On Flying Safely

An average passenger on a Western built Jet can now expect 5.3 million incident-free flights
An average passenger on a Western built Jet can now expect 5.3 million incident-free flights

The grounding two weeks ago of all fifty Dreamliner 787 aircraft just a little over a year since Boeing launched their latest model has sent a few shock-waves around the aerospace industry. A battery problem that seems to have caused an on-board fire in US and worse still an emergency landing in Japan will also unnerve aviation insurance underwriters who have been enjoying a period of relative calm. The last airline claim to have a significant impact on the market was back in June 2009 when a combination of faulty sensors and pilot error caused an Air France passenger jet to crash en-route from Rio de Janeiro killing all 228 on board. Since that tragedy, the loss experience for the aviation market has steadily improved.

In fact 2012 was the safest year for air travel since 1945. As reported in The Economist better instruments, more rigorous maintenance, improved training and the roll up of overlapping requirements into a single IATA operational audit programme have all contributed to the huge improvement in aviation safety. It is too soon to say that this all represents a paradigm shift in the risk profile of flying but already positive sentiment towards the sector is encouraging insurers, like Beazley who commenced underwriting in June, to become more active. According to broker Guy Carpenter the theoretical market capacity now stands at 237% of what is required to cover a combined single limit of $1.5 billion for a Non-US major airline.

Inevitably over-capacity is having an impact on pricing. The major renewal season for airlines was in November and rates fell on average by at least 10% and this follows reductions in the preceding two years. Recovering from the 2008 recession, passenger numbers and fleet values are now increasing once more but this is not translating into higher premium volumes for underwriters.  As another leading aviation broker JLT points out, insurers are gifting about 50-60% of growth free for good airlines: in other words, mostly ignoring the additional risk that the extra number of flights represents.

In the current climate, perhaps complacency is the biggest risk of all. The overall pool of premium in the market is still barely enough in the aggregate to meet the costs of a large catastrophic loss; underwriters’ results could therefore change overnight. Furthermore the IATA statistics also suggest that in Africa, parts of South East Asia and the former countries of the Soviet Bloc where turbo-prop fleets are aging, traffic control is weak and regulation poor, airline safety is probably deteriorating. That only three of the 23 hull losses in 2012 involved Western built jets and two of those in Accra and Lagos were owned by unaudited African carriers, starkly illustrates the contrast in geographic performance now emerging.

Not always known for their caution but in the soft market conditions currently, success will probably favour those aviation underwriters who manage their line sizes judiciously; select risks carefully and diversify their portfolio away from a complete reliance on the airlines for their revenue.

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