According to the research by Aon's London-based Aviation division, in 2003 the airline industry saw the lowest level of losses in modern aviation history and an 18 percent reduction in insurance rates compared to 2002.

Overall insurance premium volume for the top 182 airlines fell to an estimated $2.65 billion in 2003 from $3.2 billion in 2002. Aon said that underwriters and capital providers have set the market's minimum premium volume at $2.5 billion, which is viewed as the "acceptable limit" for the market to remain healthy.

Capacity is at 171 percent, but Aon cautioned that more underwriters may seek to leave the market in 2004. In part, airline industry consolidations are having an impact on carrier decisions. As airline carriers, notably outside of the U.S., create alliances and consolidate their businesses, it does not bode well for new business potential, Aon warned.

It also could mean the elimination of current insurance programs among some of the airlines, the report points out.

Some brokers, Aon said, are examining a realignment their business, either by securing other books or reducing their interest in the line.

Discussing terrorism and war risk, Aon said it is unaware of any carrier that has purchased a policy under the Terrorism Risk Insurance Act. The hull war market saw an average rate reduction of 33 percent, similar to the reasons as other renewals, overcapacity and low loss levels.

"Despite the reducing levels of premium, the future direction of the aviation insurance market remains uncertain," said Doug Peterson, chairman of Aon's Aviation division, in a statement. "With the ever-present potential for further losses, insurers pulling out of the market and the growing impact of terrorism, the aviation insurance market is in a precarious position. It is unlikely that insurers will maintain 2003 premium rate reductions."