, this is a somewhat simplistic summing up of a complex set of risk models that the underwriting process follows, but it does explain some of the reasons why the market is unlikely to harden in the short to medium term unless there is a string of catastrophic losses during 2014.

Regional fleet value2013


Africa2%

Asia Pacific37%

Middle East10%

Latin America4%

Europe27%

North America20%

Regional fleet value 2013

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A third year of low claimsFrom a claims point of view, for the second time in three years, there were fewer than 200 fatalities in the aviation industry insurable under standard hull and liability programmes. According to Aon data, this is the lowest number of insurable fatalities in the aviation industry since 1995 and only the second time since 1995 that the number of has been below 300 (the first time was in 2011, with 2012 still well below the long-term average).

The total number of incidents that resulted in claims was also exceptionally low, with only 35 incidents recorded, compared to 69 on average between 1995 and 2012. This is the first time since 1995 that the number of incidents valued at more than US$1 million has been below 40 worldwide, but the third year in a row that they have been under 50.

Despite the relatively low number of claims and the lowest number of incidents for the best part of two decades however, the actual value of claims was relatively high.

100 Average,1995–2012

Number of incidents, global1995 - 2013

Source: Aon Loss Data

Num

ber

of in

cide

nts 75

50

25

01995 1998 2001 2004 2007 2010 2013

Number of incidents, global 1995–2013

1,250

1,500

1,000

750

500

250

01995 1998 2001 2004 2007 2010 2013

Average,1995–2012

Num

ber

of fa

talit

ies


Number of fatalities, global1995–2013

Number of fatalities, global 1995–2013

Source: Aon Benfield Source: Aon Benfield

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Around a third of the US$903 million total claims value came from a single incident, the ninth most expensive in aviation history, according to our records. Despite the high value of the loss, only three fatalities were recorded in the incident.

As discussed above, while this was an exceptionally expensive loss, it is unlikely to have significant impact on the direction of the airline insurance market.

Including minor loss estimate

Value of claims, global1996 - 2013

3,000

2,500

2,000

1,500

1,000

500

01997 2001 2005 2009 2013

Valu

e of

cla

ims

(US$

mill

ion)

Source: Aon Loss DataValue of claims, global 1996–2013

Cumulative fatalities 2013(Passenger and third party fatalities)

Source: Aon loss dataAverages exclude September 11th losses

Num

ber

of

fata

litie

s

20122013Average 1995–2012

Jan Apr Jul Oct0

250

500

750

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Cumulative fatalities 2013 (Passenger and third party fatalities)

Source: Aon Benfield Source: Aon Benfield


10

The year aheadThe airline, aerospace and general aviation books all continue to be relatively soft at this stage. There is little evidence of any catalysts of hardening on the horizon, unless 2014 turns out to be a year with a significant number of catastrophic losses.

The tight margin between the total lead hull and liability premium and the total estimated value of hull and liability claims is likely to be something that underwriters look at closely, but at this stage, it will simply increase the competition for inclusion on insurance programmes with a good loss history and strong risk control measures in place.

The pressure on underwriters to increase their premium income will continue to grow, but while there is still so much underwriting capacity it seems unlikely that this will lead to anything other than more competition for inclusion on good risk programmes.

As the ripples from the new generation wide-body aircraft continue to be felt throughout the industry, the actual risk that many programmes represent continue to be perceived to be falling.

With the market at a very low ebb from a pricing point of view, there has been an increase in longer-term pricing strategies as some airlines and brokers seek to make the most of the benign pricing conditions.Cumulative claims 2013

(Including minor loss estimate)

Source: Aon loss dataAverages exclude September 11th losses

USD

mill

ion

s

20122013Average 1996–2013

Jan Apr Jul Oct0

250

500

750

1,000

1,250

1,500

1,750

Cumulative claims 2013 Including minor loss estimate

Source: Aon Benfield

11


Airline reinsurance market

As a result of low loss activity and, in the absence of any catastrophe losses since 2008, capacity remains plentiful despite the incredibly low rating environment. While aviation rates have fallen for a number of years, the low level of loses has meant that the sector has outperformed many other specialty classes. Rates on average fell 7.5% for each sub-class at January 1, continuing the long- term trend.

However, with exposures growing and rates at historical lows, should 2014 experience claims at the level of the expected losses then more underwriters could suffer significant underwriting losses than in previous years. In previous upturns, market capacity was much less abundant and capacity withdrawals occurred to strengthen the resolve and influence of the remaining reinsurance underwriters. However, with the current over-capacity, it is difficult to see a sustainable upturn gaining momentum, unless losses are very significant.

