Airlines Insurance Market: Pricing and Risk Update – Q1 2021

The airlines insurance market was challenging in the first quarter of 2021, and will likely remain so for the near term, continuing a trend that began in the fourth quarter of 2018. Rate increases have been driven in part by the fallout from the COVID-19 pandemic, challenging insurance market conditions across all major product lines, and factors unique to the airlines market as well as the wider aviation insurance market.

Five factors driving airline insurance pricing

Pricing trends in the airlines sector in the first quarter of 2021 can be viewed in light of a number of factors, including:

1. Market unprofitability. Airline insurer profits in 2020 were not sufficient to make up for cumulative losses of the preceding seven years. The continued high volume of attritional losses leaves insurer profit vulnerable should there be a catastrophic event.

2.  Market claims. Recent issues with original equipment manufacturers (OEMs) and major space losses from 2019 have affected the overall aviation insurance market. Although 2020 was the second-safest year on record regarding accident rate and fatalities, safety was driven by a significant reduction in exposures due to COVID-19. Attritional losses were estimated at approximately US$700 million in 2019, and are expected to increase yearly due to new technology and increased liability awards.

3.  Market instability. Generally, aviation premiums currently cover only attritional losses. Major losses for airline insurers, combined with events elsewhere in the aviation industry, have led to realignment and pricing increases. With flying expected to increase in 2021-2022, there are concerns regarding the effectiveness of flight crews and engineering personnel following long periods of furlough.

4.  Insurance capacity. From early 2020 to the end of March 2021, competitive capacity has continually reduced. The sentiment at the end of the first quarter 2021 was that insurers typically reduced the amount of risk they will underwrite if they perceive pricing as being too low.

5. Lead and support market pricing.  Lead insurers generally are committed to increasing pricing; however, they are differentiating among risks. Loss-affected airlines are typically encountering higher pricing. Underwriters are increasingly focused on the quality of the risk. Supporting markets are seeking to obtain terms closer to, or exceeding, leaders.

Impact of COVID-19 on airline insurance

Airlines have been among the industries hardest hit by the pandemic. As of February 2021, the number of international (long haul) flights remained low, with no growth in sight as the world deals with emerging virus variants and potential third and even fourth waves. Domestic (short haul) capacity was gradually being reintroduced, but fell as cases rose in early 2021.

In light of airline cash flow issues due to the pandemic, some insurers are willing to reconsider payment terms, though this is occurring only sparingly based on individual circumstances and reviews. Airline insurance pricing will likely continue to increase due to the persistent loss activity of the last seven years. Groundings have reduced exposure, while the premium base remains broadly similar. Reduced operational activity likely means a lower probability of catastrophic losses and attritional incidents.

Among the responses to COVID-19 that affect airline insureds:

  • The airline industry loss from the pandemic is projected at US$84 billion, according to the International Air Transport Association (IATA), which expects the industry to rebound to 2019 levels by 2023-2024.
  • Airlines are retiring/storing older aircraft and using newer, more efficient aircraft for flights, laying off and/or furloughing staff, operating cargo flights on passenger aircraft, and offering deals to consumers on future flights.
  • Airline manufacturers are reducing output, cutting staff, developing more hygienic cabin offerings, and supporting airlines with deferrals on deliveries.
  • Aircraft lessors are supporting airlines with payment deferrals on a case-by-case basis, and engaging in sale-leasebacks to help airlines with cash flow.

Five steps to a successful airline insurance renewal

1. Prepare and start early.

With increased management scrutiny, underwriters are becoming more selective and asking for significant, detailed information. It’s important to understand the key information that insurers will require, and to allow adequate time for negotiation.

2. Understand your priorities.

In a challenging market, it’s important to know your priorities. For example, which is more important to you: breadth of coverage, maximising the sum insured, minimising the level of self-insured retention, or the overall premium spend? Having a clear strategy in place before commencing negotiations with insurers will be helpful.

3. Respect long-term relationships, but challenge the status quo.

A strong, long-term relationship with a lead insurer can help bring beneficial results at renewal. Still, it is important to understand the context of your renewal quote and whether it might be beneficial to seek alternative lead quotations. Try to build a relationship with at least one following market that could “step up” if there is an insurmountable issue with the incumbent lead.

4. Differentiate through risk management.

Share with underwriters the details of risk management policies and procedures you in have in place, with specific reference to how they mitigate exposures. Insurers now are particularly interested in how organisations plan to return safely to normal following COVID-19.

5. Use Marsh Specialty’s expertise.

Marsh Specialty has vast experience in the airline insurance sector. Our specialists will work with you, providing clear, considered advice to develop an effective renewal strategy. Our data and analytics capabilities will allow you to understand your programme in the context of the wider market.

Disclaimer: Marsh India Insurance Brokers Pvt Ltd is a subsidiary of Marsh McLennan.

Marsh India Insurance Brokers Pvt. Ltd. having corporate and the registered office at 1201-02, Tower 2, One World Center, Plot-841, Jupiter Textile Compound Mills, Senapati Bapat Marg, Elphinstone Road (W), Mumbai 400 013 is registered as a composite broker with Insurance and Regulatory Development Authority of India (IRDAI). Its license no. is 120 and is valid from 03/03/2021 to 02/03/2024. CIN: U66010MH2002PTC138276.