What makes an Airline attractive to Insurers? Olivier Marre, SVP Aviation Insurance RAASI Conference Moscow December 9 th 2009 A member of the Max Capital Group B E R M U D A I R E L A N D U N I T E D S T A T E S

2 Insurers are not passengers n Main passenger attraction factors are not key to risk assessment n Price of the tickets n Flight schedules n In flight services n Some other factors are more informative n Flight cancellations n On time performance

3 Insurers are not investors n Investors key ratios are not as critical to insurers n Cost structure n Cash available n Profitability n Some other elements represent more valuable information but could have different reading n Growth plans n Fleet development

4 What insurers want ? Insurers want to be able to ascertain the probability and magnitude of claims under the forthcoming insurance policy and compare it with the offered premium

5 How do insurers compute probable future claims ? n By studying the past : claims history n Through exposure based predictive actuarial models

6 The relative importance of claims history n Overall Loss Ratio or “Credit Balance” are not as important as the Insured may think n Because of the catastrophic nature of the cover offered n In terms of frequency n In terms of severity n Because a single cat loss does not necessarily help to predict the future n Claims frequency and attritions are often far more important information

7 The importance of small claims frequency n Attritions are small and frequent both on Hull & Liability n They represent very large amounts for the industry n They often can be controlled by risk management n They are charged back to the insured + margin n Frequency of incidents have an influence on the catastrophes probability Incidents Accidents Cat

8 Predictive models are what set the premium level n Predictive models analyze n The probable frequency of losses n The probable severity of losses n Simulate a given year a very large number of times n Compute a premium taking into consideration n The expected loss level n The volatility of expected losses

9 Frequency Accident Frequency Size of Fleet Type of Aircraft Type of Aircraft Geography Underwriter Judgment Underwriter Judgment

10 Relative accident rates per region

11 Underwriter judgment : regional analysis n Climate and terrain n Infrastructure n Civil Aviation Authorities

12 Relative accident rates per aircraft type

13 Underwriter judgment : aircraft type n Aircraft age n Specific maintenance program n Specific equipment

14 Relative accident rates : size factor

15 Underwriter’s judgment : size n Operational argument n Budgets n Standard of operations n Financial issue n Premium volume n Payback

16 Claim severity : cost of life

17 Underwriter judgment : cost of life n Passenger nationality n Passenger profile n Specific legislation

18 Underwriter judgment : Relationship n Transparency n Risk visits n Updates n Continuity An attractive airline is an airline you can justify having insured the day after it had a major loss