A balanced market?
As highlighted in our Q3 aerospace update, insurers and reinsurers continue to voice concerns about pricing inadequacy in the aerospace portfolio.
As we come towards the end of 2024, this does not appear to have affected either appetite or capacity, and competition remains strong for attractive business that proactively engages with the insurance market. Looking ahead to 2025, there are no indications that this will change.
Most industry insiders refer to Q4 as the airline renewal season because an estimated 70% of global annual airline premium comes from accounts that renew during this period. A number of aerospace insureds do renew during the final quarter but there are also renewals at the start of January that are negotiated during the final quarter. Aerospace risks encompass a great variety of operations, and it is worth looking at each of the major sub-sectors in turn.
Maintenance, repair and overhaul (MRO) is a challenging sector historically. On the one hand, operators in the sector present a catastrophe risk profile associated with a total loss arising from a poor repair. The general experience however is that attritional claims such as dropped engines and wingtips clashing as aircraft are moved into the hangar cause losses of a certain frequency and magnitude that collectively erode the premium base.
The gap between the risk and the reality causes loss ratios and risk/reward factors to go askew and as a result insurers tend to have a lower appetite to engage in this class than others.
MROs are making significant efforts to get this attritional loss level in check. This is having some positive effect, but insurers are instinctively cautious, and their reticence remains an obstacle to abundant capacity deployment. This means that it is more challenging for MROs to get the best out of the current conditions.
At the other end of the scale, airports, and especially those which do not have responsibility for ancillary services such as air traffic control (ATC), ground handling or refuelling, are benefitting from the ample capacity currently available in the insurance market. There is a healthy level of appetite for participation in the airport sector which keeps prices competitive. Well managed airport insurance programs with clearly defined risk management strategies that engage positively with the insurance market can therefore expect cordial treatment.
Insurers will still require a minimum premium for the limits purchased and this is likely to be the only braking mechanism that they will bring to pricing negotiations.
Of the additional sectors mentioned above, appetite and insurer enthusiasm for ATC and refuellers risks is largely similar to that of airports, albeit perhaps from a different premium baseline. Ground handlers, however, often have a risk profile more akin to MRO risks where their risk of major loss needs to be catered for, but the premium base is often eroded from smaller, attritional type losses arising from aircraft being struck with ground handling equipment. Appetite for this sector remains more restricted than for airport risks in general.
As we discuss below, there are some large losses currently being adjusted which have come from this sub-sector of aerospace, so one would be forgiven for thinking this sector would be undergoing some form of pricing overhaul. This does not appear to be the case though. Pricing adequacy is often touted by insurers during negotiations but there is not really a consensus about where this level should be. Again, insurers are largely accepting that pricing is mostly being influenced by abundant capacity rather than insurer ambition following large loss events.
A little over a year ago, reinsurers asserted their influence over the direct insurance market when they restricted the sub-limits offered for grounding coverage (dropping it from USD500m to USD250m) and on the primary limit for AVN52 coverage (some insurers had obtained reinsurance for limits higher than USD250m but this was not widely taken up as it would have increased reinsurance costs).
Further limit reductions to the AVN52 sub-limit have been quietly mooted by some insurers during 2024, but we have not seen this on any Q4 renewals. This may be due to positive perceptions of pricing adequacy in the reinsurance world; reinsurers could be reluctant to effect such changes while there is enough alternative capacity to replace them on reinsurance treaties. The status quo remains, for the moment.
The discussions around sub-limits and the high level of capacity are in the foreground of the aerospace insurance market, but in the background, the potential conclusion of the Boeing 737 Max losses continue to loom.[1]
At the same time, the Russian government’s move to seize and re-register more than 400 aircraft leased from companies based in countries that had put Russia under sanction following the eruption of the crisis between Russia and Ukraine is still having ramifications nearly three years later. While the future of some of the aircraft has been settled, several cases recently reached court.[2]
When the losses are fully adjusted, the court cases for the re-registered aircraft concluded, and the ramifications for both issues are understood and accounted for, insurers might then take stock and try to adjust pricing and capital deployment, but that will be something for 2025, not Q4 of 2024. At this point the issues do not appear to have influenced insurers’ renewal strategies in any way noticeable other than their repeated concerns regarding the size of the combined claims that they potentially face.
One might expect that insurers would use these factors to re-evaluate their portfolio and begin to communicate new rating philosophies, but this doesn’t appear to be the case.
After a period of increases, we have now seen rates start to flatten out. Prices might be nudging up a little, but strong capacity and competition means that on occasion we are able to negotiate renewals with flat premiums. This might seem surprising given the background factors described above, and no doubt insurers are hoping that there will come a point in 2025 when they will begin to take effect, enabling them to begin looking for increased premiums. However, we would suggest that the abundant capacity will continue to apply a dampening effect on insurers’ ambitions.
