Anna Sagar
that took place at 1 November, 1 December and 1 January, Insurance Insider understands.
Sources said that insurers with loss-free business that renewed in November, December and January incurred 40%-60% increases, with even higher increases for those that ceded Boeing losses. A Willis Re 1st View report from January said that accounts which were more loss hit had rates increases between 50% and 250%.
Gallagher Re’s head of aviation, David Bell, said: “I wouldn’t say rate increases will go up for April beyond the level of 1.1, as there isn’t any new reason for that.”
Sources said that business has not been firm ordered yet, meaning that these expectations on pricing could still be confounded.
Aviation XoL renewals are spread throughout the year, occurring in November, December, January, April and July. Sources had posited last year that those renewing in April could see even higher increases than those that renewed earlier, but that no longer appears to be the expectation.
Orders are expected to be placed in the third or fourth week of March, with sources saying that cedants might delay putting terms into the market to ensure they are “getting a good deal” and might be “second-guessing” whether they are paying too much.
Key accounts that renew at this time include Chubb and Axa XL. Reinsurers that write aviation XoL include Swiss Re, Hannover Re, Munich Re, PartnerRe, Axa XL, Liberty Specialty Markets and Atrium.
Prior renewals
Reinsurance sources said that there was a “slight knee-jerk reaction” to earlier renewals as reinsurers reacted to the deterioration in the Boeing loss, whose loss reserve grew to $2bn in October as the Ethiopian Airlines crash segment increased by $650mn to around $900mn.
Sources said that the Boeing loss was now far greater in size than the World Trade Center for the aviation market, making it the biggest loss the market had ever sustained.
Sources added that the bulk of the Boeing loss had been passed on to reinsurers, and this combined with rates declining every year between 2007 and 2018 during the soft market had provided impetus to push for rate increases.
The aviation market has been hardening since around 2019, but rates only started to go up significantly last year following the loss deterioration of Boeing. Aviation is the hardest reinsurance line.
Bell said: “I think the 1.11, 1.12 renewal reflected the news in October of the bigger reserve change, so it notched up the level of increase a bit more again, but every renewal that didn’t have that new increase will get its moment in time and be adjusted.”
He continued: “I think the reaction will be the same in terms of base rates; it’s not of course any kind of a cartel or a tariff market, but reinsurers quickly get an idea of what the leaders are looking for and typically are not quoting against incumbent leaders.”
Sources said that reinsurers were remaining firm in pricing, with one source noting that “there are no renegade reinsurers doing lower [price] deals”.
Sources continued that at 1 November, 1 December and 1 January renewals, some insurers had examined their retentions, and in some cases had increased them so that they carried more risk net.
Guy Carpenter’s global head of aviation and aerospace specialty, Ian Wrigglesworth, said: “All insurers are sophisticated buyers, and they look at their individual appetite for risk. Each insurer has considered their retention on renewal and, yes, a handful have moderately increased their retentions.”
Bell said that the typical retention level for an airline based-programme was at an industry loss level of $150mn, however some insurers had moved their equivalent to around $250mn to $300mn, which was the loss level bought in 2006 and 2007.
Capacity
From a capacity perspective, sources said that reinsurance capacity remained ample and that there had not been any exits of reinsurance capacity, but there was pressure from reinsurance management to deliver improved performance.
Wrigglesworth added: “There is no reinsurance marked dislocation, but there are some new interested reinsurers. Currently there is the same or marginally more reinsurance capacity available but only at an increased price to last year.”
Bell noted: “There is just as much capacity on mainstream XoL. The big accounts have absolutely no problems with capacity. If anything, there is still a bit of a competition for involvement.
“Some of the new Bermudian reinsurers are looking to become involved, but they are going to find it difficult because as much as rates are going up due to losses, there is still competition with existing reinsurers wanting to maximise their participations going forwards.”
Sources said that they expected reinsurance XoL rates to go up for another two or three years but said that reinsurers’ ability to increase pricing would be dependent on airlines returning to pre-Covid levels of activity to rebuild airline insurers’ premium base.
Although vaccines have provided hope that flight activity can return to pre-pandemic levels, airlines are still struggling financially, which could lead to some going out of business. This could curb the pot of premium available to insurers, and consequently limit reinsurers’ ability to recoup losses.
Future renewals/Covid-19
Broking sources said that reinsurers were not factoring in reduced exposure as a result of Covid-19, presenting a challenge for reinsurance brokers at future renewals to get the pandemic aspect included in base pricing.
Bell said: “The impact of Covid-19 is completely clouded by Boeing and the size of the loss. I can understand why, but the reality is that reinsurers are giving out increased base rates at a time when exposure based on the actual number of flights and the number of people travelling has actually been at a level not seen since 1999.
“That means they are getting a much better real risk rate every day than they would be on any normal modelled view over the last 10 years normally,” he added.
According to data from the International Air Transport Association (IATA) passenger levels are not expected to recover to pre-pandemic levels this year with projections up to the third quarter expecting passenger levels to be 33%-38% of what they were in the same period in 2019.
Airlines' cash burn is also expected to be between $75bn to $95bn for this year, which goes against prior estimates that the industry could be cash positive by the second quarter of 2021.
Reinsurance sources said that although planes were not flying at normal levels, there was still risk from accumulation of grounded assets, and flying losses can still occur, reinforcing the case for reinsurance premium levels to be rebuilt.
In September last year Swiss Re research showed that “significant billions of dollars” were at risk in the US due to grounded planes.
Reinsurance sources said that the imposition of minimum premiums in primary airline deals, which sources pegged at between 75% to 85%, meant they now had better forward visibility on what level of premiums insurers would have.
Wrigglesworth explained: “With less flying, the attritional losses appear to have reduced over this period, and with return premiums to airlines, insurers will in turn have lower premiums and so won’t be paying upward reinsurance adjustments.
“Flying losses may still happen and reinsurers refer to the eye-watering ground risk accumulations as airlines are parked up and out of service.”
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