Aviation


While it’s too soon to know how the crash of Asiana Airlines Flight 214 may affect the market for airline insurance, it’s important to recognize that the loss comes at a time when the industry’s overall claims level was exceptionally low, reflecting its investment in safety.

In its latest Q2 2013 Airline Insurance Market News, Aon had reported on the extremely low level of claims the market had seen up to the beginning of May 2013. This followed a 40 percent reduction in the cost of major losses in 2012.

For the year to the beginning of May 2013, the loss figure, excluding minor losses, was $107.63 million, which while up from the $32.17 million recorded at the same point in 2012, was still some 67 percent below the five-year average, Aon said.

Adding an estimate for minor losses, the overall loss total stood at $357.63 million, compared to $282.17 million in 2012.

Passenger and third party fatality levels were extremely low, with only 23 up until the beginning of May, compared to 214 on average for the same point between 1995 and 2012, Aon added.

Major losses in 2012 totaled US$324 million, nearly 40 percent less than the US$522 million recorded in 2011. Adding an estimate for minor losses, the overall estimated incurred claims total was US$924 million, down 20 percent against the US$1.13 billion total claims in 2011.

Despite the low level of claims and fatalities, Aon noted:

The airline industry still represents a considerable risk where a single loss could still mean that the claims statistics for 2013 overtake the long term average. Equally, as we have seen in the past, a string of incidents at the mid-point of the year can change the position significantly.”

Asia Insurance Review reports that the total insurance cover on the Boeing 777 aircraft owned by Asiana Airlines that crash landed at San Francisco international airport (SFO) on Saturday stands at $2.2 billion, according to the Financial Supervisory Service.

That amount includes coverage of $130 million on the aircraft hull and $3 million in crew liability coverage. Up to $2.2 billion may be paid out for facility damages and passenger casualties.

Some 291 passengers and 16 crew were on board when the aircraft crashed during its approach to the airport. The crash resulted in two fatalities and more than 180 injured.

Check out a summary of the incident by law firm Kreindler & Kreindler.

I.I.I. facts and stats on aviation are available here.

Rates in the airline insurance market continue to decline, despite rising exposures (average fleet values and passenger number forecasts), according to Aon’s Q3 2012 market update.

Aon reports that a high level of capacity continues to drive the soft market conditions, with healthy competition for attractive risks.

The low level of claims in 2011 and so far in 2012 is another key factor.

Including an estimate for minor losses, Aon says total claims for 2012 so far are 40 percent lower than the 1995-2011 average and 60 percent lower than the five year average.

By the numbers this puts the current overall loss figure so far this year at $426.6 million, compared to $466.7 million at the same point in 2011.

Aon comments:

Last year’s loss figures at this point in the year were also at a historic low, meaning that overall claims figures so far for 2012 are extremely positive.”

Adding:

It should be pointed out that the airline industry will always represent a considerable risk and that a single claim or string of claims can instantly change these statistics.”

Despite the soft market conditions, Aon says aviation underwriters remain highly selective of the risks they support.

Check out I.I.I. facts and stats on aviation.

As well as strong winds and heavy rains, hail – ranging from pea to baseball size – was a feature of the massive tornadoes that touched down in the Dallas Fort Worth area yesterday.

Specifically, the Dallas-Fort Worth international airport reported that more than 100 aircraft were damaged by hail, according to CNN.

Hail causes about $1 billion in damage to crops and property each year, according to the National Oceanic Atmospheric Administration (NOAA).

Pea size hail measures an estimated ¼ inch in diameter, while baseball size hail would measure about 2 ¾ inches.

The Insurance Information Institute (I.I.I.) reminds us that hail damage is covered under standard homeowners insurance. It is also covered under your auto policy provided you have comprehensive coverage.

Some insurers may have special deductibles in hail prone areas, to help keep insurance premiums at affordable levels.

Physical damage to aircraft as a result of hail would be covered under a hull insurance policy.

The I.I.I. reports there were over 9,000 major hail storms in 2010, according to statistics from NOAA’s Severe Storms database. Texas had the largest number of severe hail events in 2010, followed by Kansas, Missouri, Nebraska and Oklahoma.

Learn how to protect your home from hail in this I.I.I. video:

The airline insurance sector appears to have incurred more claims than premium once again in 2010, according to Aon’s January 2011 Airline Insurance Market News.

But the majority of airlines continue to take steps to reduce losses, despite continued upward movement in average claims values.

Aon’s preliminary estimates suggest that total claims in 2010 breached the $2 billion level for the third time in four years.