With original incomes falling, reinsurance buyers have looked to reduce programme cost using loss record as the main argument for reductions.

Vertical limits and retentions remained largely stable in 2013 and are likely to remain so during 2014 unless there is a dramatic increase in loss frequency that drives pricing to prohibitive levels. Some insurers have increased retentions or taken co-insurance in the primary area to meet budget expectations.

Many reinsurers are talking about the end of rate reductions, but with some of the larger markets still looking to grow we expect rates to fall further in 2014.

Aviation is a very transparent class and analytics are prominent in most underwriting decisions albeit with a heavy weight being given to loss record. Very few programmes now meet technical pricing expectation.

It remains to be seen whether aviation will be one of the most profitable classes for 2014.

Reinsurance pricing in the aviation sector fell once again at the start of 2014, with programmes exhibiting little or no loss activity during 2013.

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Analysis.

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The pattern of limited activity in the first quarter, average activity in the second and third quarters and frenetic activity in the final quarter held in 2013.

Total Renewals Fleet ValuePassenger Movement

Premium Hull/Liability

2012 2013 % change % change % change 2012 (US$m) 2013

(US$m) % change

Quarter one 9 9 0% 20% 18% 25.05 29.21 17%

Quarter two 45 43 -4% 8% 10% 204.13 190.10 -7%

Quarter three 43 41 -5% 4% 12% 183.88 165.02 -10%

October 12 15 25% 6% 3% 97.87 90.59 -7%

November 34 33 -3% 7% 7% 212.76 204.70 -4%

December 62 62 0% 9% 6% 848.36 729.32 -14%

Quarter four 108 110 2% 9% 6% 1,158.98 1,024.60 -12%

Total/Average 205 203 -1% 9% 7% 1,572.04 1,408.94 -10%

13

Quarterly analysis



14

Airline quarterly premium profile(Proportion of lead hull and liability premium)


Q1 ‘132% Q2 ‘13

13%

Oct ‘136%

Nov ‘1315%

Q3 ‘1312%

Dec ‘1352%

Airline quarterly renewal profile(Number of renewals)


Q1 ‘135%

Q2 ‘1321%

Oct ‘137%

Q3 ‘1320%Nov ‘13

16%

Dec ‘1331%

Average quarterly percentage premium change2000 - 2013

Perc

enta

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f cha

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75%

50%

25%

100%

0%

-25%

2001 2003 2005 2007 2009 2011 2013


2001 2005 2009 2013

0

50

75

25

100

Perc

enta

ge

Quarter one

Quarter two

Quarter three

Quarter four

Quarterly percentage premium activity


Airline quarterly premium profile (Proportion of lead hull and liability premium)

Average quarterly percentage premium change 2000–2013

Airline quarterly renewal profile (Number of renewals)

Quarterly percentage premium activity





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Quarter one

The first quarter of the year is exceptionally quiet in terms of airline insurance programme renewals. Only 5% of 2013’s total number of insurance programmes were placed in Q1, representing a mere 2% of the renewals.

Because of its meagre size, any activity that does take place has the potential to significantly skew the data, which is why the 17% lead hull and liability increase stands out from the rest of the year’s trends. The increase was the result of four of the programmes that were placed seeing their lead hull and liability premium increase by more than 20%. This was based on significant fleet growth at three of the airlines and an incident at the fourth.

Quarter two

Quarter two is also relatively quiet, with 21% of programmes placed representing around 13% of lead hull and liability premium. Despite this, the quarter showed the re-establishing of the trend for lead hull and liability reductions in the region of 10% which had been in place since mid-way through 2012.

Exposure, represented by average fleet values (AFV) and passenger number forecasts was slightly higher than recorded for 2012/13 renewals (8% AFV and 10% pax in 2013/14, 5% and 4% in 2012/13 respectively).

Nearly 80% of the renewals in the quarter saw the cost of lead hull and liability premium fall.


16

Quarter three

Quarter three continued the trend that has been in place since mid-way through 2012, with lead hull and liability premium reductions of around 10% coupled with exposure increases. The AFV numbers for the quarter are somewhat suppressed by a significant fleet reduction at one of the larger renewals. Stripping this out of the data would have meant that AFV would have climbed by 9%, far more in line with the current trend.

