04 April 2024
Aerospace Manufacturers & Infrastructure
Market Update Q1 2024
As aviation insurance stakeholders leap into 2024 the only certainty is that the impact of ‘known unknowns’ will materially drive the medium-term trajectory of the aviation market. For all involved, this is a challenge, but for the astute, it also represents an opportunity.
Known unkowns
While the market in many senses remains stable, the following items present uncertainty that is impossible to entirely mitigate:
- Russia/Ukraine: All stakeholders continue to await greater certainty concerning the ongoing Russia/Ukraine lessor disputes. Developments such as deals for the transfer of title between notable Lessors and Russian Airlines are well publicised but from the perspective of the overall insurance market, meaningful clarity over loss quantum will only start to emerge as litigation in various jurisdictions begins in 2024.
- Reinsurance: Through the last two renewal cycles direct insurers have been at pains to express to aviation clients the impact of reinsurance market hardening. This rhetoric continues but uncertainty over the timing and extent of purported changes continues to pervade.
- Q1 2024 Losses: Following a notably benign 2023 in terms of new major loss activity Q1 2024 saw headline-grabbing incidents return, leading to the potential for significant traditional and non-traditional aviation claims.
Given the potentially existential impact on individual businesses of the above, it remains possible, if perhaps not probable, that 2024 could see a fundamental non-cyclical market transformation. However, for the moment, the updates we can provide, focus more on the insurance cycle and observable trends.
Reinsurance trends
As alluded to previously there remains noise within the direct insurer community that reinsurers are maintaining a desire to review rates and forensically interrogate specific areas of coverage. However, Gallagher Specialty understand that the level of rate increase being pursued has subsided when compared to 2023 and that there is an element of dislocation within the reinsurer community about when and how to tighten terms and conditions. Seemingly the short-term focus is more on achieving rating adequacy on the Middle/Upper tranches of programmes with a general perception that the primary rating is now within reasonable tolerance to the model. The challenge for insurers to manage is the compounding impact of consecutive difficult reinsurance renewals and the desire to avoid margin erosion against the backdrop of a very competitive direct market.
As an aside, Gallagher Specialty knows that those direct insurers who can demonstrate or highlight an enhanced focus on exposure mapping and aggregation management have been able to unlock more favourable reinsurance renewal results. Hence, there has been a definite increase in the number of direct insurers actively pursuing both internal and third-party portfolio management technology solutions.
Capacity trends
From a direct perspective, Gallagher Specialty is observing a continuation of the availability of excess competitive capacity. Clients with strong risk profiles, developed market presence and positive premium vs claims records are finding that significantly >100% participation is being offered. The semi-recent withdrawals of SCOR and Chaucer have certainly not, at this point, led to pricing pressure or capacity challenges for OEMs as any ‘lost’ capacity is being replaced by those with more expansive appetites. Recent personnel movement is only likely to lead to additional insurers targeting the OEM segment.
As each insurer competes for position across the OEM segment, we have observed an increased interest from insurers in exploring what facility-type structures could be implemented. For insurers, such structures can provide increased penetration into a target segment, a valuable line of sight on future premium potential and additional analytic value. This is something that we are actively exploring in partnership with core insurer partners and clients.
In the current market environment where the availability of sufficient capacity to complete arisk is not necessarily the core driver behind line allocation, we have also seen a marked rise in the number of sophisticated purchasers making insurer selection decisions on a cross-class basis. Those direct insurers who can effectively co-ordinate a multiline offering, are likely to continue to differentiate themselves. This is a challenge both to monoline providers and those conglomerates yet to effectively deliver theoretical capabilities to OEM clients.
Programme trends
From a programme design perspective, OEMs continue to deploy a diverse range of approaches based on their own unique strategic imperatives. However, Gallagher Specialty has witnessed an increase in OEM interest in employing longer-term structures. This is likely motivated by a return to ‘normal business’ in a post-pandemic world, as well as favourable market conditions that provide an opportunity to ‘lock in’ preferential renewal terms/conditions with long-term focused partners. It remains to be seen whether direct insurers will continue to sustain such deals, especially on a non-caveated basis.
Simultaneously, OEMs continue to challenge the market, to find ways to provide the strategically important non-traditional coverages that offer otherwise unavailable balance sheet protection. While product evolution in these areas is encouraged, clients should be cognisant of the tide of market opinion and, where possible, take an active role in helping to define sustainable but still impactful solutions.
Gallagher Specialty remains optimally positioned to partner with large complex clients in the OEM sector and possesses market-leading knowledge/expertise with multi-faceted programmes and long-term buying approaches. The recent market engagement has seen Gallagher Specialty continue to innovate and deploy Continuous Policy Period structures on OEM business, providing greater certainty to clients in a market still operating under dark skies.
Client trends
Positively, we are observing that OEM clients continue to demonstrate robust financial performance as the aviation industry as a whole returns to growth. Civil order books for many are strong and the geopolitical context of the world means that defence contractors are more important than ever.
As this industry growth continues Gallagher Specialty has noted a change in the tone of messaging from OEMs. There is now a marked focus on challenging previously well-established ways of working/transacting. We continue to develop differentiated offerings and the toolkit required to partner with the new generation of empowered risk managers to drive value and efficiency in the insurance transaction.
Key Takeaways
Fundamentally and on a day-to-day or week-to-week basis, the aviation insurance market is functionally stable. Current market conditions and capacity leave open bands of opportunity for clients. However, the ‘Known Unknowns’ outlined at the outset of this piece mean at some point, something will have to change.
Every market stakeholder is trying to discern whether the light at the end of the tunnel is the route to greener pastures or an oncoming train. The truth is that it will be different for different businesses based on their level of exposure to these factors. However, as consistently proven ‘market makers’ Gallagher Specialty believe that in partnership with OEM clients we can deliver market leading solutions against the backdrop of whatever the ‘Known Unknowns’ bring.
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