04 April 2024
Airline Insurance
Market Update Q1 2024
2023 presented another familiar period for both airlines and the insurance market, with renewals set against a backdrop of uncertainty, challenges and volatility. With the conclusion of the first quarter, this uncertainty persists and those challenges remain, but for now, market conditions are relatively stable and our view in the short term is for a continuation of this trend.
Current market challenges
The airline insurance market remains delicately balanced and various factors continue to play out and influence underwriting sentiment, namely:
- Russia/Ukraine: Uncertainty around the outcome and potential quantum of losses from this dispute continues to hang over the market. Various court proceedings are scheduled to start in the coming months of 2024, and both the direct, reinsurance, and retro markets will remain cautious until it is resolved.
- Boeing MAX: Following significant back year prior claims deterioration in 2023, January 2024 brought new potential B737 Max issues into focus. In the aftermath of the Alaska Airlines in-flight emergency, the Federal Aviation Administration grounded all Boeing model 737 Max 9 aircraft pending an investigation into a "pressurisation issue." Insurers are continuing to monitor developments very closely.
- Global Conflict and Geopolitical Volatility: Geopolitical volatility, heightened tensions and ongoing conflict around the world continue to create instability and as a result there is increased underwriting scrutiny on airline exposures, coverage and risk profiles.
- Hull War market: Global conflict and military actions have resulted in some costly Hull War losses during the past 24 months and insurers responded by increasing rates and tightening cover. The war market is highly reactive and the current heightened tensions and global volatility are likely to keep pressure on this class for the foreseeable future.
- Reinsurance Pricing: While reinsurance rate increases at 1/1 2024 softened in comparison to 2023 levels, direct insurers still experienced another consecutive increased reinsurance renewal. Against the backdrop of All Risks rate softening, direct insurer’s profit margins continue to be squeezed.
Despite these challenges and lingering market uncertainty over potential losses, for now, most insurers are pursuing a measured approach as they wait to see how things develop. The market landscape is complicated, so a degree of caution would appear prudent for insurance buyers and early purchase could prove an attractive option to those seeking to hedge against market uncertainty and the prospect of a more challenging landscape.
Early losses in 2024 add pressure
Following a relatively benign 2023 in terms of major and day-to-day loss activity, as we enter 2024, unfortunately, the aviation insurance market has suffered some significant early losses. These include but are not limited to the 2nd January - Japan Airlines A350 incident, and the 5th January - Alaska Airlines in-flight emergency and subsequent B737 Max Grounding implications. While we are not aware of all the official reserves yet concerning these losses, factoring in Hull, Liabilities and Grounding claims we estimate potential combined claims somewhere in excess of USD300million. While positively, the market reaction to these losses has been muted, any further major loss activity and or claims deterioration in the coming months could lead to a more severe response from insurers.
Market Capacity
While it is somewhat complex to comment on capacity levels in the airline sector due to differing risk profiles and programme structures, it is clear that overall levels have increased during the past 12 months. Theoretically, capacity levels have increased for all placements, but actual deployed capacity varies greatly depending on individual underwriter/company risk appetite. Capacity levels are highest for profitable risks with good loss ratios (≤50%), and those with low-limit (≤USD1 bn) requirements. In contrast, those airlines which purchase higher limits, have larger liability exposures (e.g. USA) and/or have higher loss ratios (≥50%), will typically find reduced levels and fewer options.
All Risks Premium and Rating Trends
As the first quarter concludes, the current landscape is largely unchanged, with the market split into two parts with a distinct differentiation between All Risks and Hull War/Third-party War Liability coverages. While the first quarter must be considered a quiet period, from our analysis the underlying rating trends show little change from that seen at the end of 2023. Renewal activity was however very limited, with this period experiencing a lower number of airline renewals than any other quarter. The All Risks results of Q1 continue to present a more favourable market for buyers albeit highlighting notable rate variation between each risk, with as-before, rate reductions and indeed increases all evident.
Capacity as ever remains a key influence on dynamics. All Risks capacity levels for airline risks are stable and we have not seen any withdrawals or market exits during the early months of 2024. The current excess of All Risks capacity continues to help suppress (for now) any potential market hardening emanating from persisting market challenges and this is positive for forthcoming airline insurance renewals. Exposure growth (or lack of) is a key factor in renewal negotiations and in what is achievable in terms of rating as insurers focus on growing or at least maintaining their premium income.
Hull War and Excess War Third-Party
In contrast to the primary All Risks class, the war markets, both Hull War and Third-party War Liability, pricing continues to trend upwards. Recent losses and heightened global tensions/volatility is keeping strong pressure on this class and consequently capacity remains tight. Positively, we recorded a much broader range of increases in Q4 2023, suggesting some element of price improvement. Indeed, as we reached the final quarter of 2023 underwriters became more open to negotiating on pricing based on each individual client’s specifics, a stark contrast to prior months where fixed market percentage increases were sought across the board on all renewals.
Looking ahead, while we do not anticipate the return of a soft market given the poor loss experience and continued global tensions, we are hopeful that insurers will continue to underwrite and differentiate on a more measured risk-by-risk basis. That said, the war markets are well known for being highly reactive to losses and global events so we cannot rule out any future volatility.
Future Outlook
- Continued uncertainty, challenges and added renewal complexities.
- Continued underwriter focus on terms, exposures and policy coverage.
- Varied insurer/underwriting approaches and responses.
- Rates and results manifest differently for buyers depending on coverage, risk profile and programme structures.
- Absent of any new developments or further major losses, our view in the short-term is for a continuation of current trends into Q2 2024 but with a cautious outlook for the longer-term.
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