AON 640 Aerospace Outlook Brochure WEB

Aon Risk Solutions

Aerospace InsuranceMarket Outlook 2012/13The tranquil sector

Contents.

A e r o s p a c e I n s u r a n c e M a r k e t O u t l o o k 2 0 1 2 / 1 3

1

Aerospace Insurance Market Outlook 2012/13

Foreword 2

Executive summary 3

Overview

Overview 5

Losses overview 9

Airline reinsurance market 12

Analysis

Quarterly analysis 15

Sector analysis 17

Regional analysis 23

Liability limit analysis 31

Inclusion criteria/notes

Throughout the economic challenges, the aerospace

insurance market has remained relatively tranquil,

with lead premium prices generally close to parity for

the last five consecutive years.

Last year had an exceptionally low level of aviation

incidents, fed by continued improvements in

technology, safety and working practices across

the industry.

This is being balanced by the return of forecast

exposure growth for many organisations.

Taking these factors together should mean in the

absence of any major incidents, the underlying trend

in the aerospace insurance market should continue to

be around parity for 2012/13 insurance programmes,

which appears to be backed-up by the initial data.

As ever, the key to a successful insurance renewal is

positive engagement with insurance markets, helping

them understand the nature of the risk that is being

presented and giving them the confidence to support

your activity.

Aon offers clients a broad spectrum of services,

helping with growing challenges such as cyber risk as

well as ongoing activity such as business interruption

and merger and acquisitions.

Please do not hesitate to get in touch with us if there

is any aspect of insurance or risk management that we

can help you with, or if you would like to discuss any

of the issues raised in this report.

Peter Schmitz,

Chief Executive Officer, Aviation, Aon Risk Solutions

[email protected]

Simon Knechtli, Head of Aviation, London, Aon Risk Solutions

[email protected]

The recovery of the aerospace sector appears to be gathering pace, with more positive turnover and passenger forecasts coming out from across the sector. There are still challenges, particularly in specific countries, but the overall prognosis is significantly brighter than it was two years ago.

Foreword


2

The

tran

quil

sect

or

Executive summaryCompared to 2010, in reporting

currency in 2011: ■ Overall aerospace lead premium fell by 1%

■ Airport lead premium fell by 6%

■ Manufacturer lead premium rose by 1%

■ Service provider lead premium rose by 3%

Premium: The lead premium total for 2011/12 aerospace insurance policies was US$759 million, compared to US$772 million for 2010/11 policies on a like for like basis. This means that 2011 was the fifth consecutive year of soft market conditions in the aerospace sector. On a non-like for like basis, the lead premium total for 2010/11 was US$775 million (see page 5).

Capacity: Despite the continued soft market conditions capacity is expected to remain healthy for 2012/13 aerospace insurance policies, unless there are any major incidents. This reflects the long term stability that the sector offers, particularly in comparison with some other insurance sectors that have suffered as a result of the natural catastrophe claims in 2010 and 2011.

Airport: Airport lead premium continued to fall despite some confidence returning to the sector after a torrid couple of years. Over 80% of airports forecast an increase in passenger numbers for 2011/12, compared to just under 60% in 2010/11 (see page 18).

Manufacturer: Around 40% of 2011/12 manufacturer insurance programmes saw the cost of insurance rise, a similar number to 2010/11. The similar numbers are despite increases in turnover forecast for over 60% of programmes, compared to just over 40% for 2010/11. This suggests that while the economic recovery is still faltering in many regions, overall, the outlook for 2012 is brighter (see page 19).

Service Provider: Four of the service provider sector’s 49 renewals saw lead premium rise by more than 30% for the 2011/12 placements as a result of significant increases in exposure and historical claims. Stripping these operations out of the numbers and the average premium for the sector would be down by 4%, more in line with the long term average. (see page 21).


3

4

A e r o s p a c e I n s u r a n c e M a r k e t O u t l o o k 2 0 1 2 / 1 3 T h e t r a n q u i l s e c t o r

The aerospace sector continues to offer a relatively safe haven for underwriters looking to ensure they have a diversified book of risk. The limited losses in the airline sector in 2011 will be a factor in keeping trends the same for 2012/13 insurance programmes.

Overview.

5


Overview

Ove

rvie

w

The price of insurance for the aerospace industry continues to fall. Despite five years of falling prices, there is little sign that the bottom of the market has been reached.

The aerospace industry enjoyed its fifth year of

prices drifting down in 2011, with total lead

premium for the sector falling to US$759 million

for the year from US$775 million in 2010 on a non-

like for like basis. Individual sub-sectors continued

to follow their own trends, with the manufacturers

sector rising by 1% on average, airports falling by

6% and service providers, long the softest of the

three, rising by 3% (although this is the result of

increases to a limited number of the sub-sector’s

programmes, see page 21 for details).

The half decade of falling prices has meant that on

a non-like for like basis the total lead premium

value of the sector has fallen by 15% since 2006.

Simple economics…In the majority of circumstances a six year soft

market would mean that there would be significant

pressure from management at underwriter

organisations to raise prices. The aerospace sector

has some extenuating circumstances, however.

