03 January 2024
Aerospace Manufacturers and Infrastructure
Market Update Q4 2023
Since early 2022, there have been dark clouds lingering over the aviation insurance market, in the form of disputed claims and deterioration of prior year reserves. However, more than 18 months later, the Aerospace Manufacturers & Infrastructure sector remains directly unaffected by this. In fact, the market has found itself in a far more positive position in 2023 with insurance buyer conditions notably improving as the year progressed. The dark clouds over the aviation insurance market have not disappeared but they seem to be far enough away (for now) so as to not be casting much of a shadow.
Pricing trends
Insurers’ drive for premium income and the high level of available capacity in this sector continues to restrict Insurers from increasing direct insurance premiums to their desired or budgeted levels, despite continued pricing pressures on their reinsurance programmes. As we entered 2023, there were a number of insurers with internal management edicts to increase premiums by at least 15%, irrespective of loss history / exposures, etc. However, the number of insurers with that edict was not sufficient to impact the overall pricing trend. There was additional and more competitive capacity available and as we reach the end of 2023, insurance buyers are in a great position and generally experiencing premium increases below 5%. Positively, we don’t anticipate this trend changing as we enter 2024, but there is still a focus on profitability so loss active risks will be viewed and rated far more cautiously.
There is a question mark around how long the market can sustain these low-level increases when generally aviation traffic and exposures are in excess of pre-pandemic levels. It is fair to say that each Insurer will state that the current total premium income for the Aerospace Manufacturers & Infrastructure sector, estimated at circa USD1.35 billion, is not a sustainable position given the continuing growth in the industry and the increasing costs of claims.
The market instability and pricing stipulations seen over the last 15 months, in the additional coverage policies such as Excess War Liability (AVN52E/G) and/or Hull War finally seem to be relaxing slightly. The necessity for greater premium income remains across those classes, but the extent of the increases being imposed is less severe than it was 3 months ago. Unless there is a significant reason, such as too low a premium base for the limit being purchased or vastly increased exposures, there are limited insurers now demanding the 100% premium increases that were being imposed several months ago. The premium increases in this sector are still substantial and capacity remains more restrictive than it has been in the past but there is more flexibility and variation in the pricing being offered by Insurers.
Capacity
Capacity remains stable but levels are far higher in certain sub-sectors, for example component manufacturers, airports, ANSP’s and refuellers in comparison to others such as prime manufacturing, MRO and ground-handling. This higher capacity also directly correlates with the differences seen in pricing across these sub-sectors. Across the board, capacity is plentiful for low liability limits (up to USD1 billion) and this is where the most competitive terms are available. There is greater capacity available (up to circa USD3 billion) but at these higher liability limits, premiums can become disproportionate to the amount charged below that.
In terms of changes, we recently saw Chaucer withdraw from the aviation insurance market, yet whilst their market share was not as large as many others, they did participate on a wide range of accounts including those sub-sectors where capacity isn’t quite so abundant, which will create a little extra pressure on some renewals in 2024.
Positively, we aren’t currently aware of any other insurers looking to follow suit but there is certainly a lot of pressure on insurers due to their increased costs, in particular reinsurance costs. Year-end insurer results are something to monitor as we enter into 2024 as underwriters’ success or otherwise in reaching their 2023 targets may influence the future capacity deployment and underwriting sentiment.
Losses
We have not yet seen any major losses in the Aerospace Manufacturers & Infrastructure sector since 2018/19, but there remains two main concerns:
Day-to-day losses - The premium levels in the airport / ANSP / refuelling sub-sectors remain very competitive, so in the event of a seemingly small incident, it can easily erode several years of premium income. For example, a common taxi-way incursion where two aircraft clip wings at the direction of the control tower can easily lead to a loss in excess of USD10 million. While this may not sound too significant compared to the magnitude of some losses, it is substantial when compared to an average premium of below USD1 million in these sub-sectors.
Social inflation – In particular ‘nuclear verdicts’, i.e. exceptionally high jury awards.
Whilst Insurers remain troubled by nuclear verdicts, it would appear that Insurers are not alone in their thinking. Insureds too are now actively reviewing their risk profiles and many are considering whether the limits of liability they are purchasing are sufficient. We have started to see greater impetus from Insureds to increase their liability limits. Whilst capacity is available and Insurers are driven by premium income, now is a good time to achieve those higher limits without significant additional costs.
Outlook
- Short-term continuation and stabilisation of current premium trends but with a cautious outlook
- No major concerns about the availability of capacity for the majority of risks
- Distinction between risks will be pursued and underwriting information will remain essential to successful negotiations.
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