Aon Airline Insurance Market Outlook 2012 WEB

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A i r l i n 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

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Aon Risk Solutions

Airline InsuranceMarket Outlook 2012The risk remains

Overview.The aerospace industry continued to defy gravity during 2010, continuing a trend laid down in 2007.

Contents.


4

The risk remains: Airline Insurance Market Outlook 2012

Foreword 5

The market view 6

Overview

Executive summary 8

Overview 9

Airline reinsurance market 16

Analysis

Quarterly/monthly data 18

Regional analysis 20

Sector analysis 27

Fleet value analysis 32

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The

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5


This is a cause for celebration across the industry,

but there are a number of reasons why it may not

instantly lead to the cost of airline insurance to

plummet, not least of which is that 2011 is likely to

have been only the second time in five years when

underwriters will have seen a positive return on their

airline books.

That said, the low level of claims will help ensure

that insurance market capacity is healthy in 2012,

particularly in comparison with some other sectors

where natural catastrophes may have had an impact

from an insurance point of view.

In the end, the level of risk that the airline industry

presents continues to improve from a technological

and safety management point of view, but in terms of

the insurance markets, this is very much an evolution.

A single year with phenomenally low level of claims

does not mean that the next year will be the same,

because the level of risk does not change over night.

Our role as an insurance broker is to help clients

understand current market conditions and help

them to communicate the unique elements of their

insurance programme to underwriters to ensure they

are as efficient as possible. This report forms a key part

of that process.

If there is any part of this report that you would like

to discuss in more detail, please do not hesitate to

contact us.

Peter SchmitzChief Executive Officer: Aviation, Aon Risk Solutions

[email protected]

The airline industry quietly delivered an exceptional claims year in 2011, with the lowest amount of claims, the lowest number of fatalities and the lowest number of incidents since at least 1995.

Foreword

mailto:peter.schmitz%40aon.com?subject=

6


The

risk

rem

ains

The market viewThe wider aviation market is as much about general aviation, aerospace and the industry’s service providers and financiers as it is airlines. The majority of insurers spread their underwriting across many product lines and reinsure for the whole account accordingly.

Underwriters have been declaring positive combined performance ratios despite bemoaning airline market conditions and the increased cost of claims. Most insurers, particularly those publicly quoted, are under pressure to grow their business year on year. As airline premium leaks from their account, new income sources must be found to make up the shortfall. Risk selection is one answer but account picking shrinks the portfolio and loses spread.

The aerospace sector is receiving increased attention and readily available capacity means the sector continues to soften. Insurers are entering or returning to underwrite product lines or programmes in geographies that they had previously avoided or left due to inadequate pricing. Meanwhile the general aviation market has the most obvious over-capacity and remains highly competitive.

There are no untapped havens and insurers are battling to balance deploying greater appetite against further market softening.

Only a small minority of insurers are blessed with management approval to scale down their aviation underwriting and wait until better times. The majority must trade through the current aviation market nadir. Insurers speak of their flexibility to move capital to better performing classes but we seldom witness this. They have to trade to pay for the cost of investment in class underwriting teams, reinsurance and other fixed costs.

Risk for risk, airlines have already taken much of the advantage of the long-standing soft market and appetite. Airlines will continue to receive advantage where insurers have to worry that seeking compensation for risks above the market could challenge their share. There are also the human factors of a functioning market where insurers make commercial moves that their peers claim defy logic. This and over-capacity are certainly performing the strong role in firmly capping insurers’ wish for market price stability let alone a hardening. That trend could only take longer term effect if capacity leaves the market.

Until then airlines can enjoy their insurance premiums being the one area of fixed costs which remains soft and encouragingly negotiable.

Simon KnechtliHead of Aviation, Aon Risk Solutions [email protected]

mailto:simon.knechtli%40aon.co.uk?subject=

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By pretty much every gauge, losses in 2011 were exceptionally low. While this is positive for 2012 trends, it follows two years where claims have exceeded previous records.

Overview.