The interplay between capacity and exposure

continues to be a factor. When the soft market started

in 2007, the high level of capacity in the sector was

generating a significant level of competition which

in turn was putting pressure on insurance prices. The

perception of the aerospace sector as stable, with few,

albeit sometimes major, claims made it a relatively

sensible place to ensure a diversified book of business

from an underwriter point of view.

Q1‘05

Q1‘06

Q1‘07

Q1‘08

Q1‘09

Q1‘10

Q1‘11

Average quarterly percentage premium movement(original reporting currency percentage change)

Perc

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10

5

0

-5

-10

Average quarterly percentage premium movement (original reporting currency percentage change)

6


The change in global economic conditions in the

autumn of 2008 meant that the main drivers of

the reduction shifted from a surfeit of underwriting

capacity to falling exposures, which had a similar

effect on the price of insurance in the absence of

major claims.

As the global economy has generally stabilised, a third

factor has come into play. The natural catastrophes

witnessed in 2010 and 2011 had very little direct

impact on the aviation sector generally, but the

stability of the aerospace sector has meant that it is

particularly attractive from an underwriter point of

view. Even in comparison to the airline sector, the

sector has proved itself to be a safe haven, ensuring

that capacity continues to suppress any appetite to

increase insurance prices.

Changes to the listLooking at the changes to the list of aerospace

operations that we have seen between the 2010/11

and 2011/12 data, 11 new programmes, representing

US$35 million in lead premium, have been added to

the list, while 12 programmes, representing around

US$16 million, have come off the list.

The reasons for operations joining the list are relatively

simple. Six have seen their limits increase to above the

US$650 million threshold that we use for inclusion in

the data set (see back page for further details), while

the remaining five, representing US$32 million of

premium, are the result of operations that extended

their 2009/10 insurance policies to renew in 2011/12,

skipping 2010/11.

Similar reasons hold for the 12 operations that have

come off the list. Nearly half of the US$16 million

total is the result of programmes extending and not

renewing in 2011/12, while a further US$3 million,

five of the 12 programmes, have reduced their limit to

below US$650 million. The remainder is comprised of

two programmes that are no longer being placed in

the international insurance markets and a further one

that has joined a group programme.

Perc

enta

ge

Increase As Before Decrease

100

75

25

2005 2006 2007 2008 2009 2010 2011

Proportion of aerospace programme premium movement

50

0

Proportion of aerospace programme premium movement

7


Looking at the changes regionally, and the majority of

activity has been in Asia Pacific. Over US$31 million of

the US$35 million added to the list has been the result

of extensions at two Asia Pacific-based aerospace

operations, while nearly US$8 million of the US$16

million lost to the list has been the result of

activity in the region, 90% of which follows

programmes extending.

By comparison, just over US$45 million came off

the 2010/11 list, with only just over US$7 million

replenishing it (see Aon Aerospace Insurance

Market Outlook 2011, available from aon.com/

aviationinsight). At that point, over 80% of the lost

premium was the result of aerospace operations

extending, compared to just over 60% for 2011/12.

Ultimately the ebbs and flows of the operations on

the aerospace list generally appears to reflect the

aerospace insurance market (or perhaps vice versa)

with the trend being very much for gradual change.

The main point to make is that despite the difficulties

that the global economic conditions have presented,

no operations that meet our criteria have consolidated

or ceased operations in the last year.

More bang for your buck?While more than 85% of 2011/12 aerospace

insurance programmes held their liability limits at the

same level and only three reduced their limits, those

that have increased their limits in many cases have

done so with a little impact on the lead premium that

they pay.

This appears to be the result of the soft markets

which are encouraging aerospace organisations and

their brokers to restructure and maximise coverage

and ensure that their insurance programmes are as

efficient as possible.

This also suggests that market conditions are actually

softer than the top line data suggests because in many

cases exposures and liability limits are being increased

without significant premium impact, suggesting that

this continues to be a buyer’s market.

www.aon.com/aviationinsight

8


The enduring safe havenThe last five years have changed the world

significantly. The credit crunch and subsequent

international recession, the string of major natural

catastrophes, there is a long list of events that

have shaken the insurance markets. Throughout it

all, however, the aerospace insurance market has

remained stable.

This time last year, we suggested that the sector

was a safe haven, with prices steadily declining as

enhancements in technology, security and working

practices delivered gradual improvements in safety.

This is still very much the case for 2012 and is likely to

continue into 2013.

This is not to say that a major incident at a global

airport or issue with a particular type of aircraft will

not harden insurance conditions, but all being equal,

the only thing that appears likely to change the

direction of the market significantly is a drying up of

capacity, and that does not appear to be likely in the

short to medium term.

Comparing the aerospace and airline insurance

markets highlights a stark comparison. Between 2006

and 2011, average lead premium change for the

entire aerospace insurance market fluctuated between

a high of -1% and a low of -4%. During the same

period, the airline sector fluctuated between -19%

and +20%. While pricing in the two markets is driven

by different factors and events, the consistency of the

aerospace market is presumably what continues to

attract capacity from underwriters.

