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Insider In Full: Aviation insurers squeezed by 40%-60% reinsurance rate rises

Reinsurance is significantly up for aviation insurers due to Boeing loss deterioration...

Aviation insurers incurred an average 40%-60% increase on their treaty excess-of-loss (XoL) programmes that renewed at 1 October and 1 December, with those on Boeing accounts experiencing even higher increases, as reinsurers endeavour to cover significant loss deterioration from the event.  

The Boeing loss has deteriorated to $2bn as the Ethiopian segment of the loss increased by $650mn to around $990mn.  

Reinsurance sources said at the time that there would have to be significant increases in pricing to cover the loss and that this would have to be across the market, with this publication predicting a hard market in aviation reinsurance in October.

  

 

Sources have since told Insurance Insider that increases had indeed been implemented across the market at completed renewals, not just in airlines and manufacturers business, which were the primary sectors hit by the Boeing loss.

“It…impacts everyone who buys reinsurance aviation, so even the guys in general aviation (GA) will have bigger expenses to face. They will moan, and they will say what do I have to do with this…but ultimately the capital base is the same,” one source said.

Reinsurers that write aviation XoL include Swiss Re, Hannover Re, Munich Re, PartnerRe, Axa XL, Liberty Specialty Markets and Atrium.

Aviation XoL renewals are spread throughout the year, with several occurring at 1 October, 1 December and 1 January, and a large proportion occurring at 1 April – meaning that the impact of hardening reinsurance will be staggered slightly over the coming months.

Some posited that those renewing in April could see even more significant increases but that it was still too early to tell and there was still a degree of uncertainty.

The sharp increase in reinsurance costs puts primary aviation insurers in a squeeze, as they attempt to continue support for their financially distressed airlines clients. One underwriting source described it as a “double whammy” for the airline insurers.  

According to the International Air Transport Association (IATA), the second quarter had been catastrophic for the industry, with an estimated $50bn cash burn and a near full grounding of the passenger fleet. Flight activity rebounded slightly in the third quarter, but cash burn continued due to reduced travel demand and ongoing travel restrictions.

 

 

Sources said that reinsurers were not taking the Covid-19 impact on airline activity into consideration, with one source saying that it was largely “being ignored”, as the priority among reinsurers was to rebuild their premium pot to a more sustainable level.

Some sources said that whilst it would be challenging for primary insurers to push increased costs onto airline clients, the heightened cost of reinsurance could be paid for by increasing prices in other lines like general aviation, which has been performing well during the pandemic. It is understood that this has already started to occur in some corners of the market.

The continued loss deterioration of Boeing will continue to impact the reinsurance market, which has been soft for years, according to sources. The premium pot for aviation XoL had been eroded for several years due to depressed pricing, reaching an “all time low” of less than $250mn in 2018 and 2019.

One reinsurance broking source said: “These XoL reinsurers are endeavouring to build a sustainable pot of premium, which is something that that have not had access to if you look at the last five to six years.”

Sources said that a more sustainable premium pot level would be around $450mn but getting back to this level would take time.

“Are they going to be able to do that in a year? Probably not. We have told reinsurers that there need to be measured responses,” one broker said.

 

Retentions and capacity

The change in market conditions has driven some insurers to examine their retentions and, in some cases, increase them so they carry more risk net. However, this was not the case for all carriers, and some had actually purchased new cover in renewals at 1 October and 1 December.

Sources said that carriers going forward will continue to examine their retentions, but that retaining more risk would be limited to well-capitalised insurers that could better weather the risk. However, sources said that even if cedants increased retentions, the cost of reinsurance would still be high.

“We might see some smaller increases in retention but not wholesale movement of people increasing retentions to dramatic levels,” one source said.

Direct underwriters with more diversified books – including general aviation and product segments in addition to airlines – are “better equipped to cope with a changing market” and may not have to increase retentions dramatically, one reinsurance broking source said.

Reinsurance sources added that it was unlikely that new reinsurance capacity would enter the aviation market imminently as the rates still needed to get back to parity after years of erosion post 9/11 and poor returns in 2018 and 2019.

One reinsurance source said: “I don’t think it is as attractive as people would like, because let’s face it, we have not made a return to the market for the last three years, if not five years as a market collectively.”

Sources agreed that exits would be unlikely as they had stuck in the market for years of underperformance and would want to make a return now.

"Reinsurers have to demonstrate to management that they are building adequate levels of pricing for risk assumed and that wasn’t being achieved on premium income business from 2018 to 2019 where it was less than $250mn,” one source said.

 

Direct premium

Some reinsurance sources said that aviation insurers were still on track to get a more sustainable airline premium level, which sources said prior to the Covid-19 crisis was headed towards the $1.9bn mark, with part of this attributed to the imposition of minimum premiums.

They added that direct insurers had also benefitted to a certain extent from reduced flight activity as it had decreased attritional losses, with some sources pegging the total attritional losses – where losses are less than $10mn – for 2020 at between $300mn-$400mn. Average annual attritional losses can come in at $600mn.

Some noted that the advent of Covid-19 vaccines could enable flying activity to resume to normal levels in the next year or so, which would have a positive effect on the premium pot, however this would be matched by an increase in exposure and increased likelihood of losses.

Increased positivity from the vaccine should also be tempered as it will take time for airlines to recuperate financially.

Research from IATA has now forecast that there is the possibility for the airline industry to turn cash positive by the second half of 2021, as opposed to its prior estimate of cash burn until 2022.

 

 

However, the organisation said that the industry “faces a very tough time getting to that point”, with a further $75bn of cash to be burned between the fourth quarter of this year and mid-2021.

It said that government support or progress on testing would be “critical for the survival of airlines in many regions” over the next six to nine months.

“Direct insurers are continuing to push rate on direct business and trying to maintain a certain level of premium on the airline side. If we get the vaccine and flying activity does return to some degree of normality we will see significant uptick in exposure, with the higher rate that direct underwriters are looking to charge that will knock on and create a return to growth,” one source explained.

 

Insurance Insider delivers global wholesale, specialty, and (re)insurance intelligence that enables you to act first. Redeem your complimentary 14-day trial for more premium content from Insurance Insider.

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