Lead lines: uncharted waters

Aviation
| The European | 14th August 2019
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In 1924 a young pilot called Captain Charles Lamplugh formed an underwriting pool in London that he named The British Aviation Insurance Group. Civil Aviation was in its infancy, as was the business of insuring aircraft, so it made sense to share the capacity among a consortium of insurers in order to spread the volatility of an unpredictable risk.

For the early pioneers of aviation insurance almost every risk was new and unpredictable. How would the latest technical innovations perform? How should pilots be trained? What legal regime would apply to accidents involving international flights?

Ninety-five years on, aviation underwriters can draw upon a wealth of historical data and can rely on the performance of proven technologies and procedures. And yet the new and the unpredictable remain constant features of the risk landscape we cover. How, for example, should we approach the fledgling space tourism business? Or what about the prospect of autonomous flying taxis? (If you think that is mere science fiction, consider the fact that there are currently over 100 “urban mobility” projects in motion, many of them very well funded and supported by the big names in aerospace manufacturing.)

These types of developments may make us nervous, but aviation insurers have always been willing to make that leap of faith required for each new step change in the industry, and to respond to any unforeseen consequences that may arise.

The business of flying is a mature industry, but the risks associated with it are by no means static. Flight safety has improved dramatically, even in the last twenty years, but the technology of powerplants, airframes and systems continues to be pushed ever further, with both foreseeable and unforeseeable consequences for insurers.

We should not be surprised, for example, that repair costs for modern aircraft and their components are significantly higher than for their predecessors. Harder to predict have been the design and manufacturing issues which have only become apparent in service and which have resulted in costly grounding claims for both insurers and the industry. Then there have been the serious accidents which have resulted from the interaction between sophisticated aircraft systems and pilots responding to abnormal situations.

If we throw into the mix the recent phenomenon of nine figure jury awards for individual cases in the US (something not limited to the aviation world – just look at the recent Monsanto awards in California), we can see that aviation insurance represents a much more volatile risk exposure than the market’s behaviour during the recent soft market seemed to suggest.

And speaking of the soft market, that was something that none of us predicted correctly. Consider the numbers: between 2003 and 2017 worldwide airline passenger numbers increased by 139%. During the same period, worldwide airline hull and liability premiums reduced by 64% – in other words the cost of insurance per passenger carried fell by a staggering 85%. We had seen dramatic fluctuations in the cost of airline insurance in the past, but what we had never seen before was a soft market cycle sustained for 14 years. I remember that some underwriters started predicting a hardening of the market in late 2005, and even the most seasoned brokers were warning their clients to expect rate increases several years before they actually started to materialise in 2018.

So what next? I think it is important to understand that the changes we have seen thus far in the market environment have been driven largely by the unprofitability of the business over a number of years absent any major catastrophes. Aviation underwriters are now facing the prospect of a number of very expensive claims which are only beginning to be reserved and recognised in people’s books. Some of these claims will then
feed through to the reinsurance protections purchased by direct underwriters on an “excess loss” basis, and it can only be assumed that the cost of these reinsurance covers may rise substantially as they renew over the next year.

So make no mistake, there is more change to come – and probably not just on pricing – possibly a fundamental change in the way we have to approach certain coverages or certain types of risks. Maybe we will also see changes in the way in which programmes are structured and placed in the future.

Who knows? I do believe, however, that in spite of the sometimes irrational behaviour of the market as a whole, there will be enough creative thinking from both brokers and underwriters for us to find a genuinely constructive passage through the uncharted waters ahead.

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