Again, around 80% of renewals in the quarter saw

the cost of lead hull and liability premium fall.

Quarter four

The final quarter of the year dominates activity in the airline insurance market, with nearly 55% of programmes and just under 75% of total lead hull and liability premium placed. As a result, premium and exposure movement for the quarter closely resembles the annual changes.

December alone represents over half of the total annual premium, driven by a little under a third of the total number of programmes being placed.

Reflecting economies of scale that the industry’s larger fleets can command, around 85% of programmes placed during the final quarter of 2013 saw their lead hull and liability fall.

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17

Regional analysis


The regional insurance data suggests a far stronger global trend than has been in evidence than over the last few years.

-20% -10%-15% -5% 0%

Percentage lead hull and liability premium change by average fleet value 2013


-6%

-11%

-10%

-11%

-12%

-12%

-14 %

Middle East

Latin America

Asia Pacific

Total/Average

North America

Europe

Africa

0% 10% 20%

Percentage average fleet value change by region 2013


Middle East

Latin America

Asia Pacific

Total/Average

North America

Europe

Africa

14%

11%

10%

8%

5%

5%

3%

0% 10% 20%

Percentage passenger projection change by region 2013


Middle East

Africa

Asia Pacific

Latin America

Total/Average

Europe

North America

15%

13%

9%

9%

7%

6%

4%

Percentage lead hull and liability premium change by region 2013

Percentage average fleet value change by region 2013

Percentage passenger projection change by region 2013

Source: Aon Risk SolutionsSource: Aon Risk Solutions


18


Africa

Airlines in Africa had the largest average hull and liability premium reduction of any of the regions for their 2013/14 insurance programmes. This was the result of reductions at the majority of programmes in the region, driven by five-year credit balance that has nearly tripled (from an admittedly low base) coupled with a relatively stable average fleet value.

The number of claims in Africa was below the long term average in 2013, but the value was higher. From a claims value point of view, the majority of the value came from the loss of two aircraft that

were under five years old, one in Ethiopia and one in Mozambique. Neither of these were in the list of five most expensive losses in Africa since 1995.

The other three losses in 2013 were to aircraft that were built over two decades ago. Fatalities were confined to two of the five losses.

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2012 2013 % change

Total renewals 17 18 6

Premium (US$m) 85.65 73.72 -14

Total AFV (US$m) 20,288.90 20,883.53 3

Total passengers (m) 54.31 61.18 13

Average liability limit (US$m) 958.33 1,000.00 4

Cost per passenger (US$) 1.58 1.21 -24

Credit balance (US$m) 37.10 103.79 180

Average aircraft value 33.69 34.61 3

19


2005 2007 2009 2011 2013-20

-15

-10

-5

0

5

10

15

20

25

30

35

40

45

Regional premium and exposure movement2005-13 Africa


Perc

enta

ge

chan

ge

PremiumAFV

Passengers

2013 claims

2013/14 insurance forecasts

Regional premium and exposure movement

2005–2013 Africa

1995–2012 average

2012 20132013

compared to 2012

Number of incidents 8 7 5 -29%

Value of claims (US$m) 105 68 124 81%

Number of fatalities 115 165 38 N/A

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20


Asia Pacific

Exposure forecasts in the Asia Pacific region have continued to grow consistently by around 10% each year since 2010, with lead hull and liability premium falling since 2012. The region is now the largest in the industry in terms of passenger numbers and average fleet value. The influx of new hardware over the last five years means that the average value of aircraft in the region is only surpassed by the Middle East, but has fallen as a result of overall fleet growth. The number of aircraft in service in the region that meet the criteria for inclusion in this report has risen from 5,061 to 6,154 between 2012/13 and 2013/14 insurance policies.

Similar to Africa, the number of incidents and the number of fatalities were below the long-term average in 2013, but high average aircraft value meant that the value of claims was significantly higher. A single loss represented nearly two thirds of the total value of claims for the region in 2013. Given that it was a passenger aircraft which was lost, there was the potential significant loss of life in the incident. It is testament to the airline industry’s work on safety that fatalities were not higher.

