Sky-high savings

Aviation insurers were pleased to record that 2003 has turned out to be one of the safest years ever for commercial air transport. Last year there were only 14 jet aircraft total losses, a record only bettered by 1986's tally of 12 losses.

The 2003 figures continue the recent trend of a reducing number of aircraft accidents year-by-year and are well down on the average for the 1990s of about 24 jet total losses per year.

Not surprisingly, with fewer aircraft losses, the number of passenger fatalities was also down in 2003 with only 596 passengers killed on revenue passenger flights. While this is one of the lowest figures ever recorded and represents a reduction of around 40% on the average for the 1990s, it did not make 2003 the safest year ever.

Under review

Reviewing the past year Nick Browne, chairman of the International Underwriting Association's (IUA) aviation executive committee, said it had been a pretty uneventful one, which had come as a welcome respite for aviation insurers.

However, he cautioned against too much optimism springing from 2003's figures, noting that good years in aviation had often been followed by bad ones. He cited 1984 as a prime example of a surprisingly good year in which only two passengers were killed - this was followed by 1985's record as the worst year ever for passenger deaths in jet accidents.

Figures produced by Airclaims currently show estimated losses incurred by the insurance market for 2003 of around $1bn, which is about half of what might be expected on average. However, Airclaims emphasises that initial early estimates tend to understate the final loss figure and looking back in its records it notes that the cost of incurred losses has increased in virtually every year when compared to the figures it first published at the time.

Currently, it estimates the cost of losses incurred by the market during the five-year period from 1998 to 2002 is about $14.4bn. That is $2.2bn more than it first estimated.

Mr Browne commented that prior to the recent two good years the aviation insurance market had been losing money for five years or so, having started to go negative in 1997. The accumulated loss for those years amounts to several billions and it will take more than two good years to wipe out the accumulated deficit.

Feeling the pressure

However, he said: "There is a lot of pressure on rating at the moment, particularly in the airlines' sector. There is an expectation from customers that rates should be going down significantly because of the relatively good loss experience and insurers have a hard time to get them to focus on the cost of capital and the reward it deserves. But the reality is that we need to have a critical mass of premium in the aviation insurance business to support the amount of capital required to provide the limits of cover that are needed. That is going to be the interesting dynamic. If the burden of losses continues to be relatively good the question is, 'will the market be able to generate that premium to keep enough capital in to cover the limits?'"

Significantly, Mr Browne noted there had been a couple of insurers withdrawing from the London market last year, not because they were losing money in aviation but because they did not feel the risk/reward equation was good enough. They simply did not consider it was worth risking their capital in aviation, despite it being profitable in the short term, since they did not feel they could justify risking their capital against the exposures involved.

Over most recent years the cost of passenger liability awards in aircraft accidents has been escalating. One of IUA's member companies, Allianz Marine & Aviation, has been conducting a study of the situation since 1979 and has recorded data from more than 19,500 passenger cases resulting from around 200 accidents. Out of that total, 14,600 cases related to passenger deaths, of which 12,200 have been finally settled. The remaining 4900 cases related to passengers injured and 4300 of those have been finally settled. With such a high proportion of settled cases in the study, the results can be considered as very reliable.

Settlements

The biggest jump in settlement awards was found in Europe where the average cost per passenger reached $1.1m in the period 1996-2002. In the previous period from 1990-1995, the average had been $169 740. In Asia for the period 1997-1999, the average cost was $282 759 compared to $112 412 from 1994-1996. Similar trends are evident in other areas and, inevitably, in passenger liability the rest of the world is fast catching up on the US in levels of awards. The increased phasing-out of limited liability regimes for air travel is obviously now making its impact. Meanwhile, the figures for North America show average costs per passenger from 1997-2002 running at $2.9m compared with the 1991-1996 figure of $1.6m.

Mr Browne concluded: "There is a continuing trend of improvement in air safety which is good news for aviation insurers. However, the simple implication for aviation insurers is that while, on the one hand, improvements in safety in the airline industry mean we are facing less frequency in terms of losses, we equally have to be well aware that when those losses do occur the likelihood is that they will cost us significantly more than they did in the past. So, we have reducing frequency but increasing potential severity that we as underwriters have to manage. I think that is the biggest challenge for aviation insurers for the next few years."