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
The market can be split into the
following areas:
 Airlines
 General Aviation
 Space Risks
Airline Insurance is Big Business

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
General Aviation

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
Product Liability

Annual premium around US$450m

Dominated by 4 programs

Claim sharing agreements are
common

Hard to assess true profitability
Space Risks

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
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
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
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
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
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
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
Alliances & Code Sharing
Allow greater range of destinations to
be offered
Invisible to public
Passengers on a flight may be travelling
under different compensation regimes
Your paint, your claim adopted in
practice
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
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
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
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
General Aviation Trends
More private wealth
Implies more traffic
Growth rate => airline growth 10%pa
Overall => losses to increase
War Trends
Middle East?
Air rage and pilot suicide
Hijackings
Overall => losses not set to improve
Satellite Trends
Cheaper launches
Lower orbit launches
Implies more failures?
US manufacturers losing market share
to Chinese
Ageing satellite population increasing
in-orbit risk
Overall => losses likely to increase
In General
Increasing costs
Market WILL turn
But retro market will turn first
Could see a vicious 2000 year for
arbitrageurs
Vertical Placing
Smoke and mirrors placing
Maximises opportunity for imperfect
information
Leading to inefficient market results
Result of too few brokers, too many
underwriters
Lemmings
 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
 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?
THE END