1995-2012 average

2012 20132013

compared to 2012



Number of fatalities 194 152 64 -58%

21



2013 claims

2005 2007 2009 2011 2013-20

-15

-10

-5

0

5

10

15

20

25

30

35

40

45

Regional premium and exposure movement2005-13 Asia Pacific


Perc

enta

ge

chan

ge

PremiumAFV

Passengers

Regional premium and exposure movement 2005–2013 Asia Pacific

2012 2013 % change

Total renewals 56 56 -

Premium (US$m) 444.76 416.50 -6

Total AFV (US$m) 287,120.47 317,232.01 10

Total passengers (m) 962.30 1,052.90 9

Average liability limit (US$m) 1,320.54 1,272.14 -4


Credit balance (US$m) 906.13 656.04 -28

Average aircraft value 56.73 51.55 -9

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22

Europe

Around 75% of airline insurance programmes in Europe saw the cost of lead hull and liability premium fall on 2013/14 insurance programmes. This was the result of continued steady growth in exposures and the recovery of the region’s five year credit balance from the significant decline witnessed in 2011. Only seven of the region’s 66 renewals saw their credit balance decline, and Europe’s five year credit balance is now the highest of any of the six regions.

Average aircraft value was relatively stable in the region, falling by only 2%, influenced by an extra

500 aircraft forecast to be in service in a region which is relatively mature from the perspective of the aviation industry.

Compared to 2012, the value of claims in 2013 was high, but still well below the long term average, as was the number of incidents and number of fatalities. The fatalities were confined to a single incident, which also represented around a third of the total claims value.

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2012 2013 % change

Total renewals 68 66 -3

Premium (US$m) 466.13 413.83 -11

Total AFV (US$m) 221,633.78 233,068.65 5


Average liability limit (US$m) 958.48 946.36 -1




1995–2012

average2012 2013

2013 compared

to 2012

Number of incidents 16 7 7 0%


Number of fatalities 92 - 44 -

2013 claims


2005 2007 2009 2011 2013-20

-15

-10

-5

0

5

10

15

20

25

30

35

40

45

Regional premium and exposure movement2005-13 Europe


Perc

enta

ge

chan

ge

PremiumAFVPassengers

Regional premium and exposure movement 2005–2013 Europe





24

Latin America

Despite strong growth in both average fleet value and passenger numbers, the strong competition in the airline insurance markets continues to drive down the overall cost of insurance in Latin America.

The average fleet value in Latin America has grown by around 10% each year since 2008, although its fleet is still relatively small in global terms. Average aircraft value was basically stable for 2013/14, and while values lag well behind the Middle East and Asia Pacific, Latin American average aircraft value is currently the third highest in the world.

Credit balance has been driven down considerably in the region as a result of three airlines having a negative result for their 2013/14 insurance programmes. These appear to have been the result of minor claims.

Major incidents involving Latin American airlines in 2013 were low for the second consecutive year in terms of value, incidents and numbers of fatalities. The two incidents that did occur both involved older aircraft.

Premium levels in Latin America are lower than they might be as a result of a number of airlines in the region being placed as part of a major European group programme.

Airline carriers in the region also seem poised for consolidation given the current industry conditions. Whether this occurs in 2014 remains to be seen, but analysts suggest that there are major synergies potentially available.

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2005 2007 2009 2011 2013-20

-15

-10

-5

0

5

10

15

20

25

30

35

40

45

Regional premium and exposure movement2005-13 Latin America


Perc

enta

ge

chan

ge

PremiumAFVPassengers 1995–

2012 average

2012 20132013

compared to 2012


Value of claims (US$m)

131 5 11 116%

Number of fatalities 98 - 7 -

2013 claims

2012 2013 % change


Premium (US$m) 78.88 69.92 -11

Total AFV (US$m) 26,696.68 29,635.05 11


Average liability limit (US$m) 970.00 992.73 2


Credit balance (US$m) 147.68 120.07 -19



Regional premium and exposure movement 2005–2013 Latin America





26

Middle East

The Middle East’s exceptionally ambitious plans for growth and development and a reduction in reliance on the petro-chemical industry are exemplified by aviation. Continued investment in wide-body aircraft means that average aircraft values in the region are forecast to rise by more than 15% during the course of 2013/14 insurance programmes. As a result, the average aircraft will be valued at US$77 million, compared to a global average of around US$38 million.

Despite this rise, lead hull and liability premium has fallen by more than 10% for a third consecutive year and total passenger numbers are expected to rise by 15%. This growth pattern that has been in place for nearly a decade.

After a spectacularly low value of claims in the Middle East in 2012, 2013 similarly saw very few incidents. The value of claims is higher as a result of one of the aircraft that was damaged (while parked) being under five years old.