8


Executive summaryCompared to 2010, in 2011:

■ average lead hull and liability premium fell 3%

■ average fleet values grew by 8%

■ forecast passenger numbers grew by 7%

■ total lead hull and liability premium was US$1.8 billion

■ total incurred claims were US$522 million

Premium: Lead hull and liability premium fell by 3%,

with the market softening as the year progressed.

Total lead hull and liability premium was US$1.82

billion, compared to US$1.88 billion in 2010 on a

like for like basis. In 2010 the actual premium was

US$1.97 billion, but the like for like figure takes

into account airlines that did not renew on a stand

alone basis or those that fell beneath the criteria for

inclusion in our data (see page 35).

Rates: The underlying cost of insurance continues

to fall with insurers prepared to trade risk exposure

growth for reductions in rates.

Claims: The final loss figure for 2011, excluding

minor losses, is US$522 million, compared to US$1.59

billion recorded for 2010. Adding an estimate for

minor losses, the overall loss total was US$1.13 billion,

compared to US$2.10 billion in 2010 (see page 12).

Region: The different recovery rates of economies

around the world are being reflected in the airline

insurance data, with Asia Pacific, Latin America and

the Middle East all reporting strong exposure growth

forecasts while AFV continues to decline in North

America (see page 20).

Sector: Most of the sectors continue to conform

to the global averages in terms of premium and

exposure. Despite the positive claims year, the

five year credit balance has deteriorated for flag,

international and regional carriers, generally the

result of minor claims as well as the evolution of

premium levels (see page 27).

Fleet: Exposure growth is strongest for airlines with

a mid-range AFV of US$1-2 billion, which has also

achieved an average lead hull and liability premium

reduction (see page 32).

Capacity: Capacity is expected to remain healthy

in 2012. The over supply of capacity should keep in

check any upwards price pressure due to potential

losses but in reality, the majority of airlines have

already used the greatest advantages of over supply

and the remaining uninvolved capacity has a low

appetite for current pricing.

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At the end of 2010, underwriters were attempting to be firm in their strategy. Industry premium needed to at least break even with the level of average five year losses even before fixed and reinsurance costs were taken into account. Given that programmes are traded in a free market however, prices continued to soften as 2011 progressed.

Overview

This culminated in an average Q4 5% reduction in

premium. This was the first quarter since 2008 when

lead hull and liability premium on average fell, with

reductions driven by the low level of claims and the

healthy availability of capacity.

Our statistics are based on the lead insurer premium

terms as this provides fair comparison and the

composite terms are impossible for an intermediary

to record with any degree of accuracy. It should

be pointed out that the lead price is not always

followed by the other insurers that are involved in

the programme and as a result, to complete the risk,

higher prices sometimes need to be paid.

Following insurers continue to take a tougher stance

on distressed programmes. While this may seem

unscientific when distressed programmes tend to pay

rates far above market average, it reflects the forces of

supply and appetite in the insurance market.

It should also be pointed out that in 2008, the last

year when lead hull and liability premium outweighed

claims, the difference was so close that that any

potential profit would have been swallowed up by

fixed and reinsurance costs.

As a result, the airline insurance market is only likely to

have been profitable once in the last five years.

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After four years where premium is estimated to have

outweighed claims, the majority of airline insurers will

have enjoyed healthy returns in 2011 given the low

level of claims, effective strategy, risk selection and

good fortune.

As a result, while underwriters will be quick to applaud

the industry’s 2011 achievement, they continue to

write against historical loss levels of around US$2

billion per annum. This highlights the challenge of

profitable underwriting.

Insurers labour the fact of the rising cost of claims

and the probability that an average year of claims will

produce a trading loss at current levels of premium. It

is important to be reminded that many insurers write

broad portfolios of aviation products and reinsure on

a whole-account basis. Life is better overall than the

specific airline market suggests.

There has been a great deal of discussion about

the effect of the natural catastrophes in 2010 and

2011 on the cost of underwriters’ own reinsurance

purchasing, but so far there is little evidence of prices

rising at this stage (see page 16).