Perc

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Aerospace premium movement

Airline premium movement

20

15

10

5

-5

-10

-15

2006 2007 2008 2009 2010 2011

Average annual percentage premium movement(original reporting currency percentage change)

0

-20

Average annual percentage premium movement (original reporting currency percentage change)

9


Losses overviewLosses in the aviation sector were exceptionally low in 2011. While this will not instantly put downward pressure on insurance prices, it will have in influence.

Phenomenal year of low claimsThere were half the average number of airline

incidents in 2011 than the long term average,

37 compared 70. The previous lowest number of

incidents was in 2002, when there were 53.

We estimate the total value of claims to be in the

region of US$522 million for the year, compared to an

average of US$1,170 million and comfortably below

2003, the previous lowest year for claims since 1995,

when there were US$573 million of claims.

There were 175 aviation fatalities worldwide in 2011,

compared to 623 on average. There were only four

fatalities in Europe covered under standard hull and

liability insurance policies, and none in Africa. No

region had more than 70 fatalities and there was only

a single incident involving more than 30 fatalities.

The total annual value of claims in North America

and Europe was under 20% of the long term

average. Worldwide, claims were 45% of the long

term average. N

umb

er o

f cl

aim

s (U

S$ m

illio

n)

Average, 1995-2011

2,000

1996

Value of claims, global 1995-2011

1999 2002 2005 2008 2011

1,500

1,000

500

0

Value of claims, global 1995-2011

10


According to Ascend Worldwide’s data, there were 1.8

billion passenger departures in 1995, a number which

grew to nearly 2.9 billion in 2011. Adding Aon loss

data to this gives an average number of fatalities per

million departures of 19.93 between 1995 and 2010.

The lowest in a single year prior to 2011 was

2004 when an average of 9.5 fatalities per million

departures was reported. Last year, there were only

4.61 recorded fatalities per million departures.

Similarly the average number of fatalities per million

passengers carried was 0.29, and the previous lowest

0.14. The figure was drastically lower in 2011 with

0.06 recorded fatalities per million departures.

The airline industry will rightly broadcast the very

positive 2011 claims figures as the result of the high

levels of investment in technology, quality and safety

and industry standards.

Valu

e of

clai

ms

(US$

mill

ion

)

Average, 1995-2011

2,000

1996 1999 2002 2005 2008 2011

1,000

500

01995 1998 2001 2004 2007 2010

Passenger fatalities per flight

Source: Acend/Aon loss dataAverages exclude September 11th Losses

Flig

hts

(m

illio

ns)

Fata

litie

s (p

er m

illio

n fl

igh

ts)

Flights (millions) Fatalities (per million flights)

20

25

30

35

40 50

40

30

20

10

0

Number of fatalities, global 1995-2011 Passenger fatalities per flight

Source: Acend/Aon loss data Averages exclude September 11th Losses

11


Ground handling and airport services should also

be commended for their necessary contribution to

the improvement in loss statistics.

For full regional analysis of claims in the airline

insurance market, please see the Airline Insurance

Market Outlook 2012, available from

aon.com/aviationinsight.

Product contributionsReviewing claims against manufacturers in the last

decade, there have been only two incidents where

the product contribution has exceeded US$100

million, one of which was a manufacturer’s hull loss.

Other than this, only four of the 23 claims in excess of

US$1 million have product contributions in excess of

US$50 million.

This relatively low level of claims activity is likely to

exert further pressure on underwriters to reduce

premiums in 2012/13.

The provisosThere are a number of factors that need to be taken

into account when examining the loss data, but it

does at least provide some supporting evidence to

the suggestion that the reliability of the global fleet

is improving.

Ultimately, aviation is an industry with significant

potential for catastrophic losses and the price of

insurance needs to reflect this. The difficulty for the

aerospace sector is that the complicated nature of

claims can make it a very drawn out process between

an incident occurring and a claim being made against

an aerospace organization.

From a purely aerospace point of view, it is difficult

to glean accurate loss statistics given that many

incidents are relatively small such as minor slips and

falls or lost baggage. Overall the airline data will have

ramifications for the aerospace sector, particularly in

2011 when the claims statistics were so positive.



12

Airline reinsurance marketThe airline reinsurance sector has been relatively stable over the last year, with only the Reno Air Show loss causing concern. As a result, the picture for 2012 is fairly positive at this stage.

In a stable reinsurance market, programmes are

renewed with similar deductible levels and vertical

limits of cover and, in the absence of any major

loss activity, this should continue throughout 2012.

Capacity is abundant for all areas of the business and

there is no reason to anticipate any change in the

short to medium term.

Due to the lack of any major claims in the airline and

aerospace sectors, excess of loss risk adjusted rates for

contracts which renewed during the last quarter of

2011 softened by around 7.5%. The January 1, 2012

reductions varied between zero and 10% as reinsurers

differentiated clients by acknowledging exposure

changes and the potential for any excess of loss

recoveries arising from the Reno Air Show loss.

The Reno loss has also had an effect on the wider

excess of loss market as reinsurers were surprised

at the quantum of loss from a general aviation risk,

highlighting the differential line structures for their

clients’ airline and general aviation accounts.

Despite increasing exposures, the total cost of excess

of loss reinsurance in 2011 continued to fall and the

overall spend of the 30 largest insurers was around

US$325 million, a 7.5% drop from the previous year.

