Willis Aerospace Says Manufacturers Paying More than Fair Share

May 27, 2009

A report from Willis Aerospace asserts that, “aerospace product manufacturers are bearing a disproportionate share of aviation market premium, considering the record profits insurers derive from the sector and its loss history compared with the airline sector.”

The report, the sixth annual Willis Aviation Products Market Review, challenges insurers for holding the line on further rate reductions for the sector in 2009.

“Against a backdrop of record profits in 2008 – the seventh consecutive year of rising insurer profitability in the sector, according to the Willis Manufacturer Index – many insurers are refusing to budge on further rate reductions this year, after lowering premiums four percent last year,” the report concludes. “Willis argues against that position, reminding insurers that the aerospace manufacturing sector accounted for 37 percent of total aviation market premium in 2008, even though over the last decade, the sector was responsible for only 18 percent of claims, versus 82 percent for the airline sector.”

Andre Clerc, Chairman, Willis Aerospace, added: “On behalf of our clients and all manufacturers worldwide, our report serves to remind insurers of their previous decision to have different rating models for aerospace manufacturers and airlines. Whilst we can all appreciate a change in insurers’ reinsurance and capital acquisition costs due to current economic trading conditions, manufacturers should not be considered in the same fashion as airlines, particularly when in the last two years it has been the aerospace manufacturers’ sector that provided the greater share of profit/premium credit to the overall aviation market.”

The review states that the airline sector has been notably less profitable for insurers over the past two years and that consequently premium/rate increases were applied from the fourth quarter of 2008. In stark contrast, however, “Willis notes that the aerospace manufacturers’ sector continued to deliver growing profitability to insurers, although the broker observed that some insurers started hardening their attitudes towards this sector in the latter part of 2008.

“Importantly, the report refers to the fact that at the end of 2002, insurers made a conscious decision to review the aerospace manufacturer and airline sectors separately. The result of this decision saw aerospace manufacturers’ premiums rise for a further two years as airline premiums continued to decline.”

Craig Davie, Willis Aerospace Practice Leader, pointed out: “It seems to us that some insurers have forgotten this decision and have combined their premium rating strategies for aerospace manufacturers together with that of the airline sector.”

The incurred claims experience of the Willis Manufacturers Index, contained in the report, found that:
— Since 2004, 40 percent of incurred losses relate to hull damage or short tail losses.
— Known losses appear to have limited potential for major deterioration while the cumulative loss ratio is at its lowest point for 15 years.
— The credit balance, in favor of insurers, amounts to approximately US$2.5 billion.

Commenting on these findings, Davie queried: “Are insurers recognizing the reasonably mature and non-catastrophic claims environment and most importantly, are they re-adjusting their actuarial rating and underwriting models accordingly?”

Source: Willis Group Holdings – www.willis.com

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