04 July 2024
Aerospace Manufacturers & Infrastructure Market Update Q2 2024
When asked about the status of the aviation insurance market, every Insurer seems to continue to focus on the potential scale of the Russia/Ukraine claims and the reserves in the manufacturing sector regarding the Boeing Max issues. Yet to date, we’ve still not seen any real impact in this segment which is currently experiencing an even more positive environment for insurance buyers compared to the beginning of 2024. Whilst the shadow of potentially vast claims lingers, we do not anticipate any direct effect from this or any other market concern on premium rating or coverages in the next 3-6 months.
Whilst reinsurance rate increases have softened compared to late 2023, the internal pressure from their managements/capital providers seems to be for Underwriters to maintain income levels. This pursuit of premium is working in the Insured’s favour rather than driving premiums up, as one might assume would be the case. The abundance of capacity that is available and its deployment is putting pressure on individual risk pricing. Whilst we have not seen any new entrants writing Aerospace Manufacturers and Infrastructure risks in the last 12 months, capacity in this sector seems to be growing, with many Insurers seeking to write greater shares of each risk to grow their income levels.
This combination of overcapacity and quest for revenue growth is preventing insurers from achieving the premium rate increase they so desperately want, to cater for future losses. As such, we would say that the market is stable and nearing a flat position. Insurers will seek to achieve premium increases on all renewals, and adjustments will be made for significant exposure growth or deteriorating loss records, but without either of those two factors, renewal premiums in this quarter, and we expect throughout most of 2024, will incur very low single-digit increases.
How long will this more positive trend continue? We don’t expect any dramatic changes in the coming months but, as and when there is an outcome from the courts to the Russia/Ukraine leasing claims we would anticipate that insurers will have no choice but to demand premium rate increases.
However, some insurers are prepared to consider longer-term policy arrangements on key accounts. By longer term, we mean 24 months, subject to an annual re-signing after 12 months and with loss and exposure caveats included. This is certainly not a standard market position and achieving 100% support for such an arrangement is unlikely. Why are some Insurers willing to support a 24-month policy? It could be suggested that they are simply not convinced that there will be a dramatic premium change in 2025 and/or that capacity could continue to grow, threatening their position on risks even further, and a 24-month arrangement allows them to hedge their bets and ensure they have at least a basis of income already pre-agreed for 2025.
This combination of overcapacity and quest for revenue growth is preventing insurers from achieving the premium rate increase they so desperately want, to cater for future losses.
Whilst aviation as an industry is the safest it has ever been, and this level of insurance capacity is keeping premiums stable, there are still some concerns regarding claims in this sector that could easily tilt the dynamics of the market and drive premiums up. There continues to be a focus on US litigation and the awards that individuals are demanding in the event of injury, and also for mental anguish when involved in a ‘near miss’, such as the Alaskan Airlines B737 Max 9 incident on 5 January 2024.
We are also seeing, what should be relatively minor day-to-day incidents at airports around the world, resulting in losses that are not just multiples of that individual risks’ annual premium but that would take 30 plus years to re-pay at their existing premium level. They are not catastrophe incidents to the extent that they are hundreds of millions of dollars, and as such, a lot of the time not even reported in the press, but there have been a number of USD10mn – USD30mn losses coming from the Aerospace Manufacturing and Infrastructure segment from individual risks whose premiums are under USD1mn (and in some instances far below that). Whilst the principle of insurance is for the losses of the few to be paid for by the many, the frequency of these ‘large’ losses will be reviewed as any greater frequency in this regard will not be sustainable. There is therefore significant uncertainty regarding how long the market can sustain these low-level premium increases.
Regarding additional coverage policies like Excess War Liability and Hull War, the market instability and pricing stipulations witnessed over the past 24 months appear to be easing still. While the need for greater premium income remains in the Excess War Liability class, the extent of imposed increases is far less severe than at the start of 2024. There is more flexibility and variation in pricing offered by insurers in the Hull War sector and exposure growth will help to mitigate any rate increases.
Outlook
In the outlook, there are no major concerns about the availability of capacity for most risks in the Aerospace Manufacturers and Infrastructure segment. Premium levels are expected to stabilise further in the short term, but the Russia/Ukraine conflict continues to cast a shadow over a bright future.
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