The unprecedented natural catastrophe losses of 2011

have yet to have any effect on aviation reinsurance

capacity or prices.

Underwriters buy reinsurance for their entire portfolio

including airline, aerospace and general aviation.

Given that, with the exception of the Reno loss, all

three areas of the business were healthy in 2011, and

as a result, discussions about the challenges that face

reinsurance programmes could be suggested to be

something of a distraction.

13


Aon’s strength in the global aviation insurance markets means that we have access to some of the most comprehensive data sets available. In this section, we examine the aerospace industry by sector, region and liability limit.

Analysis.


15

The quarterly and monthly results for 2011 highlight the aerospace sector’s continued consistency, with only a single month with relatively low activity bucking the overall trend.

Quarterly/monthly data

Ana

lysi

s

Number of renewals

2010 Premium (US$)

2011 Premium (US$)

2010 Premium Movement (US$)

2011 Premium Movement (RC*)

Jan 32 47.65 42.08 -12% -5%

Feb 7 9.32 8.62 -8% +4%

Mar 21 27.69 28.03 +1% 0%

Q1 60 84.66 78.73 -7% -2%

Apr 28 92.19 94.75 +3% +3%

May 13 13.54 13.35 -1% -1%

Jun 26 52.61 50.56 -4% -3%

Q2 67 158.34 158.67 0% 0%

Jul 45 221.67 209.53 -5% -3%

Aug 16 51.58 54.18 +5% +2%

Sep 8 11.59 11.29 -3% -8%

Q3 69 284.84 274.99 -3% -2%

Oct 21 104.56 102.70 -2% -6%

Nov 23 90.71 94.17 +4% +1%

Dec 17 48.51 49.81 +3% +6%

Q4 61 243.78 246.68 +1% 0%

Total/Average 257 771.62 759.07 -2% -1%

* Reporting currency

16


17


Sector analysis

Renewals Premium

2010 2011 % change 2010 (US$m)

2011 (US$m)

% change (US$)

% change (RC)

Airport 79 88 11% $108.44 $103.18 -5% -6%

Manufacturer 123 120 -2% $616.78 $606.51 -2% 1%

Service Provider 43 49 14% $46.40 $49.38 6% 3%

Total/Average 245 257 5% $771.62 $759.07 -2% -1%

The airport sector has continued to gradually fall and the manufacturer sector has continued with its slight increases. The main real change is in the service provider sector, although on examination, the long term trend remains in place.

14%

80%

6%

Service ProviderAirport Manufacturer

Premium and renewals by sector(proportion of US$ total)

Premium

Number of renewals

47%

19%34%

-10% -0% 10%

Percentage premium change by sector 2010-2011 (US$ and reporting currency)

6%

1%

-2%Manufacturer

-1%

Service provider

-5%Airport

-2%Total/average

-5%

3%

RC US$

Premium and renewals by sector (proportion of US$ total) Percentage premium change by sector 2010-2011 (US$ and reporting currency)

18


Airport (including air traffic control)The gradually falling price of the airport insurance

market in 2011 continues a trend that has been in

place for around five years. During this period, total

airport premium has fallen from around US$130

million to the current US$103 million, despite eight

programmes being added to the list.

Just over 50 of the airports report passenger number

forecasts, of which 82% are suggesting that passenger

numbers will rise during the course of their 2011/12

insurance policies. This compares to just under 60%

expecting an increase for 2010/11 policies.

That said, the average passenger increase is only 8%,

well down from the highs of the middle of the last

decade. This reflects the economic uncertainty that

is still having an impact on the aviation industry as a

whole. The forecast increase for aircraft movements is

similar at 7%, with regional differences reflecting the

differing impact of the global economic conditions,

for example with the Americas forecasting a 4%

increase while Asia Pacific forecast an 11% increase.

Passenger forecasts for the airlines are similarly

modest in the main, with an 8% increase overall.

Latin America, Asia Pacific, Europe and the Middle

East projected a 33%, 13%, 10% and 9% increases

in passenger numbers during the course of 2011/12

insurance policies, while Africa projected a 4%

reduction. North America passenger numbers were

flat. For further analysis of the airline insurance market,

please see the Aon Airline Insurance Market Outlook

2012, available from aon.com/aviationinsight.

-15

Q1‘06

Q1‘07

Q1‘08

Q1‘09

Q1‘10

Q1‘11

Airports average quarterly percentage premium movement(original reporting currency percentage change)

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10

-10

Airports average quarterly percentage premium movement (original reporting currency percentage change)


19


Outlook for 2012/13After a five year soft market, it seems likely that

conditions will change at some point in the future,

but there is little evidence of this occurring so far in

2012. Ten of the fifteen airport and air traffic control

2012/13 programmes that have been recorded so far

this year have reported premium reductions, seven of

which by more than 10%.

The falling premium coupled with increasing exposure

puts underwriters in a challenging position, although

it should be pointed out that the challenging

economic conditions of the last few years have meant

that passenger forecasts have not perhaps been as

bullish as they were in the middle of the last decade.

It is also important to note that there has not been

a significant airport claim for some time, likely to be

a major factor in the downward drift in the price of

airport insurance.