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1995–2012

average2012 2013

2013 compared

to 2012


Value of claims (US$m)

58 1 16 1500%

Number of fatalities 23 - - -

2013 claims


2012 2013 % change

Total renewals 20 20 -

Premium (US$m) 106.47 93.41 -12

Total AFV (US$m) 75,337.78 85,734.41 14






2005 2007 2009 2011 2013-20

-15

-10

-5

0

5

10

15

20

25

30

35

40

45

Regional premium and exposure movement2005-13 Middle East


Perc

enta

ge

chan

ge


Regional premium and exposure movement 2005–2013 Middle East





28

North America

After virtually no exposure change in North America for 2012/13 insurance programmes, average fleet value is forecast to rise by 5% and passenger numbers by 4% during 2013/14 insurance programmes. While it would be difficult to describe this as stellar growth, the region is undoubtedly the most mature aviation market globally. As a result, any growth could be deemed to be impressive.

Average aircraft value however, is expected to fall by around 10%, making it the lowest in the world.

This suggests that the aviation industry has not finished its protracted period of uncertainty. The number of aircraft insured under standard hull and liability programmes has risen from 6,437 to 7,448.

Three of the four incidents in 2013 in North America involved cargo aircraft. One of these represented just under half of the total value of claims for the year. Overall however, claims were once again very low in terms of value, frequency and numbers of fatalities compared to long-term averages.

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1995–2012

average2012 2013

2013 compared

to 2012



Number of fatalities 63 1 0 -100%

2013 claims

2012 2013 % change


Premium (US$m) 390.15 341.56 -12

Total AFV (US$m) 161,388.67 170,046.87 5




Credit balance (US$m) 1,198.51 644.20 -46


2005 2007 2009 2011 2013-20

-15

-10

-5

0

5

10

15

20

25

30

35

40

45

Regional premium and exposure movement2005–13 North America


Perc

enta

ge

chan

ge


Regional premium and exposure movement 2005–2013 North America




30


Sector analysis


30

Lead hull and liability premium has fallen fairly universally over the last year, with only the cargo sector bucking the trend.

Total renewals Premium

2012 2013 % change 2012 (US$m) 2013 (US$m) % change

Flag 65 66 +2% 941.40 821.50 -13%

International 24 21 -13% 135.15 114.01 -16%

Charter 26 24 -8% 60.54 56.63 -6%

Regional 38 42 +11% 174.86 166.69 -5%

Cargo 14 13 -7% 80.23 88.96 +11%

Other 6 7 +17% 7.43 7.38 -1%

Low-cost 32 30 -6% 172.43 153.77 -11%

Total/Average 205 203 -1% 1,572.04 1,408.94 -10%

Fleet value Passengers

Total (US$bn) % change Total (m) % change

Flag 576,176.50 10% 1,953.65 7%

International 73,737.33 1% 275.40 6%

Charter 21,017.00 6% 83.56 5%

Regional 42,131.14 7% 248.02 10%

Cargo 47,239.02 -6% N/A N/A

Other 5,477.48 17% 2.75 0%

Low-cost 90,822.05 8% 635.77 8%

Total/Average 856,600.52 8% 3,199.86 7%


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Average liability limit Cost per passenger Credit balance (US$)

2013 (US$m) % change Total (US$) % change 2012 2013

Flag 1,455.17 -3% 0.42 -18% 1,327.96 865.23

International 1,283.38 -2% 0.41 -20% 501.66 468.54

Charter 979.58 2% 0.68 -11% 164.69 160.96

Regional 695.00 -1% 0.67 -14% 273.65 300.54

Cargo 1,109.62 0% N/A N/A 63.41 12.90

Other 878.57 -3% 2.69 -1% 9.81 33.22

Low-cost 1,005.00 0% 0.24 -17% 666.47 657.94

Total/Average 1,115.35 -1% 0.44 -16% 3,007.65 2,499.33

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0% 5% 10% 20%

Percentage passenger projection change by sector 2013


Regional

Low-cost

10%

Flag

Total/Average

International

Charter

Other

8%

7%

7%

6%

5%

0%

Percentage passenger projection change by sector 2013

-20% -10% 0% 10% 20%

Percentage lead hull and liability premium change by sector 2013


Cargo

Other

Charter

Regional

Total/Average

Flag

Low-cost

International

11%

-1%

-5%

-6%

-10%

-11%

-13%

-16%

-10% 0% 10% 20%

Percentage average fleet value change by sector 2013


Other

Flag

17%

Low-cost

Total/Average

Regional

International

Charter

Cargo

10%

8%

8%

7%

6%

1%

-6%

Percentage lead hull and liability premium change by sector 2013 Percentage average fleet value change by sector 2013

Source: Aon Risk Solutions Source: Aon Risk Solutions


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Flag

Reflecting its position as the largest of the sectors both in terms of both premium and numbers of renewals, flag carriers enjoyed the second largest average reduction in lead hull and liability premium on 2013/14 insurance programmes.

