12 October 2022
Upwards pricing pressure on Hull War
& War Third Party Liability
As we enter the final quarter of 2022, Hull War and War Third Party Liability coverages continue to experience the greatest upwards pricing pressure following the Russia/Ukraine conflict and heightened global volatility. In this article we explore current trends and look ahead to the future outlook.
Around 70% of the aviation market's airline premium is placed in the last quarter of the year, representing a
staggering amount of renewals in such a short space of time. This period is decisive in determining year-end underwriting results, in turn typically setting the tone for future market direction.
Looking back, major losses in 2014/15 and a continuous flow of loss activity since had kept pressure on war rates. The most recent high profile loss being Ukraine International Airlines flight 752, which was shot down on 8 January 2020. However, as we look back to the last quarter of 2021, market conditions had become softer and many insurers were striving for market share. There was excess capacity available, over USD500m, which played a key role in this softening. Insurers typically base their lines on the maximum hull value or spares limit, whichever is greater.
Around 70% of the aviation market's airline premium is placed in the last quarter of the year, representing a staggering amount of renewals in such a short space of time
This trend looked set to continue throughout 2022, but as we enter the last quarter, the landscape is now somewhat different due largely to the uncertainty in the market derived from the Russia/Ukraine conflict.
One of the consequences born from this conflict is that insurers are facing increased reinsurance costs as reinsurers react. In light of recent events, the hull war market has typically reacted in prompt fashion and insurers are seeking 100% rate increases on hull war policies, aggregates are being reviewed and in particular aggregates for confiscation exposures are being reduced further.
We have already seen and previously reported that several major insurers withdrew from offering hull war insurance and/or ‘paused’ underwriting earlier this year, which has caused some challenges. But, in contrast, we have seen two new insurers (Fidelis & Elseco) enter the class and offer capacity, and several markets are known to be reviewing hull war renewals, hoping to submit plans and obtain management approval to start writing in the coming months.
he global annual hull war premium income was estimated to be around USD180m in 2021, a marked increase over prior years. Insurer sentiment is that this figure is still too low, however, opinions vary as to what the annual premium “needs to be” in order to have a market that is “sustainable”, with premium income targets ranging from USD400m to excess of USD500m. There is the thought that the market would like to eventually get to the size where it could be in a position to sustain two wide body aircraft losses, but we are still some way off from insurers achieving this.
War Third Party Liability (AVN52)
Moving on, by association, War Third Party Liability (AVN52) pricing is now also under pressure, as the insurers which write this business are largely the same as those who write Hull War, and coverage is typically placed in parallel. This cover has experienced sizeable increases of late, despite being loss free, as insurers argued that pricing had hit “rock bottom” after a protracted period of soft market pricing and as such, the returns for the level of capacity that they were deploying were simply “inadequate”.
At the start of this year the total AVN52 capacity (i.e. before the Russia/Ukraine conflict/recent market withdrawals) was around the USD 1.75bn mark. Whilst capacity remains stable, at present, we could well see it further impacted in Q1 2023 post insurers renewing their reinsurance programmes at 1/1 and 1/4.
Insurers could be faced with having to potentially choose between reducing their offered USD lines, if they cannot secure a sufficient level of reinsurance cover or face the prospect of deciding whether to increase their net retentions, or not, as the case may be.
Post the Russia/Ukraine conflict insurers are now seeking circa 50% increases on AVN52 cover. The 2021 AVN52 annual premium income is estimated at somewhere around the USD125m mark, and the consensus amongst insurers is that they are hoping to surpass USD200m in premium income for 2022.
With regards to coverage changes, both hull war and AVN52 insurers are no longer offering non-cancellable policies, not even for the more “benign” operators. Insurers are also looking at airlines routes and destinations much closer.
Whilst the soundbites of new war capacity will most certainly be welcomed by clients, it remains to be seen just how much more may be needed in the years to come to allow this sub-sector to continue to offer the significant limits and values that airlines require.
Looking ahead, expectation is that we will have a better understanding of available capacity and future trending after insurers have renewed their reinsurance programmes in 2023. The reaction that follows these renewals will ultimately be key in telling us just how long the insurers desired premium income expectations might take to come to fruition.
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