Aviation insurance underwriters are in for a bumpy ride
Excess capacity and new exposures are forcing underwriters to rethink how they write aviation risk.
Overcapacity, soft pricing and attritional losses have transformed the aviation market from a reliably profitable sector into a no-man’s land of virtually no margin for the last few years, with little relief in sight.
Experts in the field note that despite high-profile incidents such as the April 17 disaster of Southwest Airlines Flight 1380 (in which an engine failure resulted in one passenger’s death), too much capacity remains in the market for even a sustained string of major catastrophes to spur pricing.
Terry Rolfe, global head of aviation for New York broker Integro, says that catastrophe losses in other marketplaces — namely, some $100 billion in insured losses from Hurricanes Harvey, Irma and Maria and the devastating California wildfires and flooding in Houston — are pushing insurers to raise rates wherever they can, even in aviation. “We are looking at small increases of 1% to 3%, depending on losses. Until we see a significant consolidation of capital, we will not see a hardening of this market.”
“The biggest issue is that reinsurance has been flowing freely into aviation for a long time,” explains Shan Rogers, director of the national aviation practice for Chicago-based wholesaler RT Specialty. “Aviation has a reasonable loss rate, which makes it an attractive reinsurance market. So the money flows in, everything is cheap and the prices drop.” Most carriers, he adds, are looking for rate increases of 5% to 15% this year, but not all will find them thanks to continued competition for high-quality accounts.
Paul Tuhy, chief underwriting officer of global aerospace for XL Catlin, remains cautiously optimistic that rates will increase in the near future. “People have utilized redundant reserves to maintain their head above water until attritional losses catch up to the market,” he explains. “Now, they have added up.” Across the board, he predicts rates to range from flat to a 5% increase, depending on loss history.
“Universally, across the market, everyone agrees that rates are too low. Everyone says that. The carriers, the brokers, even the insureds themselves,” says Steve Allen, head of aviation at Sydney, Australia-based insurer QBE. “In our discussions with brokers and insurers, we expect 5% to 10% rate increases from 2018, and we are getting little to no pushback on that.”
Cyber coverage gaps
Whether it’s business interruption caused by the hacking of a passenger booking system, physical damage caused by taking certain mechanical processes offline, or reducing the value of a fleet of aircraft by compromising their electronic logbooks, cyber exposures have become aviation risks.
“There is a high degree of awareness in the airline industry about this risk. What is lacking is the insurance market,” says Joshua Motta, CEO of Coaliton, a San Francisco-based cybersecurity and cyber insurance provider. “The aviation underwriter has very little awareness of how cyberattacks work, who the actors are, or what controls to put in place to prevent a data breach or physical cyberattack. Meanwhile, the underwriters who do specialize in this risk don’t provide coverage for some of the risks that the aviation industry has.”
The real issue lies in policy wording: Most aviation policies don’t specifically exclude losses from cyber risks, and most cyber policies don’t specifically exclude physical aviation losses. That creates a gray area in coverage.
Steven Anderson, product executive, privacy and network security for QBE, heads that company’s cyber business and works closely with Steve Allen in aviation to provide seamless coverage. But it’s not easy.
“What a lot of carriers pitch, especially with aviation and cyber, is that you’d like to have the same carrier on the same policies,” Anderson notes. “It’s like having Home/Life/Auto with the same carrier — you’re more likely to get more attention, faster claims payments, better terms, etc.”
The take-up rate with cyber is increasing among aviation clients, he adds, and insurers are focusing on providing creative risk management solutions — such as data breach response, forensics, legal and PR — to help their clients better manage risk on the front end.
Still, the capacity glut can be felt here, too, and the Coalition’s Motta notes that they’re seeing rate increases of up to 5% for smaller clients.
Drones are a game-changer
Eventually, the Federal Aviation Administration will allow drone operators to fly their aircraft beyond line of sight. When that happens, says Rogers, the drone market will expand dramatically.
“We’re talking about multimillion dollar drones that can fly to 80,000 feet, and essentially act like near-Earth satellites without the launch costs and can fly for months at a time.”
Drones acting as satellites will require data links between drones and ground facilities, as well as additional facilities themselves to hangar, maintain and operate the equipment. “Drones can get really expensive really fast, and the system costs are often five to 10 times the cost of the drone itself,” Rogers says, pointing to potentially huge insurance opportunities.
At the moment, though, most drones are personal devices still best folded into a Homeowners policy, says Tuhy. Larger drones that are part of a commercial fleet might fold into specialty coverage for the industry they serve, such as construction firms using them to survey build sites, or energy firms using them to inspect equipment or transmission lines. Ultimately, the market will segmentize it according to type of use.
“We have to wait and see what the future guidelines are on drones,” says Tuhy. “Then, it will become similar to underwriting aviation risk and [asking] who is flying them. What are their credentials and experience/?” While this is still an evolving market without a lot of loss experience to draw upon, Tuhy said that if forced to choose between writing drones and writing helicopters (a segment that has suffered a large number of big losses recently), “I’d take the drone.”
The M&A factor
The $4.28 billion merger of XL and Catlin in 2015 could have been a bellwether event for the sector, but both sides of that transaction maintained their relative books of aviation business. Even now, as AXA and XL enter into a $15.3 billion merger, sources say it’s still too early to tell what kind of changes said union would really have on the market.
“There has been significant consolidation since 2015,” says QBE’s Steve Allen, referring to mergers and acquisitions between Arthur J. Gallagher & Co. and NationAir; Ace and Chubb; and Willis and Towers Watson, in addition to XL, Catlin and AXA. “You’ll continue to see smaller specialty brokers being acquired by a few of the larger ones.”
In the niche markets space, such as drones and excess, the biggest recent shakeup was Aerospace’s straight purchase of Meadowbrook in 2016, says Shan Rogers at RT Specialty. Since then, Aerospace has merged with Hallmark, reducing the niche aviation markets to just two players: Aerospace and Great American.
According to Integro’s Terry Rolfe, soft market conditions are pushing brokers that might otherwise be content with their book of business to buy smaller specialists on the premise that a future hardening of the market will justify the investment.
Making hay in a soft market
For now, the antidote to soft pricing lies with sharper underwriting. But that is easier said than done, says Integro’s Rolfe, who notes that in any prolonged soft market, underwriting skill tends to erode: “We have an entire generation that have come up without having to deal with any real consideration of underwriting. They are not having to have those difficult conversations about why a product costs what it costs.”
“In a soft market, it is really incumbent to be disciplined in your underwriting approach. You do not want to be caught in a death spiral of decreasing premium,” says QBE’s Allen. He cautions against placing top-line deliverables on underwriters, which adds premiums on the books in the short term but will cause problems over time with unsustainable loss ratios. “If you can focus on profitability, the bottom line, and walk away from underpriced risks, that’s how you can mitigate a soft market.”
“A big thing for us is looking at analytics and how that can help us better underwrite the general aviation market,” says Tuhy, who points to deeper data sets and artificial intelligence to better evaluate pilot behavior and other operational factors that can help to price risk.
He notes that the advent of ADS-B technology, which is essentially a GPS transponder that IDs planes at all times, rather than just when they are in the air, is also a big step not just for more detailed underwriting, but for overall safety. All U.S. planes must feature ADS-B sets by 2020, but as the tech itself has dropped to $3,000 per kit, aircraft owners are installing it proactively.
“Five years from now,” Tuhy adds, “we will not underwrite general aviation risk the way that we have in the past.”
Bill Coffin is an award-winning content, corporate communications, and media relations executive.
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