the aviation working party
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The Aviation Working Party. Justyn Harding (chairman) David Hart Phillip Tippin James Widdows The working party wish to acknowledge the valuable assistance provided by: Richard Power Cameron Johnston of BAIG. THE AVIATION AND SPACE INSURANCE MARKET. The Market. - PowerPoint PPT PresentationTRANSCRIPT
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The Aviation Working Party
Justyn Harding (chairman) David Hart Phillip Tippin James WiddowsThe working party wish to acknowledge the valuable assistance provided by: Richard Power Cameron Johnston of BAIG
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THE AVIATION AND SPACE INSURANCE
MARKET
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The market can be split into the following areas: Airlines General Aviation Space Risks
The Market
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Total premium is around US$1.4bn Hull values up to US$225m Liability payments can be over
US$3m per passenger The total cost of a single incident
could exceed US$3bn Over 500 airlines worldwide War risks are covered separately
Airline Insurance is Big Business
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Aircraft with up to 40 passengers Around 300,000 planes Difficult to get an overall view of the performance of the market More suited to a technical rating exercise
General Aviation
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Annual premium around US$450m Dominated by 4 programs Claim sharing agreements are
common Hard to assess true profitability
Product Liability
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Covers launch and in orbit risks Annual premium around US$700m Overall frequency of launch failure is around 4% Loss severity is much more variable
Space Risks
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Features of the Aviation Market
Rapidly increasing exposure Rapid technological change Dominance of small number of insureds, insurers &
brokers Vertical placement Alliances and code sharing arrangements Variability of claim sizes Availability of reinsurance Cyclical nature of business
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Increasing Exposure
All sectors of the market are growing fast Large numbers of increasingly expensive new
airliners being ordered as fleets are modernised Rising freight levels Increasing number of passengers More flights with smaller jets to provide better
service More frequent flights to wider range of destinations More satellite launches
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Technological Changes
Accident rate four times higher for non-industrialised nations compared to industrialised
Continuing process, always some accidents Will reach safety plateau Future Issues
(a) Privatisation of ATC and possible conflict of interest(b) Need for secure communications(c) Regulation of crew drinking(d) Technological changes: cameras, radar to detect CAT
Better information is available to the public on which airlines and aircraft are safe
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Airline Safety
New ranking system- Flightsafe Non judgmental - allows for past accidents (number &
nature), and ten factors including: average fleet age, type of planes, maturity of airline and the control environment
Air Canada renowned to be the safest airline, with British Airways ranked 9th and all five major US operators in the top 20
Worst operators: (a) Small ex Soviet Union airlines (b) Nigeria Airways(c) Myanmar Airways (d) Merpati
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Consolidation in Market
Only three brokers and four major manufacturers so have substantial power
Airlines and manufacturers becoming more global, so industry needs to respond
Merger of European and American insurance operations e.g. BAIG and AAU
This has caused the vertical placing strategy
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Vertical Placing
Inefficient system that exploits poor market information
Risk placed with following market first who will not know lead terms
Different terms offered to leaders e.g. claims handling allowance or better rate
Many slips for one risk so terms not obvious Difference between lead and follow terms can be
up to 40% for airlines
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Alliances & Code Sharing
Allow greater range of destinations to be offered
Invisible to publicPassengers on a flight may be
travelling under different compensation regimes
Your paint, your claim adopted in practice
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Claim Size Variation
To a large extent caused by differing liability payments Hull values up to $225m Liability payments up to $10m per passenger in US ($3m
average) Claims often split with products insurers Highest overall claim $800m (Swiss Air) Largest hull claim $150m Will only rise in the future Will rise as more operators move to unlimited liability
working conventional defences
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Reinsurance
Substantial amount needed to limit exposure Reinsurance may end up with non aviation
insurers - naive capacity Naive capacity enters market on back of good
years for the aviation market and falling returns in its own markets
Someone has to pay claims - this cycle the Australian reinsurers, REAC and GIO
Availability causes extreme cyclical swings
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Cyclical Market
Rates are turning, particularly for airlines and these movements are dramatic
Thai Airlines recently suffered a 20% rise despite its size and having had few losses (none in the last year).
Indian Airlines facing 65% rise after two losses last year (A320 at Yangon and 737-200 at Patna)
This comprises an increase of 14% in liability costs and 90% in hull costs
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Airline Trends
Bigger aircraft Unlimited liability US Courts & Inflation More traffic Approaching safety plateau Code sharing and the “deep pockets syndrome” Overall => losses to increase
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General Aviation Trends
More private wealthImplies more trafficGrowth rate => airline growth
10%paOverall => losses to increase
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War Trends
Middle East?Air rage and pilot suicideHijackingsOverall => losses not set to improve
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Satellite Trends
Cheaper launchesLower orbit launchesImplies more failures?US manufacturers losing market share
to ChineseAgeing satellite population increasing in-
orbit riskOverall => losses likely to increase
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In General
Increasing costsMarket WILL turnBut retro market will turn firstCould see a vicious 2000 year for
arbitrageurs
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Vertical Placing
Smoke and mirrors placingMaximises opportunity for imperfect
informationLeading to inefficient market resultsResult of too few brokers, too many
underwriters
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Players in the market doing better than average by making money from their reinsurers.
Somebody selling reinsurance too cheaply. Ultimately someone will end up sitting on a very
poorly priced liability as losses work through retro layers. This cycle much of losses have ended up with REAC and GIO
Late 1980s saw marine underwriters caught the same way.
There is a macho image associated with aviation XL
Lemmings
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And still companies start up new aviation wings - DP Mann only a month ago.
Situation is theoretically unsustainable, but will last as long as there are lemming insurers prepared to throw capital off a cliff.
The ultimate question is a simple one. Are our lemmings dying off too quickly to survive, or is this ritual suicide a symptom of a constant level of overpopulation?
For non-US risks last year, available capacity equalled 170% of the size of the aviation insurance market.
Who are our next lemmings?
Lemmings
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THE END