Average fleet value is forecast to rise significantly, reflecting the delivery of new aircraft to major airlines around the globe. The availability of new wide-body aircraft is also reflected in the increase in projected passenger numbers.

Credit balance in the sector has dropped by around a third as a result of a couple of major incidents, although number of fatalities insurable under standard hull and liability policies was limited.

International

In terms of fleet value, the international sector is the third largest in the airline industry. After significant exposure increases forecast on 2012/13 insurance programmes, the sector has been fairly modest in its growth projections for 2013/14. As a result, lead hull and liability premium on average is due to fall at the fastest rate in the industry.

The reductions are fairly uniform across the sector, with only two of the 21 recorded renewals having to endure an increase in lead hull and liability premium, in one case the result of an increased loss ratio, the other the result of a significant increase in departures.

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34

Charter

After falling last year, the charter sector is forecasting a modest 6% increase in average fleet value during the course of the 2013/14 insurance programmes. Average aircraft value continues to decline, potentially reflecting the knock-on effect of flag and international carriers embarking on fleet replacement programmes over the last two years, which have in turn suppressed the value of slightly older but no less functional aircraft that make up the majority of the charter fleet.

The fall in passenger numbers forecast on 2012/13 charter airline insurance programmes was not repeated for 2013/14 programmes. This suggests that the more stable economic conditions are having an impact.

Regional

Regional airlines have once again suffered a relatively low premium reduction, although it has come at the same time as the highest increase in forecast passenger numbers. Average fleet value increases themselves have been modest.

Similar to the charter sector, some of this change will be related to the availability of relatively new aircraft in the second hand market as international and flag carriers roll out new generation aircraft.

There tends to be less underwriting competition for this sector because the relatively low premium volumes can be quickly eroded by minor claims.

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Cargo

After attracting strong support from the underwriting community and enjoying 10% lead hull reductions in 2012/13, a string of claims in the cargo sector during 2013 has meant that sentiment towards the sector has dipped. The cargo sector is the only one to have endured average premium increases.

On examination however, 12 of the 13 renewals actually saw their lead hull premium fall. The thirteenth, one of the world’s largest cargo carriers has seen its five year credit balance decline for two consecutive years as a result of losses. The increase that this airline has suffered has changed the average data for the sector.

Low-cost

The low-cost sector enjoyed an 11% lead hull and liability premium reduction on average for 2013/14 insurance programmes. This was the result of 25 of the 30 renewals in the sector seeing the cost of lead premium fall. The five with premium growth also had strong exposure growth in the form of average fleet value and passenger forecast increases.

The number of aircraft insured under airline hull and liability premium programmes has risen from 1,973 for 2012/13 programmes to 2,824 for 2013/14 programmes. Again, this is likely to reflect the ripple effect from the commercial introduction of new generation wide-body aircraft at the top end of the market changing the dynamics of the mid-range sector. More stable global economic conditions are also likely to be a factor.

Unusually the largest fleets did not enjoy the most significant lead hull and liability premium reductions.

Examining the global aviation fleet by bands of fleet value usually delivers a simple standard trend: the larger the fleet the larger the lead hull and liability premium reduction.

Insurance renewals for 2013/14 are different, however. The largest exposure increases occurred to airlines with an average fleet value (AFV) of US$500 million-US$1 billion, the band which also attracted the best reductions in lead hull and liability premium. This band also saw the value of average aircraft rise by 27%, although this lagged behind the three larger AFV bands.

The fleet value increases in the US$500 million-US$1 billion range are not confined to a few airlines that

have invested heavily. Over 75% of the 25 fleets in this band are expecting to increase the value of their fleet during the course of their 2013/14 insurance programmes, 13 of which by more than 10%.