Weathering the stormData from airline renewals in the insurance market

provides a good indicator about how the industry

has fared during the economic challenges of the last

few years. It is very difficult to comment on overall

changes in the industry, but changes in Aon’s data

provides a useful guide.

We estimate that around US$232 million of lead hull

and liability premium disappeared from the insurance

market during 2011.

Num

ber

of

inci

den

ts

Average, 1995-2011

100

1996 1999 2002 2005 2008 2011

75

50

25

0

Number of incidents, global 1995-2011

11


Num

ber

of

fata

litie

s

Average, 1995-2011

2,000

1996

Source: Aon loss data

1999 2002 2005 2008 2011

1,250

1,000

750

500

250

0 Jan Apr Jul Oct

Averages exclude September 11th losses

Num

ber

of

fata

litie

s

2010 2011 Average 1995-2010

0

250

500

750

Number of fatalities, global 1995-2011 Cumulative fatalities 2011 (passenger and third party fatalities)

2000 2002 2004 2006 2008 2010

Source: Aon market data

Perc

enta

ge

Ch

ang

e

75

100

50

25

0

-25

Average quarterly percentage premium change 2000-11

2007 2008 2009 2010 2011


US$

bill

ion 1.5

2.0

2.5

-US$0.47bn

+US$0.12bn

-US$0.42bn

-US$0.13bn

-US$0.67bn

1.0

0.5

0.0

Premium Claims

Total premium and claims 2007-2011 (inc. minor loss estimate)

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This was mainly a result of airlines ceasing operations,

consolidating, seeing their average fleet value (AFV)

drop below US$150 million (the threshold used for

inclusion in this data set, see page 35 for details),

joining or exiting group placements or no longer

insuring their programmes within the recognised

international airline insurance markets.

The number of airlines that have come out of the data

is 35, mainly the result falling AFV, 12 organisations,

joining group placements, 11 organisations. Seven

airlines formerly in our data have ceased operations.

At the other end of the scale, 23 airline insurance

programmes, totalling just over US$132 million in

terms of lead hull and liability premium, have joined

the data. This is dominated by 15 airlines, representing

US$42 million of lead premium whose AFV forecasts

climbed above the US$150 million mark. The

remainder is comprised of six airlines that have left

group programmes, representing US$38 million, two

airlines consolidating and a solitary new carrier.

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.

Jan Apr Jul Oct

Averages exclude September 11th losses

US$

mill

ion

s

2010 2011 Average 1996-2010

0

500

1,000

1,500

2,000

Valu

e of

cla

ims

(US$

mill

ion

)

Average, 1995-2011

2,000

1996


1999 2002 2005 2008 2011

1,500

1,000

500

0

Cumulative claims 2011 (including minor loss estimate)

Value of claims, global 1995-2011

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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.

According to Ascent Worldwide’s data, there were 1.8

billion aircraft 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 as the result of the high levels of

investment in technology, quality and safety and

industry standards.

Ground handling and airport services should also be

commended for their necessary contribution to the

improvement loss statistics.

1995 1998 2001 2004 2007 2010

Source: Aon market/Ascend dataAverages exclude September 11th 2001

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

Passenger fatalities per flight

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Continuing the trendThe risk of an incident remains the same, and while

2011 was fantastic in terms of claims, 2007, 2009

and 2010 were well above the long term average and

2008 was only slightly below.

Underwriters tend to look at the profitability of a book

of business over a five year period, so the longer term

numbers take some of the shine from the 2011, which

may turn out to be exceptional in the true sense of

the word.

As stated in the executive summary however, the

low level of claims in 2011 will be a single element

in the downward pressure on the market in 2012.

Underwriters look at the risk profile of an insurance

programme on an individual basis as well as taking

into account overall insurance market trends. The low

level of claims will mean more airlines with improving

loss histories and should improve the negotiating

position for insurance brokers and risk managers.

Underwriters’ appetite for reacting positively to 2011’s

results will clearly not depend purely on technical

pricing, rather the commercial realities of the global

market in which they are trading and set against the

fact that they are currently close to the nadir of the

market cycle.