The market incurred an estimated $2.1 billion in total losses in 2010, while lead premium for 2010 looks to be just above $1.9 billion. This means a significant shortfall for underwriters even before reinsurance and fixed costs.

But while 2010 saw significant claims, the data is not universally negative.

For example, Aon notes that some 601 airline-related fatalities occurred in 2010, compared to the long term average of 621.

While this could simply be a statistical anomaly, the fact that fatality rates have been below the average in all of the last five years does at least suggest an improvement.”

Aon hints at a shift to fewer but more expensive claims, noting that between 1995 and 2009 there were 67 claims on average that met the criteria for inclusion in its statistical analysis. Three of the last five years has seen the number of losses fall below this number, however.

Aon concludes:

Statistics can be used to justify any position that anyone chooses to take, and while the claims value average figures may continue to point upwards, the majority of airlines continue to take steps to reduce losses and ultimately insurance claims.”

Check out I.I.I. facts and stats on aviation.

Conditions in the airline insurance market have been getting calmer throughout 2010 and the market appears to be stabilizing, according to Aon’s Airline Insurance Market Indicators 2010/11 report.

While lead hull and liability prices continue to rise, the increases are tending to be lower than exposure growth, Aon says. This means that in real terms, the cost of airline insurance is falling.

At this point, it seems that there is the prospect of a stable or even soft insurance market for the rest of 2010 and into 2011, which will be welcome news after the difficulties that the airline industry has endured over the last couple of years.”

Aon reports that between January and July 2010, average lead hull and liability premium rose by 7 percent, average fleet values grew 9 percent and average passenger forecasts grew by 13 percent.

Nevertheless, the airline insurance market is perilously close to suffering a fourth consecutive year without return. Why?

A string of major losses since May has now put the 2010 claims level well above the long term average. Aon notes that total claims so far this year excluding minor losses are $996 million, compared to a long term average of $612 million.

If there are no more major losses during 2010, Aon estimates total losses for the year including minor losses will be in the region of $1.8 billion, while total lead hull and liability premium for the year will be just over $2 billion.

Taking fixed costs into account, this means that there is a very real possibility that the airline insurance market will make a loss for a fourth consecutive year.”

If this is the case Aon suggests that commitment to the sector may fall in 2011 and prices could rise as a result.

Check out I.I.I. aviation facts and stats.

The eruption of the Eyjafjallajökull volcano in Iceland has left the aviation industry reeling, but from the perspective of the insurance markets, the position is relatively clear, according to Aon’s May 2010 Airline Insurance Market News.

Aon notes that successful claims against standard airline liability insurance policies due to delays as a result of the volcanic eruption in Iceland are unlikely. The main reason for this is that this is a natural event and there has not been any actual damage to aircraft or property at this stage.

The picture is similar from the business interruption point of view. Stephen Cross, CEO, Aon Global Risk Consulting, says:

Typically, business interruption (BI) policies will most likely not be responding to the disruption to airspace caused by the volcanic ash. BI policies usually only kick in when there is physical damage. If ash falls to earth and lands on a business’ premises and causes damage, blocking air pipes that could lead to an explosion for example, then that could trigger a resulting BI policy.”

However, Cross says it’s important to note that insurance policies vary and a firm should always ensure they study their own policy language in determining whether they are able to claim on their insurance cover. Work continues on developing BI cover to make it more relevant and bring it into the 21st century, he adds.

Supply chain management is another critical area. Cross observes that it is the companies that have an effective plan for disruption that are likely to get back on their feet quickly:

While you can’t plan for every eventuality, especially rare occurrences as volcanic eruption, the fundamental principles of sound supply chain management still apply: you should always be aware of what business continuity measures your suppliers of critical inputs have in place and be thinking about alternative suppliers.”

Check out I.I.I. facts and stats on volcanoes and aviation.