Given the major incidents that have occurred in

some non-aviation sectors, the aerospace insurance

market continues to offer a stable place to ensure

that underwriters’ books of business are diversified

effectively. As a result, capacity is likely to continue

to be healthy and prices stable, despite prices falling

consistently for the last five years.

ManufacturerThe manufacturing sector represented around half

of the renewals and 80% of the premium in the

aerospace sector in 2011. This reflects the cost of a

claim in the sector if there is an incident that can be

subrogated against an aircraft manufacturer.

While the manufacturer trend has been slightly harder

than the aerospace sector as a whole, insurance

pricing has been close to parity for around four years.

One of the key reasons for the level prices is that while

claims can be exceptionally expensive and complex

for the manufacturer sector, improvements in

technology, quality and testing have meant that they

have become relatively rare.

Around half of 2011/12 manufacturer insurance

programmes saw the cost of insurance rise compared

to just under 40% in 2010/11. The change reflects

increases in turnover forecast for nearly 70% of

programmes, compared to just over 40% for

2010/11. This suggests that while the economic

position is still fragile, the outlook for 2012 is

brighter overall.

Focusing on the maintenance, repair and overhaul

(MRO) sector which is included in the manufacturing

sector because of its similar risk profile, average

turnover is forecast to be down by 4%, compared

to a 2% increase for 2010/11 programmes and 9%

increase for 2009/10. This again potentially reflects

changing economic conditions, with airlines looking

to maintain rather than replace aircraft during the

worst of the downturn.

With conditions improving and expected deliveries

of new medium sized aircraft in North America, MRO

forecasts are likely to have fallen slightly.

Outlook for 2012/13The manufacturer sector is always likely to be priced

higher than other aerospace programmes given the

scrutiny on the design and build of an aircraft in the

event of any major incident. The phenomenally low

level of aviation incidents in 2011 and up to this point

in 2012 means that claims are very low, which will

continue to keep pressure on the insurance prices.

If the global economic conditions continue to

improve, then the forecast increases in passenger

numbers for airlines should be delivered, which in

turn is likely to mean increased orders for aircraft.

There is some way to go before we get back to

streams of press releases heralding the return of

record order books, but after three difficult years as

well as the bedding in of new aircraft for major aircraft

manufacturers, there is reason for the sector to look at

2012/13 positively.

Looking at the data for 2012 so far, the picture is fairly

mixed. Two thirds of the nine programmes that have

been placed are forecasting increases in turnover, and

their premium looks set to grow as a result.

20


-15

Q1‘06

Q1‘07

Q1‘08

Q1‘09 Q1

‘10

Q1‘11

Manufacturer average quarterly percentage premium movement(original reporting currency percentage change)

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10

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Manufacturer average quarterly percentage premium movement (original reporting currency percentage change)

21


Service ProviderAfter consistently being the softest of the aerospace

sectors, there appears to have been a notable change

in conditions in 2011, with prices rising in three of the

four quarters.

At first glance this would suggest that prices on the

service provider sector had fallen too far and the

bottom of the market had finally been reached, but

in reality the averages are being driven by increases at

just over a third of programmes.

Four of the 49 renewals in the sector that have seen

lead premium rise by more than 30% for the 2011/12

placements. The increases are occurring for a variety

of reasons, but, as ever, can be basically boiled down

to operations with significant increases in exposure

and those with a poor loss history.

Stripping these operations out of the numbers and the

average premium for the sector would be down by

4%, more in line with the long term average.

The service provider sub-sector is dominated by

refuelling operations. Fuel consumption is forecast

to be down by 1% on average during the course of

2011/12 placements.

This is the fourth consecutive year when fuel demand

in the industry has been forecast to drift down. The

reductions have not been spectacular, but they do

suggest consistent efficiency improvements.

All bar one of the operations that are forecasting

significant fuel supply reductions are based in Europe

and the Americas, which continue to bare the brunt of

the current economic challenges.

-5

Q1‘06

Q1‘07

Q1‘08

Q1‘09 Q1

‘10

Q1‘11

Service provider average quarterly percentage premium movement(original reporting currency percentage change)

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5

0

-5

-20

10

-10

Service provider average quarterly percentage premium movement (original reporting currency percentage change)

22


Operations based in the Americas are projecting fuel

supply reductions of more than 25% on average, while

operations in Asia Pacific are forecasting increases of

around 6% during the course of their 2011/12

insurance programmes.

The sub-sector has seen lead premium rise by around

1%, although only 10 of the 38 refuelling programmes

have seen the cost of insurance rise.

Looking at the sector without the influence of refuelling

operations, premium rose on average by 11%, although

this was influenced by two operations that had

significant increases. Removing these from the data and

the average would have been a 4% decline.

Outlook for 2012/13The market has been saying that the bottom of the

service provider market has been reached for four

consecutive years, but prices continue to drift down

(accepting the exceptions that were in place

during 2011).

Ultimately, in the absence of a major claim, while

capacity remains robust in the service provider sub-

sector, prices will continue to fall.

If the economic recovery becomes more universal during

2012, exposure could well begin to rise, which could

have an impact on the price of insurance, but at this

stage this is the only factor which is likely to change the

current trend.

