The benefits of engagement and transparency
The airline renewal season has arrived, and with it the placement of an estimated 65% of the total annual airline hull and liability premium. Most of this premium is placed on December 1, so with that now ticked off in the diary, where does the market sit?
Exposure growth has been a key topic of conversation for the 2024/25 renewal season, with both passenger[1] and cargo statistics[2] rising throughout 2024 according to the International Air Transport Association (IATA).
As we discussed in our Q3 update, despite the rising exposure, insurance prices were stable throughout 2024. In most cases, airline insurers appear to have been focused on retaining accounts that match their risk strategy but negotiating hard on everything else. For accounts that insurers are keen to compete for, reductions, possibly even double-digit price changes, might be achieved, subject to various criteria. Other placements, such as those with less positive loss records or less well-defined risk management strategies, might not get such favored results but might still get flat pricing.
There are several reasons for this, but the main one is that there is a healthy level of insurance capacity available across the aviation insurance markets, with insurers attracted to the sector by rising prices in the years running up to the pandemic, and the benign period of losses that occurred subsequently.
The problem is that insurance costs have been rising, so there’s a question about when the market moves past the current equilibrium point and starts to harden. At this stage the benign market conditions look likely to continue into 2025, although the next round of reinsurance placements in January could give an indication of how the market will evolve for 2025/26 placements. Indications at this point suggest a continued softening of direct insurance pricing, particularly for insurance programs that airline insurers are keen to keep supporting or those that they would like to engage with.
The question this raises is how to increase the probability that a particular program comes to be looked on positively by an airline insurer. There are several factors that come into play, but, as ever, the two most important are having a good loss record and a clear, well-defined risk reduction strategy that is communicated with insurance partners. This is always likely to be the case irrespective of where we are in the insurance cycle.
Unfortunately, there appears to be little indication that the challenging geopolitical conditions of the last couple of years will change in the near future. That said, after two years of steep increases and a rapid reassessment of the airline hull war market’s importance and pricing, we appear to have reached a plateau and the market is starting to relax its rating requirements. Astute negotiations with insurers are enabling reductions on a composite premium basis for some placements.
Like the hull and liability market, pricing relief for hull war seems to be available for airlines with risk profiles that match an insurer’s risk strategy. Hull war insurance is based on a low-frequency, high-cost principle, and as such the rebalancing of the sector over the last couple of years seems to have been sufficient to match the perceived levels of risk, at least in the short term. In the longer term though, there are plenty of flashpoints around the world where politics could fail and conflict arise.
The insurance market will continue to balance probability and price and respond to changing levels of tension as appropriate, but even if simmering tension boils over into crisis, there’s unlikely to be such a steep rise in the cost of hull war insurance as witnessed in 2022 and 2023, in the short term at least.
There are several other issues on the agenda for the airline insurance market as we move into 2025.
The matter of the 400 aircraft leased to Russian airlines that were confiscated at the start of the crisis with Ukraine has rumbled on for nearly three years. Initial estimates for the combined value of the claims were somewhere in the region of US$10–12 billion,[3] but negotiations have been ongoing for the transfer of ownership of the aircraft from Western leasing companies to Russian operators at the same time as the discussions about how a claim against insurance could work.
While the negotiations have been occurring behind firmly closed doors, there have been court dates throughout the last few months, which appear to have encouraged resolutions in the case of many of the aircraft.[4] Unfortunately one of the more significant UK court cases is said to have hit a further delay, but the interruption might encourage further settlements to occur before any court decisions are made. The long and short of it is that the initial estimates of what would have been comfortably the largest claim in the 110-year history of aviation insurance, have subsided somewhat.
This may be having an influence on the current market conditions. Insurers will have been preparing for the worst-case scenario in terms of the Russia-related claims, but if the claims are less likely to be as significant as initially feared, there is a chance that there will be room for negotiation as 2025 gets underway.
That said, the factors outlined in the last airline update still stand. Inflation has raised operating costs and reinsurance rates have also increased significantly over the last couple of years, so under normal circumstances, the market would be looking to harden. These aren’t normal circumstances though: capacity in the airline sector is relatively high, attracted by the rising cost of aviation insurance in the years running up to COVID-19 followed by the low level of aviation activity during the pandemic itself, which reduced the risk of claims.
There is relatively little activity in the airline insurance market during the first quarter of the year, giving all sides of the market a moment to assess their positions and try and judge the conditions. At some point the cycle will move around and the benign environment for insurance buyers will give way to harder conditions. From an airline point of view, the best way to take advantage of the current market and reduce the impact of the harder conditions when they arrive remains the same: keep an open dialogue with insurance partners and make sure that everyone understands the nature of the risk you represent and the steps that are being taken to minimize the risk as far as possible.
As an organization with a global perspective across many aspects of insurance and risk management, WTW has a role in helping both leadership and operational teams understand the risks and opportunities that are starting to be visible on the horizon, as well as those that are perhaps becoming more pressing.
Our Emerging and interconnected risks survey is intended to help clients navigate an increasingly complex risk landscape and assess the actions they’re looking to take in 2025/26 against anonymized groups of peers.
The research, led and reported on by the WTW Research Network, brings together the opinions of more than 300 people worldwide, many of them in senior roles and involved in organizations that together have an estimated 1.3 million employees and US$2.3 trillion in revenue. The research examines the most pressing emerging risks across 14 industries, looking at levels of preparation and areas of concern. It also provides insights on underappreciated topics, shares specialized perspectives from WTW leaders and offers action plans to support organizations as they take steps to build their resilience.
The WTW Aviation & Space team will be examining aviation-specific aspects of the results during 2025, but you can find the topline results of the survey here.
