June looks set to be the most expensive month in the aviation insurance market since September 2001. In an already hardening market, this means price rises are likely to be universal for the rest of 2009.
The Air France and Yemenia losses in June are likely to set the agenda for the airline insurance market for the rest of the year and potentially well into 2010. With just over half the year gone, claims totals including an estimate for minor losses are already around 11% higher than the average for a full year.
This means that total losses are likely to be significantly higher than the average by the end of the year, even if there are no further major incidents.
Market Context
The price of lead hull and liability premium in the airline insurance market plummeted in 2006 and 2007, but claims outweighed premium in 2007 and 2008. Coupled with difficult economic position for global
insurance providers, there was already considerable pressure to increase the price of airline insurance in 2009 even prior to the two losses in June.
The price rises were already occurring even given the airline insurance market’s high level of latent capacity, much of which was holding back as a result of the low prices, and the falling fleet and passenger exposure forecasts.
Expensive year likely
According to 1996-2008 loss data, on average there are US$621m worth of losses between July and December if an estimate for minor or attritional losses is included. Adding this to the year to date loss total would mean that total claims for 2009 could exceed US$2.2bn. This is nearly 60% higher than the long term average of US$1.4bn. This means that if the rest of 2009 follows the 13 year average pattern for losses and discounting 2001, the year will be the most expensive ever seen in the airline insurance market.
More than challenging
With losses so far this year are already above the full year average, the industry is likely to see insurance premiums rise significantly for the rest of the year and potentially into the next.
This will be a bitter pill to swallow for an industry that is already seeing passenger numbers fall as a result of the global economic downturn as well as fuel prices that are climbing once again.
So far this year, only around a third of the total number of expected airline insurance programs have been placed, representing about 20% of the total forecast lead hull and liability premium.
With 19 of July’s 36 expected renewals now placed, it seems that the market is already hardening in response to the losses. Nearly half of the programs placed so far have seen lead hull and liability premium costs rise by more than 25% compared to 2008 as a result of either losses or projected fleet increases. This pattern is likely to continue for the rest of the year.
Losses
The loss figure excluding minor losses is US$1,315m so far in 2009, compared to US$457m recorded at the same point last year. Taking an annual pro-rata estimate for minor losses into account, the overall loss total for the year to date is US$1,590m, compared to US$715m in 2008.
There has been a single major loss since the last edition of this newsletter.
On June 30, an Airbus A310-300 operated by Yemenia was lost near the Comoros Islands in the Indian Ocean. The loss happened while the aircraft was on a flight from Yemen’s capital Sanaa to Moroni, the capital of the Comoros Islands. The aircraft was valued at around US$34m.
The aircraft is thought to have had 153 people onboard, 142 passengers and 11 crew. At this point there is thought to have been a single survivor. There are believed to have been strong winds in the area at
the time.
Coupled with the Air France loss (covered in the June edition) and excluding September 2001, June 2009 looks set to have been the most expensive month for claims under standard hull and liability policies ever once the liability reserves are set.
It also means that even with half the year still to go, 2009 is already the third most expensive year ever in terms of hull and liability claims (excluding 2001).
Any further major losses will simply make the position worse, and would potentially extend the expected hard market conditions well into 2010. The loss charts on the right paint a stark story for the airline industry and its attendant insurance markets.
Timeline for the EU ETS
- 31 August 2009 : Aircraft operators to submit benchmarking and emissions plans to respective authorities
- 1 January 2010 and every year thereafter : Operators to monitor total CO2 emissions every year, starting with calendar year 2010 and surrender the correct number of allowances to cover emissions from 2012
- 1 January 2011 – 31 March 2011 : Operators to have emission reports verified by regulated party (it is not necessary to have the emissions plan verified)
- 31 March 2011 : Operators to submit pre-compliance verified benchmark tonne-km reports and annual emissions reports for the monitoring period 1 January 2010 to 31 December 2010
- 30 September 2011 : Commission produces benchmark number for calculating emissions
- 31 December 2011 : Regulator publishes final allocations to each operator
- 28 February 2012 : Regulators issue allowances to operators
- 31 March 2012 : Operators to submit pre-compliance annual emissions reports for the monitoring period 1/1/11 to 31/12/11
- 31 December 2012 : End of first emissions reporting year for which allowances must be surrendered by operators. Submission of first verified emissions report.
- April 2013 and every year thereafter : Operators surrender the correct number of allowances from their registry accounts to cover CO2 emissions
Airline renewals
Over the last few years, July has become one of the pivotal months in the airline insurance calendar. In 2008 it became the month with the highest number of renewals after December.
The last month of the year dominates activity in the airline insurance market however. Over half of the total annual lead hull and liability premium was placed in December 2008, compared to around 13% in July, so there is some way to go before the market could be described as having a smooth pattern of renewals.
There are five renewals expected to take place in July that were previously placed earlier in the year. Three other airlines that formerly renewed in July are no longer expected to renew during the month. Two of these are the result of fleet reductions taking them below the inclusion criteria for this newsletter (see below) while the third has extended to the end of the year.
The variety of airline insurance programs that are placed during July means that it should provide a strong indicator for market direction for the rest of 2009.
The market has hardened considerably since 2008, driven both by the economic challenges facing global insurance capacity providers generally as well as the reaction to the major losses that have occurred so far this year. The harder conditions look set to continue.
Sources : AON AVIATION & AEROSPACE
