Waiting for the landing
You could be forgiven for feeling that the airline insurance market has been stuck in a holding pattern for the last couple of years. Despite much-discussed dark clouds on the horizon, insurance supply has remained in surplus. Those clouds have started to change shape, however, and they are now looming large over the aviation insurance and reinsurance markets.
The storm has not yet broken though, so as 2025 gets underway, it’s worth reflecting on the many ways the airline insurance market delivered for buyers in 2024 and how it kept underwriters and brokers alike on their toes. Momentum from Q4 2024 is set to continue into the early 2025 renewals and opportunities are still available for those in position to seize the moment. The question remains though: how long can the current conditions be sustained?
The collision between an American Airlines flight and a military helicopter at the end of January with the loss of 67 lives is said to have been the first total loss of a US registered commercial jet in the US since 2009.[1] The causes of the incident are still being investigated, so from an insurance perspective, it will be some time before the ramifications become clear.
There are several other factors that need to be considered, with each factor influencing each market sector to varying degrees. This renewal outlook will look at each market in turn and discuss the factors that are driving it.
The January 1 reinsurance renewals are used as a bellwether to gauge direct aviation market appetite and direction for the rest of the year. In a wider context, aviation reinsurers (those who underwrite insurers’ own insurance policies) have performed strongly in recent years and their portfolios appear to have been balanced, allowing sufficient margin to cover the capital costs.
This has made aviation reinsurance a generally attractive place to do business, notwithstanding ongoing scrutiny, and there has been buoyant capacity in the sector over the last few years. There is a suggestion from the market that some insurers with a spring renewal looked to renew their reinsurance treaties ahead of time, retaining their anniversary date but accessing reinsurers at the end of 2024. This enabled them to negotiate at a time when reinsurers were less diverted by the potential ramifications of decisions in the lessor court cases.
The current court cases for the leased aircraft that were seized as a result of the crisis between Russia and Ukraine could be resolved in a way that puts some of the claims on the reinsurance market. In that scenario, capacity could retreat, reducing the supply into the direct aviation market and ultimately leaving less choice for buyers. This means that there is strong potential for a sharp change in market direction as 2025 progresses.
There are a handful of reinsurance renewals due to be placed in the second quarter, around the time that some of the current court cases are expected to reach their conclusion[2]. This is likely to be the best time to look for indications that the reinsurance market will change direction.
That said, the seizure of the aircraft occurred around three years ago, so both direct and reinsurance organizations have had time to assess their portfolios and prepare for various claims scenarios. The bottom line is that at this stage it’s hard to say what will happen until the court cases reach their conclusion.
Insurers typically arrange their reinsurance programs to protect against major losses above a certain cost threshold. There’s currently a widely shared concern among insurers that the rising costs of smaller or attritional claims, which are typically absorbed before an insurer’s reinsurance program responds, are eating away at margin and leaving little left to cover major loss events.
It varies from year to year, but these attritional claims are estimated to represent somewhere between half and two-thirds of the total annual global premium, so insurers have a clear incentive to work with risk managers to find ways of ensuring that risks are identified, assessed and mitigated as far as possible before they become claims.
Airline insurers sought to enhance hull and liability prices in 2024, but excess capacity meant that rating deteriorated throughout the year. Unless there is a squeeze in the supply of insurance capacity, it seems likely that rate reductions will continue to be offered in the early part of 2025.
That said, the febrile competition for premium income that defined the final quarter of 2024 is likely to be a little subdued initially in 2025 as insurers take stock. Insurers are always focused on achieving critical mass in premium income so that they can meet their business plan obligations, but with only a limited number of airline insurance programs renewing during the first two quarters of the year, it will be difficult to get a firm gauge of market direction for the next few months.
Despite the liability claims that will follow the tragic losses in Azerbaijan[3] and South Korea[4] at the end of December, these events are unlikely to significantly affect the direct airline insurance market. Composite airframe repair costs, high-value engines and the effect of inflation in liability claims will continue to attract scrutiny from insurers as the year develops.
The liability claims following the American Airlines loss at the end of January (see above) could be significant, but given the limited placement activity in the first quarter of the year, coupled with the loss causation being unknown at this time, it is difficult to gauge the market reaction.
Unless there is another major loss event or resolution of the leased aircraft court cases that is detrimental to balance sheets, in general terms direct insurers are likely to continue to be keen to negotiate on risk management and insurance programs with a good loss history and a willingness to engage proactively.
Market conditions could change quickly, so buyers of airline insurance should evaluate the benefit of chasing short-term opportunity against the security of nurturing relationships over the long-term.
Excess AVN52E and hull war have been in sharp focus following successive renewal cycles with significant rate increases for buyers of the insurance. Insurers have mostly achieved their objective of increasing the excess AVN52E premium base from a level that they perceived as not representing reasonable value for the capital they exposed. As is often the case, a rating adjustment of this magnitude attracted new entrants, which is part of the reason why capacity is now healthier than in recent years for those trying to purchase the cover. It is worth noting that capacity remains tight for some non-airline classes of aviation insurance business, such as manufacturing.
The stabilizing of excess AVN52E pricing appears to be closely aligned with the cost of capital. This means that although there is significant surplus capacity for these placements, there appears to be a clear floor below which pricing is deemed inadequate.
The situation facing hull war insurers is much more dynamic with new market entrants challenging longstanding hull war insurers’ positions. This intense competition has driven the market into rate reduction territory. More choice invariably creates opportunity for buyers but given how reactive the hull war market has been since 2022, it is worth reiterating that short-term opportunity should be balanced with the value of long-term relationships.
A likely outcome of surplus supply in the hull war and excess AVN52E markets is a review of limits on some placements where increasing coverage may be an appropriate objective. The value equation between coverage and price isn’t the same for all buyers and the availability of increased coverage may be something to consider while current market conditions prevail.
Underlying factors offer few indications that the market will harden in the first half of 2025 and indeed, early reinsurance renewals suggest that direct insurers will be receptive to negotiation as momentum from Q4 2024 shows little signs of abating.
However, the potential resolution of the ongoing Russia/Ukraine leasing claims (see above) could rapidly reduce reinsurer or insurer appetite, altering market conditions. In a market that is susceptible to change, it is prudent not to lose sight of the longer-term view. Buyers should engage proactively ahead of renewal and seek advice from their broker about the mitigation strategies that could come into play if market conditions become more constrained.