Whatever insurers debate between technical and

commercial pricing, one thing is certain: if you are

in the market, you have to write business to meet

targets. The question is which portfolio and how

broad or selective it should be. Insurers are looking

at new areas to grow their business and make up for

premium leaking from their airline book.

The trend of increasingly aggressive forays into

the aerospace and general aviation segments

has only served to further soften market-wide

aviation prices. We are also witnessing insurers (re)

entering geographies or products from which they

had previously withdrawn deeming pricing to be

inadequate. Evidence of this flow of capacity at a

micro-market level can be seen risk for risk. On a

macro level, the aerospace and general aviation

markets are also benefitting as a premium source to

substitute airline loss in premium.

Just to keep the positive note for buyers, underwriters

are aware of the much rumoured news of new

capacity entering the market. The greatest effect will

be if this takes place in the direct rather than through

the reinsurance market.


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Asia Pacific in poleLast year appears to have confirmed the primacy of

the Asia Pacific region in the airline industry. According

to the forecasts provided to insurers, the region now

has the highest average fleet value (AFV), the highest

number of passengers and the second highest average

aircraft value. Moving to the top of the tree means that

the region now reports the highest amount of lead hull

and liability premium.

As can be seen from the regional fleet value chart,

the proportion of AFV represented by the majority of

regions over the last five years has stayed relatively

steady for Africa (2%), Europe (27-29%), Latin America

(3-4%) and the Middle East (7-9%). The greatest

change has come in the Asia Pacific region, where

the proportion of global AFV has grown from 30% in

2006 to 36% in 2011. This change has occurred at

the expense of North America, where the considerable

economic challenges that the airline industry has faced

has meant that the global proportion of AFV in the

region has fallen from 31% in 2006 to 22% in 2011.

It should be pointed out that there is an unusual

conflux of economic circumstances for North America

as well as ultimately the fact that the region is

already very mature from an aviation point of view,

particularly in comparison with the Asia Pacific market,

which has been enjoying a giddy period of growth

over the last decade.

For the latest analysis of airline insurance market

trends, please go to www.aon.com/aviationinsight.

Africa Asia Pacific Europe

Latin America Middle East North America

*Estimate

2007

2008

2009

2010

29%

3%

8%

22%

3%

33%

28%

25%

9%

3%

2%

2%

28%

4%

8%

26%

29%3%

8%

2%

30%

27%3%7%

31%

2%31%

32%27%

35%

2011

Regional fleet value 2006-2011

http://www.aon.com/aviationinsight

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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.

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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.

The fantastic claims result in 2011 has had ramifications across the airline industry. The challenge is delivering results in 2012 to prove that the industry has achieved a genuine reduction in risk.

Analysis.


18

Conditions softened as the year progressed, influenced by the play in market capacity and the low level of claims in the industry

Quarterly/monthly data

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Total Renewals Fleet Value

Passenger Movement Premium Hull/Liability

2010 2011 % change % change % change 2010 (US$m)

2011 (US$m) % change

Jan 2 - - - - - - -

Feb 2 3 +50% +45% +9% 3.98 5.03 +27%

Mar 7 4 -43% +7% +20% 11.95 12.65 +6%

Quarter one 11 7 -36% +14% +16% 15.93 17.69 +11%

Apr 19 20 +5% +14% +16% 129.36 124.48 -4%

May 19 14 -26% +10% +11% 61.57 66.75 +8%

Jun 12 16 +33% +1% +2% 53.11 54.21 +2%

Quarter two 50 50 0% +7% +12% 244.04 245.44 +1%

Jul 35 31 -11% +8% +15% 238.85 232.81 -3%

Aug 6 7 +17% +10% +15% 34.02 41.57 +22%

Sep 6 6 0% +47% +38% 23.69 26.23 +11%

Quarter three 47 44 -6% +7% +12% 296.56 300.61 +1%

Oct 14 13 -7% 0% +19% 156.47 148.39 -5%

Nov 37 38 +3% +8% +7% 262.14 233.98 -11%

Dec 65 62 -5% +5% +5% 901.07 869.17 -4%

Quarter four 116 113 -3% +5% +20% 1,319.68 1,251.54 -5%

Total/Average 224 214 -4% +6% +8% 1,876.21 1,815.28 -3%

The fourth quarter renewal season remains frenetic,

however less than 70% of the market’s premium was

placed during the period. At the beginning of the

century, 80% of premium was placed during the final

three months of the year, but this has been eroded

since 2004.