23


Renewals Premium Composition

2010 2011 % change

2010 (US$m)

2011 (US$m)

% change (US$)

% change

(RC)

Manf % Service Provider

%

Airport %

Africa 4 5 +25% $5.04 $4.43 -12% -7% 24% 27% 49%

Americas 78 78 0% $410.50 $394.72 -4% +1% 95% 3% 3%

Asia Pacific 45 51 +13% $41.57 $41.14 -1% -6% 65% 10% 25%

Europe 106 110 +4% $296.47 $301.24 +2% 0% 79% 9% 12%

Middle East 12 13 +8% $18.03 $17.55 -3% -5% 51% 17% 32%

Total/Average 245 257 +5% $771.62 $759.07 -2% -1% 80% 7% 14%

Regional analysisEach region had a different experience with aerospace underwriters during 2011, with prices tending to change according to changes in the level of exposure at individual operations.

52%

5%

40%

Asia PacificAmericas Europe

Premium and renewals by region(proportion of renewals)

Premium

Number of renewals

43%

5%

30%

2% 1%

2%

20%

Middle East Africa

-15% -0% 15%

Percentage premium change by region 2010-2011 (US$ and reporting currency)

-2%

-5%

-3%Middle East

-6%

Total/Average

-7%Africa

-1%Asia/Pacific

-12%

-1%

RC US$

Americas 1%-4%

Europe 2%1%

-10% 5% 5% 10%

Premium and renewals by region (proportion of renewals) Percentage premium change by region 2010-2011 (US$ and reporting currency)

24


AmericasReflecting the size of the sub-sector in the aerospace

industry as a whole, activity in the Americas is

dominated by manufacturers, which make up around

95% of the total premium activity for the region. The

sector contributes nearly half of the US$759 million

total for the aerospace industry globally.

The dominance is exacerbated by the large

number of North American airports that place their

insurance in domestic markets, falling out of our data

set as a result.

The benefits of renewing in the global insurance

markets are significant, given the depth of experience

and expertise as well as the economies of scale that

are available away from the domestic markets.

Similar to the combined industry, just over a third of

Americas-based aerospace insurance programmes

saw the cost of insurance rise for 2011/12 insurance

programmes, up from the 16% of increases on

2010/11 programmes but comparable to the 40%

reported for 2009/10. Just under half of insurance

programmes placed saw their lead premium change

by between -5% and +5%, suggesting a relatively

stable market.

All bar one of the increases were to manufacturers,

reflecting the caution that underwriters tend to treat

placements in this sector, given the size of potential

awards and the length of time it can take for claims to

filter through to insurance policies. These factors also

tend to lead to a lower level of capacity for the sector.

Five of the six Americas’ based airports have forecast

an increase in the numbers of passengers and aircraft

they expect to serve during the course of their

2010/11 insurance policies, a marked improvement

on the 2010/11 forecasts when only a third were

projecting increases. None of the forecast increases

-15

Q1‘07

Q1‘08

Q1‘09

Q1‘10

Q1‘11

Average quarterly percentage premium movement (Americas)(original reporting currency percentage change)

Perc

enta

ge

Ch

ang

e

15

5

0

-5

10

-10

Average quarterly percentage premium movement (Americas) (original reporting currency percentage change)

25


are of more than 10% in terms of passengers or 3%

in terms of aircraft movement, however. This is

broadly in line with the forecasts being made by the

airline operators in the region, which have forecast

no passenger increases and a 6% increase in fleet

value, reflecting a number of new aircraft that are

due to be delivered.

Significant increases in passenger numbers are unlikely

given the maturity of the aviation industry in North

America, even ignoring the challenging economic

conditions. It should be pointed out that Latin

American airlines are expecting a surge in passenger

numbers of 33% and an increase in average fleet

value of 18%. For further information and analysis of

the airline insurance market, please see Aon’s Airline

Insurance Market Outlook 2012, available from

aon.com/aviationinsight.

The proportion of Americas based manufacturers

that are forecasting a reduction in turnover has fallen

to just under a third in 2011/12, compared to 56%

and 49% for 2010/11 and 2009/10 programmes

respectively. This suggests improving confidence in

the sector.

Please note that there are only four aerospace

operations based in Latin America that meet the

criteria for inclusion in this report (see page 32). As

a result, we examine the Americas as a whole rather

than breaking it down into North and Latin America.

If you would like analysis that is more closely aligned

to your region and sub-sector, please contact your

Aon representative or email [email protected]



26

Asia PacificPrices in the Asia Pacific aerospace insurance market

have now been falling for five consecutive years

at the same time as there have been significant

exposure increases. The reductions have been driven

by its reputation as relatively less litigious in the

event of a claim and the relatively low proportion of

manufacturers in the region.

That said, in premium terms the proportion of

manufacturers continues to grow, rising steadily from

55% on 2009/10 insurance programmes to the 65%

reported for 2011/12 insurance programmes. The

region is relatively small compared to the Americas

and Europe however, representing slightly over 5%

of the total global premium. As a result, changes

at a relatively small number of operations have a

significant impact.

Just under a quarter of the aerospace programmes

placed in the region saw their lead premium

increase, slightly below the 30% global average.

The proportion of increases has risen from the

16% reported on 2010/11 insurance programmes,

reflecting the continued growth of the aerospace

industry in the region.

