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The Aviation Working Party zJustyn Harding (chairman) zDavid Hart zPhillip Tippin zJames Widdows The working party wish to acknowledge the valuable assistance.

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Presentation on theme: "The Aviation Working Party zJustyn Harding (chairman) zDavid Hart zPhillip Tippin zJames Widdows The working party wish to acknowledge the valuable assistance."— Presentation transcript:

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2 The Aviation Working Party zJustyn Harding (chairman) zDavid Hart zPhillip Tippin zJames Widdows The working party wish to acknowledge the valuable assistance provided by: zRichard Power zCameron Johnston of BAIG

3 THE AVIATION AND SPACE INSURANCE MARKET

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6 The market can be split into the following areas: z Airlines z General Aviation z Space Risks The Market

7 z Total premium is around US$1.4bn z Hull values up to US$225m z Liability payments can be over US$3m per passenger z The total cost of a single incident could exceed US$3bn z Over 500 airlines worldwide  War risks are covered separately Airline Insurance is Big Business

8 z Aircraft with up to 40 passengers z Around 300,000 planes z Difficult to get an overall view of the performance of the market  More suited to a technical rating exercise General Aviation

9 z Annual premium around US$450m z Dominated by 4 programs z Claim sharing agreements are common z Hard to assess true profitability Product Liability

10 z Covers launch and in orbit risks z Annual premium around US$700m z Overall frequency of launch failure is around 4%  Loss severity is much more variable Space Risks

11 Features of the Aviation Market zRapidly increasing exposure zRapid technological change zDominance of small number of insureds, insurers & brokers zVertical placement zAlliances and code sharing arrangements zVariability of claim sizes zAvailability of reinsurance zCyclical nature of business

12 Increasing Exposure zAll sectors of the market are growing fast zLarge numbers of increasingly expensive new airliners being ordered as fleets are modernised zRising freight levels zIncreasing number of passengers  More flights with smaller jets to provide better service zMore frequent flights to wider range of destinations zMore satellite launches

13 Technological Changes zAccident rate four times higher for non-industrialised nations compared to industrialised zContinuing process, always some accidents zWill reach safety plateau zFuture Issues (a) Privatisation of ATC and possible conflict of interest (b) Need for secure communications (c) Regulation of crew drinking (d) Technological changes: cameras, radar to detect CAT zBetter information is available to the public on which airlines and aircraft are safe

14 Airline Safety zNew ranking system- Flightsafe zNon judgmental - allows for past accidents (number & nature), and ten factors including: average fleet age, type of planes, maturity of airline and the control environment zAir Canada renowned to be the safest airline, with British Airways ranked 9th and all five major US operators in the top 20 zWorst operators: (a) Small ex Soviet Union airlines (b) Nigeria Airways (c) Myanmar Airways (d) Merpati

15 Consolidation in Market zOnly three brokers and four major manufacturers so have substantial power zAirlines and manufacturers becoming more global, so industry needs to respond  Merger of European and American insurance operations e.g. BAIG and AAU zThis has caused the vertical placing strategy

16 Vertical Placing zInefficient system that exploits poor market information zRisk placed with following market first who will not know lead terms zDifferent terms offered to leaders e.g. claims handling allowance or better rate zMany slips for one risk so terms not obvious zDifference between lead and follow terms can be up to 40% for airlines

17 Alliances & Code Sharing zAllow greater range of destinations to be offered zInvisible to public zPassengers on a flight may be travelling under different compensation regimes zYour paint, your claim adopted in practice

18 Claim Size Variation zTo a large extent caused by differing liability payments zHull values up to $225m zLiability payments up to $10m per passenger in US ($3m average) zClaims often split with products insurers  Highest overall claim $800m (Swiss Air)  Largest hull claim $150m  Will only rise in the future zWill rise as more operators move to unlimited liability working conventional defences

19 Reinsurance zSubstantial amount needed to limit exposure zReinsurance may end up with non aviation insurers - naive capacity zNaive capacity enters market on back of good years for the aviation market and falling returns in its own markets zSomeone has to pay claims - this cycle the Australian reinsurers, REAC and GIO zAvailability causes extreme cyclical swings

20 Cyclical Market zRates are turning, particularly for airlines and these movements are dramatic zThai Airlines recently suffered a 20% rise despite its size and having had few losses (none in the last year). zIndian Airlines facing 65% rise after two losses last year (A320 at Yangon and at Patna) zThis comprises an increase of 14% in liability costs and 90% in hull costs

21 Airline Trends zBigger aircraft zUnlimited liability zUS Courts & Inflation zMore traffic zApproaching safety plateau zCode sharing and the “deep pockets syndrome” zOverall => losses to increase

22 General Aviation Trends zMore private wealth zImplies more traffic zGrowth rate => airline growth 10%pa zOverall => losses to increase

23 War Trends zMiddle East? zAir rage and pilot suicide zHijackings zOverall => losses not set to improve

24 Satellite Trends zCheaper launches zLower orbit launches zImplies more failures? zUS manufacturers losing market share to Chinese zAgeing satellite population increasing in-orbit risk zOverall => losses likely to increase

25 In General zIncreasing costs zMarket WILL turn zBut retro market will turn first zCould see a vicious 2000 year for arbitrageurs

26 Vertical Placing zSmoke and mirrors placing zMaximises opportunity for imperfect information zLeading to inefficient market results zResult of too few brokers, too many underwriters

27 zPlayers in the market doing better than average by making money from their reinsurers. zSomebody selling reinsurance too cheaply. zUltimately someone will end up sitting on a very poorly priced liability as losses work through retro layers. This cycle much of losses have ended up with REAC and GIO zLate 1980s saw marine underwriters caught the same way. zThere is a macho image associated with aviation XL Lemmings

28 zAnd still companies start up new aviation wings - DP Mann only a month ago. zSituation is theoretically unsustainable, but will last as long as there are lemming insurers prepared to throw capital off a cliff. zThe ultimate question is a simple one. Are our lemmings dying off too quickly to survive, or is this ritual suicide a symptom of a constant level of overpopulation? zFor non-US risks last year, available capacity equalled 170% of the size of the aviation insurance market. zWho are our next lemmings? Lemmings

29 THE END


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