There are a number of attractive arguments both for

renewing in the final quarter and renewing during the

first nine months of the year, but at this stage there is

only a very gradual tide in favour of renewing during

the first three quarters when underwriters have the

time to discuss a renewal programme in detail.

Some airlines have taken out an option to extend

their placement, but there have been few to that have

taken it up at this stage. Placing insurance is part of an

airline’s wider financial strategy indicating Q4 remains

as a strong preference.

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Source: Aon market data*Estimate

Dec ‘1148%

Q1 ‘111% Q2 ‘11

13%

Q3 ‘1117%

Oct ‘118%

Nov ‘1113%


Dec ‘1129%

Q1 ‘113%

Q2 ‘1123%

Q3 ‘1121%

Oct ‘116%

Nov ‘1118%

Airline premium profile (proportion of lead hull and liability) Airline renewal profile (number of renewals)

Regional analysis

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Ana

lysi

s


Middle East

Africa

North America

Europe

Total/Average

Asia Pacific

Latin America

-15% -10% -5% 0% 5%

1%

-3%

-4%

-5%

-8%

-13%

3%

Percentage lead hull and liability premium change by region 2011

-5% 15%


13%

33%

25%5% 35%

Asia Pacific

Latin America

10%

Total/Average

9%Europe

8%

North America 0%

Africa -4%

Middle East

Percentage passenger projection change by region 2011

-5% -5% 15%


18%Latin America

14%

Asia Pacific 10%

Total/Average

7%Europe

6%

North America

6%

Africa

-4%

Middle East

Percentage average fleet value change by region 2011

The global economic travails have been keenly felt in the airline industry. On average premium has declined in the majority of regions, but the reasons have been different according to economic performance.

Africa2011 claims

1995-2010

average2010 2011

2011 compared to 2010

Number of incidents 9 12 4 -67%

Value of claims (US$m) 114 402 66 -84%

Number of fatalities 119 174 0 -

2011/12 insurance forecasts

2010 2011 % change

Total renewals 15 17 +13%

Premium (US$m) 110.45 102.07 -8%

Total AFV (US$m) 18,337.88 19,405.76 +6%

Total passengers (m) 51.33 49.36 -4%

Average liability limit (US$m) 970.59 985.29 +2%

Cost per passenger (US$) 2.15 2.07 -4%

Credit balance (US$m) -19.35 -85.09 -340%

Average aircraft value 31.05 33.59 +8%

While the number of passengers being carried by

African airlines is forecast to fall by 4% during the

course of the 2011/12 renewal programmes, the

total number is due to rise to 49 million as a result of

operations growing to meet our criteria. In 2007, the

number of passengers forecast to be carried was 33

million, so its growth to 49 million in 2011 suggests

an industry in relatively good health.

Seven of the 17 renewals that meet our criteria

forecast an AFV increase of more than 20% during

the course of their 2011/12 insurance programmes.

The region has the second lowest average aircraft

value, US$34 million per aircraft compared to

a global average of US$37 million.

21


2005 2008 2011


Perc

enta

ge

Ch

ang

e

10

20

30

40

-10

0

-20

Premium AFV Passenger

Regional premium and exposure movement 2005-11 Africa

Asia Pacific2011 claims

1995-2010

average2010 2011




Number of fatalities 205 370 44 -88%

The growth of the airline industry in the Asia Pacific

region continues, with passenger forecasts up 13%

on average and AFV forecasts due to rise by 10%.

There were similarly robust growth forecasts made for

2010/11.