Drilling down into the data, seven service providers,

four manufacturers and an airport saw the price of

their insurance increase, mainly the result of exposure

and limit increases.

Of the 24 airports in the region that reported

passenger numbers, only five are expecting to see a

reduction in passenger numbers, four of which by

under 3%.

-15

Q1‘07

Q1‘08

Q1‘09 Q1

‘10

Q1‘11

Average quarterly percentage premium movement (Asia Pacific)(original reporting currency percentage change)

Perc

enta

ge

Ch

ang

e

15

5

0

-5

10

-10

Average quarterly percentage premium movement (Asia Pacific) (original reporting currency percentage change)


27

The average passenger forecast increase is 7%,

slightly lower than the 13% increase forecast by

the airlines themselves.

Despite the forecast exposure increases, airports in

Asia Pacific saw the price of lead premium fall by 13%

on average for their 2011/12 insurance programmes,

well down on the 5% average reduction globally. This

reflects the positive treatment the sector enjoys from

the airline insurance markets as a rule, the result of the

factors discussed above and only five of the region’s

airports reported a negative five year credit balance.

Average turnover at the region’s 11 manufacturers

is once again ambitious, averaging a 14% increase.

Three of the regions five component manufacturers

are projecting turnover growth of more than 15%

during the course of their 2011/12 insurance

programmes, similar to the forecasts that were put in

place for 2010/11 insurance programmes.

Turning to the region’s service providers, average

premium is somewhat influenced by a 100% limit

increase at one of the refuelling operations which has

meant a 90%+ increase in lead premium. Removing

this renewal from the data, means that lead premium

on average for service providers in the region has

fallen by around 1%. While this is relatively low from

the perspective of the global averages, it does reflect

the long term reduction in prices that has been

witnessed for the sector over the last five years (see

page 21).

Much of this is driven by exposure increases in the

refuelling sub-sector, where the 11 operations are

forecasting a 6% average increase in the amount of

fuel they expect to provide.

28


EuropeThe largest region in terms of renewals and second

largest in terms of lead premium, Europe’s long soft

market appears to have come to an end during the

second half of 2011 when premium rose on average

by 7%. As a result, average insurance prices were flat

during 2011.

Five of the 44 European placements in the second half

suffered 50% increases, one the result of a historical

claim, the others following general exposure growth.

Stripping these five out of the data means that the

average Q4 reduction was around 6%, more in

keeping with the industry and longer term average for

the airport sector. Equally, more than half of European

programmes that renewed in the second half enjoyed

a reduction in the cost of their lead premium, only

slightly below the 59% globally for the full year.

These two factors suggest that the five year trend for

European aerospace insurance programmes is holding

generally true and prices are continuing to drift down

in response to improved technology, safety and

working practices.

-15

Q1‘07

Q1‘08

Q1‘09

Q1‘10

Q1‘11

Average quarterly percentage premium movement (Europe)(original reporting currency percentage change)

Perc

enta

ge

Ch

ang

e

15

5

0

-5

10

-10

Average quarterly percentage premium movement (Europe) (original reporting currency percentage change)

29


As we have stated for the last two years, there is likely

to come a point where the market has fallen so far

that it has to harden fully if it is to remain viable for

underwriters. Despite what the top level data would

suggest, this point does not appear to have been

reached yet going by the data that we have for 2012

so far.

Of the 26 airports that reported passenger forecasts

on 2011/12 insurance programmes, the average

increase was around 7%, with only four suggesting

that there will be a reduction in the number of

passengers carried (reflecting their presence in

countries that are still face extreme economic

difficulties). Aircraft movement projections are similar,

with a 5% increase forecast overall. This is broadly in

line with average fleet values and passenger forecasts

projections made by the European airlines, up 7%

and 9% respectively.

By comparison, for 2010/11 insurance programmes,

airports forecast an average passenger reduction

of 3%, and a 1% reduction in aircraft departures,

suggesting that confidence is improving after a torrid

couple of years.

Stripping out the programme that endured a

significant historical loss, manufacturers in the

region enjoyed an average reduction of around 3%

for 2011/12 insurance programmes. The outlook

is generally positive, with 25 of the 35 reporting

programmes suggesting that they will see an increase

in turnover during the current policy period.

The region’s refuelling operations reported mixed

fortunes, with five of the ten operations that report

fuel supply forecasts suggesting that there will be an

increase, but the other five suggesting a reduction.

Again this reflects the differing economic fortunes in

the region, with the reductions in supply tending to

be in the countries that have economic problems.

Overall, two thirds of European service provider

programmes saw the cost of lead premium fall.

30


Middle EastAerospace activity in the Middle East continues

to gradually increase, but it is likely to be some

time before it reaches a level where trends are not

influenced by a handful of renewals. The region

represents 5% of the insurance programmes but only

2% of the global lead premium, meaning that it is

very difficult to discuss trends.

Only three of the region’s 13 renewals saw their lead

premium increase for 2010/11 insurance programmes.

The region’s composition has evolved over the

last year. For 2010/11 renewals, manufacturers

represented over 80% of the premium, with airports

and service providers representing 10% each. For

2011/12 placements, manufacturers representation

declined to just over 50%, with service providers

and airports representing around 20% and 30%

respectively. The change is based on the addition

of a single additional programme.

