Soft market, rising costs
It has been another fascinating year in the airline insurance market, with several factors combining to create a very complicated environment. There were multiple issues in play and while the renewal season in the final quarter of 2023 was relatively benign, the market could harden in 2024 as insurers respond to rising costs.
The first issue is the ongoing crisis between Russia and Ukraine, which shows little sign of calming as its two-year anniversary approaches.
The issue of the non-returned aircraft in Russia was significant issue at the start of 2023, and while the situation is slightly improved as 2024 gets underway, with some lessors securing payments for their aircraft from the Russians, there are still many more aircraft that need to be negotiated before the issue is completely resolved. We discussed this in more detail in the Airline Insurance Market Renewal Outlook: Q4 2023.
The crisis also put focus on certain coverage items in aviation specifically related to decisions made by governments rather than economic decisions made by the insurance sector or the aviation industry. Insurance policy language is unlikely to change until the lawsuits between lessors and insurers are concluded.
The second issue facing the aviation insurance sector is that while major losses were relatively infrequent in 2023, the cost of insurance claims was already rising, even before the two losses that took place in early January 2024. There are three key reasons for this.
Firstly, aircraft values are rising as more carbon fibre and more complicated technology is deployed in aircraft manufacturing. This increases the cost of construction, the value of aircraft hulls and the price of repair on even small incidents.
Secondly, the global appetite for travel has recovered after COVID-19. Airports and aircraft are seeing a growth in passenger numbers, and this increased density is creating more loss events. Couple this with rising social and financial inflation, and insurers are seeing ‘average’ loss values constantly creeping upward.
Finally, the claims related to the historic Boeing 737 Max loss deteriorated in 2023. This caused concern in the direct aviation insurance market, but outright angst in the reinsurance market. Claims related to the incidents were initially estimated to be around USD350m, but have now exceeded USD3bn[1], the majority of which will end up with reinsurers due to the structure of reinsurance treaties. It is too early to say if the recent Alaska Airlines incident[2] will add to this issue.
On the positive side, the fact that both the Alaska Airlines and the Japan Airlines[3] incidents were concluded with only limited liability claims is a testament to the hard work that goes into risk management across aviation.
The rising cost of claims may have influenced some insurers to step away from offering aviation retrocession reinsurance (reinsurance of reinsurance at high or catastrophe-levels).
Aviation reinsurers have begun the process of attempting to rebalance their books in three ways:
On the direct insurance side, post-COVID-19 pricing remains buoyant, so pricing for airline, general aviation, and aerospace insureds continued to soften throughout the renewal season at the end of 2023. Reinsurance and retrocession insurance continue to be watched closely, however.
Meanwhile, the lockdowns associated with the pandemic led to a rapid evolution in the way that the insurance market operates, encouraging a rapid move to electronic trading and document management.
As both insurers and brokers come to grips with the new ways of working, there has also been the post-pandemic uptick in activity, so brokers and insurers have been bringing in additional staff to manage the increased workloads.
This has created an unusual situation. During most softer insurance cycles, headcount tends to fall, or at least grow less quickly, because insurers are amenable to brokers’ requests, so negotiations tend to be brief and insurance policies placed relatively swiftly. Negotiations are more complex in the current environment however, meaning that it takes longer to place an insurance programme and additional staff are required to manage workloads. This has created an active recruitment environment as individuals move between institutions to fill staffing gaps.
Taken together, the historical claims, the rising cost of reinsurance and retrocession, and the active recruitment environment mean that costs are increasing for insurers at the same time as their income is falling.
For now, some insurers appear to be willing to relinquish profit margin to stay in the game. They may be less willing to accept this in the longer term however, so the soft market might prove to be short lived. Aviation brokers are working hard to ensure that their clients enjoy improved results while the current conditions prevail.
That said, there are so many influences pulling the aviation market in different directions, it is difficult to be certain about where the market will stand in 2024.
There are some notable court dates in place that will help bring more clarity to the claims around the aircraft detained in Russia. These may encourage more early deals to be entered creating a clearer picture for insurers and their ledgers.
The increasing cost of losses plus the scale of the claim against Boeing is likely to encourage insurers to re-calibrate both their loss and ratings models. This has always tended to occur after large loss events, such as 9/11. Insurers might believe they have significant resolve, but normal market forces tend to balance supply and demand ratios relatively quickly, so this may hold their ambitions in check.
Whatever happens in 2024, the aviation sector will continue to be fascinating.
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