Spare a thought for the tens of thousands of passengers (including I.I.I. president Dr. Robert Hartwig) stranded at airports across Europe as the continued eruption of a volcano beneath Iceland’s Eyjafjallajokull glacier grounded thousands of flights for the second consecutive day. According to an Associated Press report, Eurocontrol, the European air traffic agency, said half a dozen European nations have closed their airspaces and 60 percent of European flights would not operate with delays continuing into Saturday. Only 11,000 of the 28,000 flights on an average day were expected to take place Friday in European airspace, while about 100 trans-Atlantic flights arrived of the 300 typically expected. As for insurance implications, in a Reuters report via InsuranceJournal.com, several European reinsurers noted that the airlines typically are not insured against cancellations. In an article at BusinessWeek.com several insurers state that business interruption policies for airlines and airports would be triggered only if there is physical damage to equipment. An online article at National Underwriter quotes Gordon Woo at Risk Management Solutions saying that payouts from Iceland’s national natural catastrophe fund could follow if there is property damage. Aside from the significant travel disruption, the event highlights the point that even though many volcanoes with the potential to erupt are located where they can cause major damage and losses, the volcanic threat appears to attract little attention relative to other natural hazards. According to the 2009 Hazard and Risk Science Review from Aon Benfield and Partner Re research on the impacts of volcanic eruptions continues to grow. It’s worth noting that here in the United States volcanic eruption is a covered cause of loss under homeowners and business insurance policies. Check out State Farm’s info on insurance and volcano damage on what is and isn’t covered. Check out I.I.I. facts and stats on volcanoes.

Investigations continue into the plane crash that killed Polish president Lech Kaczynski and some of the country’s top political and military personnel on Saturday. According to reports, the Tupolev 154 aircraft en route from Warsaw to Smolensk crashed as it tried to land in foggy conditions about 1.5 km from Smolensk airport in Western Russia. All 97 people on board were killed, including Poland’s deputy foreign minister, a dozen members of Parliament, the chiefs of the army and the navy and its Central Bank governor. An April 12 New York Times article observes that investigators examining the crash appear to be focusing on why the pilot did not heed instructions from air traffic controllers to give up trying to land in bad weather. The NYT reports: “Their inquiry may lead to an even more delicate question: whether the pilot had felt under pressure to land to make sure that the Polish delegation would not be late for a ceremony on Saturday in the Katyn forest, where more than 20,000 Polish officers and others were massacred by the Soviets during World War II.” A tweet from Reinsurance Magazine, linking to an article at Postonline.co.uk cites reinsurance sources noting the crash is not thought to have been insured in the Lloyd’s market. Check out I.I.I. aviation facts and stats.

Hull and liability premium prices in the airline insurance market are likely to continue to rise in 2010, but the rate of increase could slow as a result of the high level of capacity that is still available, according to Aon’s Airline Insurance Market Outlook 2010. Aon says there are a number of reasons why the price rises are not likely to continue at the same rate in 2010. Firstly, while average lead hull and liability premium in the airline insurance market rose by 20 percent during 2009, taking total lead hull and liability to $1.9 billion, average annual claims over 10 years came to $1.8 billion. This means the airline insurance market’s current level is now enough to comfortably cover claims in an ordinary year, according Aon. Still as 2009 has proved, there is always the potential that there will be an extraordinary level of claims in a given year (total estimated claims for 2009 came to $2.3 billion), but overall the hard markets have now served their purpose and prices have risen to the point they need to be to ensure that total premium and average claims are roughly in balance. Proof that the markets have reached the equilibrium point comes from the fact that some underwriters that were holding back capacity in 2008 and 2009 are now being encouraged to participate on airline insurance programs, Aon notes. New capacity is also being attracted to the sector, a fairly sure sign that prices have reached the appropriate level. Equally, while 2009 was, hopefully, an exceptional year in terms of airline claims, the fact that the actual number of losses was relatively limited should mean that a smaller number of airline underwriters will have taken a hit on their airline books of business, Aon believes. Check out I.I.I. aviation facts and stats.

In a recent post we discussed how aviation losses outweighed premiums in 2009, despite a relatively safe year for the airline industry last year. With the crash of Ethiopian Airlines flight 409 early this morning into the Mediterranean Sea off Lebanon’s south coast aviation insurers appear to have been hit with their first major loss of 2010. The Boeing 737-800, en route to Addis Ababa, crashed shortly after take-off from Beirut after losing contact with airport control amid stormy weather. According to media reports, a total of 90 passengers and crew were on board, including Marla Pietton, wife of the French ambassador to Lebanon. As of yet, no survivors have been found. While it is too soon to speculate on the cause of the crash, several reports quote Lebanese President Michel Suleiman saying a terrorist attack is unlikely. “Sabotage is ruled out as of now,” he said. Others report on the stormy weather conditions in Lebanon at the time, including thunder, lightning and heavy rain. Global Reinsurance has a story on the crash, including some information on the insurance implications. It reports that 54 of those on board were Lebanese. Others on board were citizens of various countries including Ethiopia, Britain, Canada, Russia, France, Iraq and Syria. Check out I.I.I. aviation facts and stats.

Next Page »