Calmer landings
Let’s begin by putting the current aerospace insurance market in context. Both direct aerospace insurers and their reinsurers are suggesting that from their perspective, pricing in the direct market is inadequate when compared to current claims trends. So far in 2024 however, buyers have encountered a relatively stable marketplace, with coverage and premiums remaining largely consistent with the previous year. Overcapacity has been the key influence in the aerospace sector, and insurers have had to be competitive to maintain market share.
Insurers continue to assert that they require premium uplift across their portfolios, but in many cases market forces mean that they have struggled to meet their ambitions.
There are four main factors driving the direction of the aerospace insurance market: reinsurance, inflation, claims and geopolitical considerations.
Reinsurance: Insurers stated throughout 2023 that reinsurance costs had increased, and programs needed to be restructured. Interestingly though, this did not drive significant pricing increases for direct buyers, with competition for business depressing price increases as insurers focused on income throughput to cover the rising costs of their reinsurance programs and increased retentions.
Inflation: Insurers are still citing inflationary pressures as a factor in their push for premium increases, but rising premium in 2022 and 2023 has attracted new capacity to the market, making it challenging for incumbent insurers to increase pricing while still securing their participation. As exposures return to pre-COVID-19 levels, this translates into technical rate reductions for many insureds.
Claims: There’s been an attempt to focus on claims deterioration in aerospace sub-classes that have tended to suffer the most losses, such as maintenance, repair and overhaul (MRO), manufacturers, and ground handlers. Unfortunately, from the insurers’ perspective, the need to ensure premium income and the drive to secure long-term capacity on placements are winning more of a focus. Insurers are taking the strategic view and securing their position and line structure.
Geopolitical considerations: The scale of the claims related to the Ukraine/Russia crisis remains in insurers' minds but rebalancing portfolio pricing appears to be a higher priority. There are court dates for cases in the latter half of 2024, so while the uncertainty remains, these claims are less of a focus than they were in 2023.
Following an incident in January, the US Federal Aviation Authority (FAA) issued a grounding notice for the aircraft type concerned. This put Grounding Liability coverage in the spotlight once again and reinsurers are still making quiet noises about excluding the coverage from reinsurance treaties. There are no changes at this juncture, but it continues to be a point of discussion.
Looking across the aviation insurance portfolio, the year began with a collision between a Japan Airlines A350 and a Dash 8 operated by the Japan Coast Guard. [1] The A350 was successfully evacuated but there were five fatalities among the six crew on the Dash 8.
Insurers have also been closely monitoring an increase in turbulence events. In May, a Singapore Airlines flight declared an emergency after encountering severe turbulence. The turbulence is thought to have led to one passenger dying of a stress-induced heart attack and around twenty other passengers sustaining serious injuries. There have been four other notable turbulence events in 2024 already, with research suggesting that climate change is contributing to their increase.
At this stage however, losses in 2024 have not had a significant impact on coverage, capacity, or pricing.
It is worth noting that the buoyant insurance market is encouraging several major manufacturers to buy higher limits in response to general inflationary influences and a perception of aggressive plaintiff pursuits in the event of an incident.
Recent capacity withdrawals from the aerospace sector have been balanced by new capacity being attracted to the market. As a result, capacity remains readily available on placements that can demonstrate strong claims performance and robust risk management strategy and protocols, where limits purchased are up to the US$1.5bn level. Notably, some insurers are taking the opportunity to offer greater shares within their management guidelines and appear to be willing to negotiate more competitive pricing to secure a larger participation on a risk.
Our analysis suggests that insurers’ expectations of price increases are likely to slow further as year progresses. Currently, flat or as before premiums are widespread and insurers appear to be increasingly keen to demonstrate their commitment to clients.
Contrary to some of the discussions around the market, the rising costs of reinsurance has not led to coverage restrictions and we do not anticipate constraints being implemented as we move through 2024 into 2025. To use the war risk liability AVN52E clause as an example, the suggestion that primary AVN52E limits could fall from a maximum of US$350 million to US$250m has not become a reality.
Ancillary policies such as hull war and excess AVN52 continue to endure pricing changes. Recent geopolitical events are the main driver, with insurance companies still requiring significant changes to both pricing and risk spread to ensure that portfolios are sustainable.
Communicating how organisations approach and reduce their exposures is the first step to negotiating with insurers. At this point they appear to be trying to avoid taking a one-size-fits-all approach and are willing to review and price risks on a case-by-case basis where the client proactively engages with them.
Should current conditions continue, we expect insurers to continue to chase a small step-change in pricing across their portfolios, with surplus capacity continuing to limit significant rate change. The pace and level of increase from leaders in the class has slowed, but where they can, certain following markets are flexing their capacity on larger limits to increase pricing for their share. This is tending to keep pencils sharp, as they used to say.
According to internal WTW Aviation & Space analysis, at the start of quarter two, the average increase in Excess 52 program renewals was around 40% for all aviation lines but only around 30% for aerospace, reflecting both reduced liability risk and market economics in the aerospace market. By the start of the third quarter, the rate of increase had slowed but the gap between all aviation and aerospace-specific renewals had narrowed.
2024 has seen a return to prevalence of long-term agreements (LTAs) across the aviation sector. In 2023, fully supported multiyear deals at preferential terms for clients were unusual. However, we have seen a marked increase in LTAs this year, with insurers seeking to offer competitive structures to lock in shares and pricing. Most LTAs do involve a premium increase, but often at a level which is attractive to clients and ‘flat’ deals are possible. Caveats in respect of claims and exposures continue to be the norm.
We are entering a market phase where LTAs could prove to be beneficial for both insurer and insured. Given current capacity trends and market competition, insurers see LTAs as a way of securing future participation. For clients, an LTA provides competitive premium certainty and protects against the potential market volatility – which could become important in view of the outstanding Russia-related claims.
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