The average value of an aircraft in the Asia Pacific

region is just over US$57 million, compared to US$37

million on average. The high value of average aircraft

reflects the significant fleet investment that has been

made over the last five years, with the region one of

two that is particularly active in the purchase of new

generation wide-body aircraft.

22


Ana

lysi

s

Regional premium and exposure movement 2005-11 Asia Pacific


2010 2011 % change

Total renewals 53 57 +8%

Premium (US$m) 510.02 513.73 +1%

Total AFV (US$m) 241,325.83 266,327.25 +10%

Total passengers (m) 805.36 909.73 +13%

Average liability limit (US$m) 1,270.18 1,300.53 +2%


Credit balance (US$m) 1,217.70 693.80 -43%


2005 2008 2011Source: Aon market dataPe

rcen

tage

Cha

nge

10

20

30

40

-10

0

-20



23

2005 2008 2011Source: Aon market data

Perc

enta

ge

Ch

ang

e

10

20

30

40

-10

0

-20


Regional premium and exposure movement 2005-11 Europe

Europe2011 claims

1995-2010

average2010 2011





Airlines in Europe enjoyed a reduction in lead hull and

liability premium on average during 2011, despite

exposure increases.

Passenger numbers are forecast to grow by 9%, but

Asia Pacific’s 13% increase means that Europe no

longer has the highest number in the airline industry.

Given the economic conditions, this is likely to

continue in the short term at least.

After climbing at the joint slowest rate in 2010

(2%), lead hull and liability premium has fallen

by around 4% on average for 2011/12 airline

insurance programmes.


2010 2011 % change

Total renewals 71 66 -7%

Premium (US$m) 528.35 508.07 -4%

Total AFV (US$m) 202,631.56 217,492.40 +7%


Average liability limit (US$m) 1,009.24 979.70 -3%


Credit balance (US$m) -150.94 -35.99 +76%

Average aircraft value 35.36 34.85 -1%


24A

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sis

Regional premium and exposure movement 2005-11 Latin America

Latin America2011 claims

1995-2010

average2010 2011




Number of fatalities 108 78 25 -68%

After a peak in 2009, average premium in 2011 in

Latin America has risen by a relatively modest

amount, despite projected passenger increases

of over 40% as well as healthy AFV growth.

The exposure growth reflects the robust economic

conditions in some countries in the region, with five

of the 13 Latin American airlines that report forecasts

suggesting that passenger numbers will grow by

more than 20% during the course of 2011/12

insurance programmes.

Given that the value of claims was around average

in 2011 and the number of fatalities very low, it is

unsurprising that five year credit balance in Latin

America is much improved, at US$103 million

compared to -US$76 million for 2010/11 placements.


2010 2011 % change

Total renewals 18 18 -

Premium (US$m) 98.47 101.91 +3%

Total AFV (US$m) 20,673.37 24,336.58 +18%


Average liability limit (US$m) 943.06 984.72 +4%


Credit balance (US$m) -75.97 102.61 +235%



Perc

enta

ge C

hang

e

10

20

30

40

-10

0

-20



25

Middle East2011 claims

1995-2010

average2010 2011





After two years where lead hull and liability premium

has been relatively high, Middle East based insurance

programes enjoyed a healthly level of average rate

reduction given the supportive factor of growth in risk

exposures for 2011/12.

There are a number of reasons for this, not least the

economies of scale that airlines with large modern

fleets tend to attract from underwriters.

The average aircraft value in the Middle East is US$82

million, compared to US$37 million on average

globally, and has risen by more than 25% since

2010/11 placements.

Five year credit balance, while still in the red, has

improved considerably since 2010. This region’s

statistics are influenced by one particular claim and

that programme’s subsequent price adjustment.


2010 2011 % change


Premium (US$m) 129.74 113.02 -13%

Total AFV (US$m) 53,219.72 60,785.07 +14%


Average liability limit (US$m) 1,229.17 1,208.33 -2%


Credit balance (US$m) -244.03 -59.90 +75%



Perc

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10

20

30

40

-10

0

-20


Regional premium and exposure movement 2005-11 Middle East

North America2011 claims

1995-2010

average2010 2011





Economic conditions in North America have made

this a challenging period for airlines in the region,

with fleet value projected to continue to wear away

during the course of 2011/12 insurance programmes.