AfricaAfrica continues to represent less than 1% of the

global aerospace premium total, with only five

programmes placed in the London insurance markets.

As a result, any changes at individual organisations can

have a significant impact on trends for the region.

An example of this is the addition of a single service

provider in 2011 which has increased the proportion

that the sector represents from 19% last year to 27%

this year. As a result of the limited data, it is difficult to

provide in depth analysis of regional trends.

Premium in Africa fell by 7% on average during 2011,

reflecting premium reductions at all but one insurance

programmes. The increase, relatively minor, was the

result of significant projected turnover growth.

The 2011/12 reduction follows a -5% for 2010/11, a

-1% in 2009/10 and a -10% in 2008/09.

31


Renewals Premium Composition

2010 2011 % change

2010 (US$m)

2011 (US$m)

% change (US$)

% change

(RC)

Manf % Service Provider

%

Airport %

US$2bn+ 17 19 +12% $301.48 $296.76 -2% -3% 96% 1% 4%

US$1.5-1.99bn 18 21 +17% $108.65 $103.69 -5% -6% 71% 9% 20%

US$1-1.49bn 111 123 +11% $234.72 $232.61 -1% -3% 73% 8% 19%

US$750-999m 36 34 -6% $37.12 $37.25 0% +2% 60% 13% 26%

US$500-749m 38 40 +5% $48.68 $49.29 +1% +2% 50% 25% 25%

US$0-499m 25 20 -20% $40.97 $39.48 -4% +2% 83% 6% 11%

Total/Average 245 257 +5% $771.62 $759.07 -2% -1% 80% 7% 14%

Liability limit analysisSegmenting the aerospace sector in this way does not always provide a direct indicator of the size of an organization, but the level of liability does give a good indicator of an organization’s risk profile and the market impact that it has.

-10% -0% 10%

Percentage premium change by liability limit 2010-2011 (US$ and reporting currency)

-1%-2%US$2bn+

Total/Average

-6%US$1.5-1.99bn

US$1-1.49bn -3%-1%

-5%

-2%-1%

RC US$

US$500-749m

US$0-499m

US$750-999m

2%-4%

2%

2%

1%

0%

Premium by liability limit

39%

31%

5%

US$750-999m

US$2bn+ US$1-1.49bn

Premium

Number of renewals

16%

8%8%

5%

7%

48%

US$1.5-1.99bn

US $0-499m

14%

6%

13%

US$500-749m

Premium by liability limit

Percentage premium change by liability limit 2010-2011 (US$ and reporting currency)

32


Inclusion criteria/notesThe information featured in this report is

representative of market trends only. With vertical

or fragmented marketing the exact percentage rate

movements and/or shifts in premium can sometimes

prove difficult.

Aon defines the aerospace industry as being

comprised of airframe, engine and component

manufacturers, airports and air traffic control

organizations, caterers, retailers and ground handlers,

refuellers, repair and service operations, security

companies, financiers and other service providers. We

group these into three sectors, manufacturers, airports

and service providers, based on their risk profiles and

operation type.

We focus throughout this review on lead premium

in reporting currency (RC), unless stated otherwise.

Looking at changes in premium that has been

converted into US dollar terms can complicate the

picture because it represents changes in the price of

currency, rather than changes in the cost of insurance.

Our criteria for inclusion is accounts with any of the

following: a combined single liability limit of over

US$650 million; premium of over US$2 million; top

50 airport groups by revenue; top 100 manufacturers.

Given the low level of activity from an aerospace

point-of-view, outside of Embraer, we have included

Latin American operations within the overall Americas

regional summaries.

The airport sector includes air traffic control

(ATC) operations.

The manufacturer sector includes maintenance, repair

and overhaul (MRO) operations because of their

similar risk profiles.

33


Feedback on issues, suggestions for future coverage,

comments and editorial enquiries, please contact:

Magnus [email protected]

+44 (0)20 7086 1277

For information and analysis, please contact:

Paul [email protected]

+44 (0)20 7086 3641

We must point out that due to the nature of this type

of document, Aon cannot be held responsible for

any loss or damages caused through the use of any

information contained herein.

While we try to comment on issues we know to

be fact, we are fully aware that in gathering the

information contained herein from various sources

there is always the possibility of inaccuracy. We can

therefore only claim that the information is correct to

the best of our knowledge at the time of publication.

Published by Aon Limited.

Registered office 8 Devonshire Square, London EC2M 4PL

© Copyright Aon Limited 2012. All rights reserved.

No part of this report may be reproduced, stored in a retrieval system, or transmitted in any way or by any means, including photocopying or recording, without the written permission of the copyright holder, application for which should be addressed to the copyright holder.

Aon Limited is authorised and regulated by the Financial Services Authority in respect of insurance mediation activities only.

Aon Risk Solutions | Specialty | Aviation 8 Devonshire Square London EC2M 4PL United Kingdom

+44 (0)20 7086 5500

aon.com/aviationinsight

Danny Green [email protected]

+44 (0)20 7086 3633

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+1 (0)212 44 112 13

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