This is not likely to be a long term change however, and is directly related to the commercial launch and increasing availability of the new generation wide-body aircraft at the start of the decade. There is a chance that the ripples from the fleet investments will continue to be felt for the next couple of years, but they are likely to become less pronounced and the natural order of the airline insurance market, that the largest fleets attract the best insurance deals, will be reasserted.

36


Fleet value analysis


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-20% -10%-15% -5% 0%



US$150–500m

US$1–2bn

US$2–5bn

Total/Average

US$5bn+

US$500m–1bn

-9%

-7%

-10%

-10%

-11%

-15%

0% 5% 10% 15% 20%

Percentage average fleet value change by average fleet value 2013


US$500m–1bn

US$5bn+

Total/Average

US$1–2bn

US$2–5bn

US$150m–500m

15%

8%

8%

8%

7%

1%


Percentage average fleet value change by average fleet value 2013

Ana

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Source: Aon Risk Solutions Source: Aon Risk Solutions

0% 5% 10% 15% 20% 25%

Percentage passenger projection change by average fleet value 2013


US$500m–1bn

US$2–5bn

US$1–2bn

Total/Average

US$5bn+

US$150m–500m

20%

9%

7%

7%

6%

4%

Percentage passenger projection change by average fleet value 2013Source: Aon Risk Solutions


3838


Inclusion criteria/notes

The information featured in this report is representative of market trends only. With vertical or fragmented marketing, sourcing exact percentage rate movements and/or shifts in premiums can sometimes prove difficult.

Our analysis is therefore representative of airline programmes with an insured average fleet value equal to or greater than US$150 million. Average fleet values are the average projected value of a fleet during the entire length of an insurance programme, rather than at a specific date.

Flag carriers are classified as national airlines, international carriers are airlines that fly intercontinental but are not flag carriers.

Rate and premium movement percentages are based on the London nett lead hull and liability terms.

Five year credit balance describes the difference between the total value of claims and the total amount of premium collected over five years.

Insurance cost per passenger is worked out by taking the total cost of hull and liability premium for an industry segment and dividing it by the total number of expected passengers.

Where airlines have replaced their programmes or have implemented short-term policies, the full annual figures have been used for calculation purposes on their accounts. If placements have changed, through the addition or deletion of airlines, no allowance has been made in the expiring figures.

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Unless otherwise stated, all data is based on Aon market data. Aon loss data is based on information from Aon Benfield Aviation Reinsurance and loss data excludes 9/11. The loss regions are based on the domicile of the airlines involved, rather than where the loss occurred.

It should also be noted that for comparison purposes all local currencies are converted to US dollars.

This review examines on western built, non-military aircraft and airline organisations only.

Unless otherwise stated long-term loss refers to the period 1995 to 2012.

Please note figures may differ due to rounding.

Due to the sensitive nature of the issues involved, the losses overview features only those incidents with an incurred hull and liability loss value of US$1 million or above.

We must point out that due to the nature of this type of document, Aon cannot be held responsible for any loss or damages caused through the use of any information contained herein. While we try to comment on issues we know to be fact, we are fully aware that in gathering the information contained herein from various sources there is always the possibility of inaccuracy. We can therefore only claim that the information is correct to the best of our knowledge at the time of publication.

The aerospace industry continued to defy gravity during 2010, continuing a trend laid down in 2007.

Aon Risk Solutions | Global Broking Centre | Aviation 8 Devonshire Square London EC2M 4PL United Kingdom

+44 (0)20 7086 5500

aon.com/aviationinsight

Mike Smith Aviation and Space Business Leader [email protected] +44 (0)20 7086 4568

David Reed Chief Commercial Officer, [email protected]+44 (0)20 7086 2980

John Levack Chief Broking Officer, [email protected] +44 (0)20 7086 4555

Mike Crozier Head of [email protected]+44 (0)20 7216 3094

Paul Mitchell Head Business Analyst, [email protected] +44 (0)20 7086 3641

Peter SchmitzChief Executive OfficerGlobal Aviation [email protected] +1 212 4793 220

Tracy ToroUS Aviation Practice [email protected] +1 212 4793 233

For more information, please contact:

Published by Aon UK Limited.

Registered office 8 Devonshire Square, London EC2M 4PL

© Copyright Aon UK Limited 2014 . All rights reserved.

No part of this report may be reproduced, stored in a retrieval system, or transmitted in any way or by any means, including photocopying or recording, without the written permission of the copyright holder, application for which should be addressed to the copyright holder.

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