Hurricanes Slow Aviation Premium Cuts, Report Says

October 14, 2005

The decline in airline insurance premium rates will slow during the October to December renewal season, despite a good industry safety record in 2005, according to the “Airline Insurance Market Review,” a new report from Aon.

The Aon report provides a broad overview of the market between January and August and addresses key issues of this year’s renewal season, including the growing number of low cost and budget airlines that have entered the market, the hull war market, aviation legal liability and the impact of insurance and oil prices on the airline sector’s bottom line.

The aviation sector has seen limited direct damage from the devastating hurricane season in the southern states of America, but the knock-on effect is that underwriters will try and end this year’s run of premium reductions, which have averaged at 7 percent for liability and hull insurance combined. Instead, there is likely to be a decline in premium reductions with certain aviation insurers already claiming that their aviation reinsurance costs have increased.

Year-to-date hull and liability premiums stand at over $530 million, a reduction of 15 percent for hull and 13 percent for liability rates, in comparison to nearly $575 million for January to September 2004. With the bulk of renewals taking place in the last quarter plus increased fleet values and thus exposure, premium volumes are expected to edge closer to $2 billion.

The expected reduction of over 15 percent, from $2.4 billion in 2004, is partly the result of consolidation between airlines such as Sterling Airways and Maersk Air, US Airways and America West Airlines, Swiss and Lufthansa, as well as changes such as ABX Air being included in the DHL-led cargo airline pool.

Hull losses for the first eight months of 2005 totalled $430.5 million, decreasing 14 percent from $503 million for August 2004 which went on to become one of the industry’s safest years. This strong safety record meant that there is little evidence that the five major airline crashes in August will have a significant impact on renewal premiums. While the safety record has not had an impact, however, the hurricane season has.

Doug Peterson, Aon Aviation Global Practice Leader, said: “The change in the aviation reinsurance market highlights how the insurance sector has had to react to situations beyond its control, in this case Hurricanes Katrina and Rita. The airline industry itself, however, has responded positively to a variety of changes and challenges, such as high oil costs, the vocal environmental lobby and the rise of the low cost sector. Against this background, and despite the five major losses in August, the industry has also continued to maintain its excellent safety record.”

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