Aviation reinsurance is on the ascent, driven by spillover from primary underwriting, recent loss experience, and disruption among underwriters and brokers. Reinsurers are expected to push hard for improved terms and conditions during upcoming renewals.
For several years aviation reinsurers and their ceding customers have struggled with declining rates and a relatively static risk pool that has driven price-competition among carriers aiming to protect their top lines. Meanwhile large losses have crashed through the bottom lines of many, including at least $1.25 billion from the world-wide grounding of the Boeing 737 Max aircraft.
Original aviation business pricing has risen for the past year or so, by as much as 25% for some accounts. Most of this improvement was the result of the broad non-life commercial market strengthening that followed significant catastrophe losses and widespread capacity withdrawals from multiple lines in 2017/18. However, these factors did not change the aviation reinsurance market significantly. Risk-adjusted aviation reinsurance rates were largely flat in the first six months of 2019, although proportional reinsurers began to benefit from increased original rates.
Meanwhile, a substantial amount of capital has been withdrawn from aviation reinsurance. Exits have been notable at Lloyd’s, including MS Amlin’s surprise withdrawal from airlines and products, and other Lloyd’s players following the market’s ‘Decile 10’ review. That tightening of supply, alongside the impact of multiple losses including the Boeing claim, had fuelled reinsurance pricing optimism. At the mid-year renewals, however, as clarity developed around the ultimate cost of larger losses, brokers sought flat risk-adjusted pricing. They were often successful, with rate hikes were limited primarily to loss-hit excess reinsurance layers.
With further losses and loss development, that experience is unlikely to be repeated. Upwards pricing momentum now permeates the aviation reinsurance market. We expect that quotations for 1 January programmes will land with 10% or even 20% rises proposed, although the prices cedants ultimate pay are likely to be lower, because brokers will advocate vigourously on their clients’ behalf.
Cedants with significant manufacturer exposures are likely to feel the most pressure, as reinsurers count the cost of the Boeing Max loss. Reinsurance markets at the top end of programmes are also likely to seek meaningful increases in minimum rates on line. Meanwhile capacity has stabilised. No flood of new capital is expected as the year draws to a close. That boosts reinsurers’ ability to increase rates, although cedants with long-standing reinsurance relationships may achieve a loyalty bonus.
In contrast, new entrants have been attracted to the aviation insurance market by its rising rate profile. If any of these make a big play for market share, they could overturn the delicate balance that has yielded original rate rises. Almost everyone expects that such capacity will be deployed in support of recent months’ pricing momentum, rather than against it, but the outcome is uncertain. In aviation, any hard-won pricing balance is a fragile achievement.