Willis predicts unprofitable airlines market by 2015 as soft market continues

A British Airways jet in flight
Soft airline market

Unprecedented levels of competition, growth in exposures and low loss levels are driving premium reductions for insurance buyers during the busy airline renewal season according Willis Group Holdings.

Willis predicted if the current trend in premium volumes and loss levels continues to slide, it is possible that at lead terms the market will fall to unprofitable levels by 2015.

A number of buyers are looking to hedge against any possible market change by securing some portion of their programme on a two year basis.

This is according to its Q4 issue of Airline Insight premium volume in 2013 is expected to be more than $150m lower than the prior year. This will generate an overall premium volume for 2013 of less than $1.5 billion, the lowest it has been post-September 2011.

"With the majority of premium available at this time, the continued appetite for, and in some cases increased, participation by insurers has fuelled significant reductions. Market conditions are being described by some as the ‘softest for a generation'," said Phil Smaje, chief executive of Willis Aerospace.

According to the report, annual loss levels continue to track below the five year average despite four losses of over $50m: the Lion Air crash in April which resulted in a total loss of a B737 aircraft but no fatalities; the Asiana Airlines crash in San Francisco which claimed three lives and left some passengers with serious injuries and which could yet impact the liability reserve; and the UPS crash near Birmingham Airport in Alabama which killed the two crew members on board. The recent Linhas Aereas Mozambique crash which killed all 33 people on board also exceeded the US$50 million loss threshold.

Commenting on the impact these losses may have on the insurance market, Smaje said: "With the significant ‘miss factor' that exists, whereby the high level of capacity and the number of underwriting units mean that any loss will likely only impact a portion of the market, it remains unlikely that a single catastrophe, or even a number of significant losses, during the remainder of the year will do anything to halt the downward trend."

Meanwhile, exposure levels continue to increase as the fortunes of the airline industry improve as the global economy revives. Average fleet values have grown by 9% in 2013 and passenger numbers by 8%, according to the report.

"The inclusion of the majority or all of this increased exposure, for the same or less premium, plainly demonstrates the benefit of current market conditions for buyers in a growth cycle," added Smaje.

 

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