Commercial airlines can expect minimum premiums and accelerating rate increases at upcoming insurance renewals during what are expected to be difficult end-of-year negotiations.
The prolonged downturn in air travel brought on by COVID-19 has led to widespread layups of aircraft resulting in dramatically reduced exposures for insurers making it more urgent for them to protect their premium base.
Aviation market premium is estimated to be down by close to 40% due to the COVID-19-related travel slump, market sources say.
However, while exposures are down, insurers are still paying significant claims with reduced funding, said Jeff Bruno, Parsippany, New Jersey-based president and chief underwriting officer at Global Aerospace Inc.
Significant claims in 2020 include the shooting down of a Ukrainian International Airlines 737-800 in January, the crash of a Pakistani International Airlines Airbus A320 on approach to Karachi airport in February, a fire on board an Ethiopian Airlines Boeing 777 on the ground in Shanghai in July, and the crash of an Air India Express plane after it skidded off the runway in Kerala state in August.
Several other hull claims have also occurred that have not been as widely publicized, in addition to attritional losses, such as claims from grounded aircraft, experts say.
“The issue is underwriters need an aggregate revenue amount that covers rising claims and reinsurance costs, so rates are rising, and minimum premiums are being applied,” Mr. Bruno said.
Estimated worldwide airline premium on a net basis was around $1.9 billion in the fourth quarter of 2019, according to Brad Meinhardt, Las Vegas-based managing director of Arthur J. Gallagher Inc.’s aerospace practice. “Unfortunately, with the impact of COVID you’re going to see a lot of that money coming back.”
In this environment, there is no such thing as no rate increase, Mr. Meinhardt said. It is a “super hard market,” but minimum premiums are the most significant issue coming up for airlines in the fourth quarter, he said.
Minimum premiums are already being applied in the market, according to Mr. Meinhardt.
“Irrespective of what happens in the world and irrespective of return provisions like layup credits,” insurers want a minimum premium, such as 80% of the premium that they quote, he said.
Minimum premiums are one way for underwriters to ensure they get appropriate premium coverage for the risk, regardless of how much exposures drop, said Jason Saunders, Atlanta-based president of Willis Towers Watson Aerospace, a unit of Willis Towers Watson PLC.
Many renewal discussions are beginning earlier than in the past, and the idea of minimum premiums is being discussed, Mr. Saunders said. “We really don’t know what the end game is for COVID and what its impact will be on the airline industry,” he said.
David Beyer, director of risk management at Alaska Air Group Inc. companies, based in Seattle, said minimum premiums are not something that has been experienced in the past on aviation renewals.
“I expect it will be a negotiating point for a renewed policy,” Mr. Beyer said. “I do understand where the insurers are coming from and wanting a guarantee and we’ll just have to see how that plays out in the negotiating process.”
Mr. Beyer expects capacity changes in the aviation insurance marketplace come December or during the fourth-quarter renewal.
As passenger numbers have declined, so the amount of insurable risk going into the aviation market is much lower, he said.
“I would assume that insurers are going to want to increase rates to try and make up some of the revenue that they would be losing insuring on a renewal rate basis, but we’re not there yet. Those conversations don’t occur until November in a typical market,” Mr. Beyer said.
Unlike some other airlines in the worldwide marketplace, Alaska Airlines hasn’t been a “loss-intensive carrier,” so it has been somewhat insulated from the rate pressure other airlines may have seen, he said.
“There have been some increases, and some decreases, the last few years. It’s a typical market of ups and downs,” he said.
The challenge is that while the aviation insurance industry is trying to make a profit after eight consecutive years of losses, the airline industry is “literally fighting for its survival,” Mr. Saunders said.
“Trying to get one to understand the needs of the other is going to be difficult if both sides don’t listen. … The aviation insurance community has been quite flexible in its approach — some more than others — to assist airline clients during this unprecedented time,” he said.
Insurers have been professional in explaining why they need rate increases and the pressures that they are under, said Brian Glod, New York-based U.S. aviation practice leader at Marsh LLC.
The airline market is seeing a wide range of rate increases, with insurers, and even single insurers, treating different segments of the market differently, he said.
In general, rate increases are more than double-digit or at least double-digit, Mr. Glod said. “We have a situation where it could become emotional, and if it becomes emotional by buyer or insurer it’s a powder keg,” he said.
It’s unfortunate that rates have to rise when customers are facing challenges, but airline underwriters have been through a sustained period of unprofitability, Mr. Bruno said.
“The upward movement in rating is part of the market turn that started before the COVID crisis,” he said.
Airline rates have been rising about 30% on average and that trend line continues anywhere in the range of 20% to 35%, with minimum premiums applied, Mr. Bruno said.
Meanwhile, insurers are scrutinizing airline accounts more closely, and aggregation risks due to idled aircraft have drawn more questions, brokers say.
Early in the pandemic almost every underwriter raised concerns about aggregation risks, Mr. Glod said.
In the U.S. the losses didn’t mount as much as they potentially could have as airlines brought aircraft back into service, or perhaps retired aircraft altogether, he said.
The focus tended to be outside the U.S., where values, for example for blue-chip airlines in the Middle East, could be close to $20 billion versus a couple of billion dollars in aircraft in any one location in the U.S.
However, the issue remains a concern, and “we still get questions,” Mr. Glod said.
As the pandemic intensified in the earlier part of the year, Alaska Airlines, like most others, parked some of its fleet, Mr. Beyer said.
“We took a scientific approach of choosing where we were going to park planes to make sense for us so that they would be spread throughout the U.S. in locations that we had established maintenance facilities,” he said. “We divided them, so we didn’t have too large numbers at any location.”
