Reinsurers may take flight

The loss-making aviation reinsurance sector needs better returns or it is likely to withdraw capaci...

The loss-making aviation reinsurance sector needs better returns or
it is likely to withdraw capacity, according to the all-risks aviation
(re)insurer Munich Re.

The crunch is likely to come in the second and third quarters of the year,
when reinsurers decide how much capital to allocate to the market in 2004,
according to Thomas Thomsen, Munich Re's head of aviation, special and
financial risks.

Last month, at the 2003 Airline Insurance Rendez-vous of the International
Air Transport Association (Iata) in Paris, he said that no major insurer
facing net losses in 2003 and 2004 needed to remain in aviation.

"We have really seen some terrible prices for 2003 so something has to
give," he said. "No one should be surprised if there is a major capacity
crisis in 2004." He doubted that a disappearance of low-level reinsurance
capacity would stop insurers from doing silly deals. He added insurers had
retained little premium in 2002, therefore passing on all large aviation
losses to reinsurers.

Bleak outlook

"So far in 2003 the market has not been good for aviation insurers," said
Jacques Mercier, managing director for airlines at Allianz Marine &
Aviation. "We continue to show an accumulated loss."

He pointed to four successive calendar years of losses from 1998 to 2002,
with only a small positive cashflow last year. Net premiums were $3.2bn in
2002 and losses $1.1bn, before costs.

Mr Mercier said: "Unless there is a radical change aviation insurers will
again soon be making a loss." In an average year, aviation insurers expect
a $500m profit on $3.2bn of premiums, with $1.9bn of losses in excess of
about $500m, he added.

Tony Medniuk, chief executive of Global Aerospace Underwriting Managers,
said investors in high-risk catastrophe aviation (re)insurance expect a
12-20% return. He said that in the 1992-2002 underwriting years
(re)insurers had an accumulated loss of $3.2bn.

Mr Thomsen commented that in the first nine months of the 2002
underwriting year premiums increased by 73% year-on-year, before "the
usual madness set in again". He said: "Underwriters without shares in
large accounts attacked, going for full shares, brokers were delighted and
helped things along by frightening leading underwriters with exaggerated
statements about their competitors' state of dementia and $560m of premium
went out of the market."

Mr Mercier said that if rates continued the decline seen at the end of
2002, premiums in 2003 would be an inadequate $700m. "We would have no
option but to withdraw from the market."

However, Mr Thomsen said 2003 is probably not like 2002. In the
underwriting year 2003 there is in theory 180% of the airline insurance
capacity needed, provided by 15 Lloyd's syndicates, 10 insurers, three
underwriting agencies and seven reinsurers. Major insurers have left the
market, to be replaced mainly by reinsurers operating through insurance

In 2002, most primary insurers "were still traders, rather than
risk-takers, and kept only part of the first $50m of each loss as their
own net retention", said Mr Thomsen. Some losses in the $50-400m range
will be in the failed Fortress Re (see p37). Losses greater than $400m
were reinsured with a few reinsurers in continental Europe, Bermuda and at
Lloyd's, said Mr Thomsen.

In 2003, however, Fortress Re went under and most reinsurers were not
offering cover for losses of less than $400m or $500m, he said. "Aviation
underwriters are keeping retentions for large losses that are between five
and 10 times higher than in underwriting year 2002."

Reinsurers are obtaining adequate prices for cover between $400-500m and
$1.5bn, but the disaster area is above $1.5bn, said Mr Thomsen. "Primary
insurers are buying covers extending not just up to $2bn, but in some
cases up to $3.5bn."

Extra burdens

Mr Thomsen said 183 losses of more than $10m between 1994 and 2002
totalled $15.6bn, including $5.6bn up to the $50m retained by primary
insurers, $6.4bn in the $50-400m band (including $2.4bn reinsurers have
yet to pay) and $3.5bn in the $400m to $1.6bn band, including $3.2bn yet
to be paid.

Much reinsurance was unlikely to be paid, mainly because of Fortress Re's
failure, said Mr Thomsen: "Just how much will remain uncollectable is
completely unknown." Reinsurers such as Gerling and Scor could also leave
the aviation market.

"Primary insurers that give in to unreasonable demands from airline
clients and brokers will make net underwriting losses sooner than you
think," Mr Thomsen told the Iata meeting. "Most of them will also have to
cope with the burden of uncollectable reinsurance." He said Munich Re had
not decided its future aviation involvement: "We have not made up our mind
what our exit price is."

- For more on aviation see next month's technical report.


- International law will be changed within five years to stop the aviation
industry being legally liable for terrorist attacks, predicted Tony
Medniuk, chief executive of the large aviation insurer Global Aerospace
Underwriting Managers, at the 2003 Airline Insurance Rendez-vous of the
International Air Transport Association (Iata) in Paris. He said moves in
that direction are already under way.

- "The airlines should not be responsible for acts of terrorism against
them," Mr Medniuk said. However, insurers could cover terrorism risk, he
stressed. "It's a problem of price."

- Until legal liability is removed an interim solution to terrorism perils
could be provided by market forces or by one of the proposed international
aviation (re)insurance mutuals now being discussed, Mr Medniuk said. "What
we are discussing is an interim solution, not a permanent solution," he

- The most likely mutual to be set up is the Globaltime scheme proposed by
the International Civil Aviation Organisation (Icao).


- The Homeland Security Act in the US, introduced in the wake of the 11
September 2001 terrorist attacks, has wiped out a large chunk of the
commercial market for airline hull insurance, according to the hull
underwriter Limit Underwriters.

- Limit's specialist risk underwriter Angus Roberts said that US airlines
could buy cheap hull cover under the act. "More than 30% of our income has
been lost as a result," he told the 2003 Airline Insurance Rendez-vous of
the International Air Transport Association (Iata) in Paris last month.
"We are down at precariously low levels of overall premiums."

- Mr Roberts claimed that current commercial hull insurance rates are
similar to those in 1996, even including a surcharge that insurers imposed
after 11 September. He said that the surcharge, of 0.5% of hull value,
made rates profitable for insurers.

- He defended the seven-day cancellation of cover that insurers can impose
on a risk of war, which angered airlines when it was enacted after 11
September. "Without such a clause the hull premium rate would be
undoubtedly higher," he said.

- Munich Re's head of aviation, special and financial risks, Thomas
Thomsen, also defended the cancellation clause for passenger liability:
"We have to have that seven days' exclusion period."
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