There are a number of reasons for this, but of

consolidation among the US majors plays a

significant role, bringing with it restructuring and

fleet rationalization.

The position may change as 2012/13 insurance

programmes are discussed, with new aircraft

deliveries set to rise, particularly in the mid-range.

North America now has the lowest average value

of aircraft in the industry, although the high number

of aircraft relative to the rest of the world is a major

factor in this.T


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Regional premium and exposure movement 2005-11 North America


Perc

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Ch

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10

20

30

40

-10

0

-20

Premium AFV


2010 2011 % change


Premium (US$m) 499.18 476.49 -5%

Total AFV (US$m) 174,362.04 167,193.60 -4%

Total passengers (m) 789.11 786.89 0%

Average liability limit (US$m) 1,177.34 1,249.22 +6%


Credit balance (US$m) 720.51 774.17 +7%

Average aircraft value 23.82 22.54 -5%

Sector analysisDespite overall premium reductions, exposure growth was prevalent across the airline industry for 2011/12 placements.

Total Renewals Premium

2010 2011 % change 2010 (US$m) 2011 (US$m) % change

Flag 63 67 +6% 1,114.70 1,050.97 -6%

International 24 25 +4% 160.07 160.83 0%

Low-cost 36 32 -11% 214.17 210.98 -1%

Charter 37 29 -22% 84.09 83.11 -1%

Regional 43 41 -5% 201.66 212.18 +5%

Cargo 11 13 +18% 92.47 87.50 -5%

Other 5 7 +40% 9.05 9.71 +7%

Total/Average 219 214 -2% 1,876.21 1,815.28 -3%

Fleet Value Passengers

Total (US$bn) % change Total (m) % change

Flag 487,557.73 +6% 1,707.36 +5%

International 67,941.36 +10% 246.92 +15%

Low-cost 83,063.02 +8% 593.40 +12%

Charter 22,438.91 -2% 83.84 +11%

Regional 43,808.81 +7% 239.69 +15%

Cargo 45,766.01 +8% NA NA

Other 4,964.84 +21% NA NA

Total/Average 755,540.67 +6% 2,873.54 +8%

27


28


-10% 0% 10%

-6%

-5%

-3%

-1%

-1%

0%

5%

7%

Flag

Cargo

Total/Average

Low-cost

Charter

International

Regional

Other

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Percentage average fleet value change by sector 2011

-5% 15% 25%

21%

10%

8%

8%

7%

6%

6%

-2%

5%

Charter

Flag

Total/Average

Regional

Cargo

Low-cost

International

Other

0% 20%


15%

15%

12%

11%

8%

5%

10%

Flag

Total/Average

Charter

Low-cost

International

Regional

Percentage lead hull and liability premium change by sector 2011

Percentage passenger projection change by sector 2011

Average Liability Limit Cost Per Passenger Credit Balance (US$)

2011 (US$m) % change Total (US$) % change 2010 2011

Flag 1,503.36 0% 0.62 -11% 558.49 273.07

International 1,232.00 +3% 0.65 -13% 324.73 282.81

Low-cost 976.56 +1% 0.36 -12% 515.68 699.60

Charter 996.90 0% 0.99 -11% 181.86 343.56

Regional 740.98 +4% 0.89 -9% -138.43 -249.27

Cargo 1,071.15 0% NA NA -15.02 12.32

Other 892.86 +4% NA NA 20.62 27.51

Total/Average 1,131.96 +1% 0.63 -11% 1,447.92 1,389.60


29

FlagFlag carriers have enjoyed relatively benign treatment

from the airline insurance markets during 2011, with

66% of placements enjoying lead hull and liability

reductions compared to an industry average of 54%.

The reductions come in spite of relatively healthy

exposure increases (while 6% AFV and 5% passenger

increases appear relatively modest in comparison

with some other sectors, given the size of the

numbers involved, even a 1% increase

is significant).

The sector’s credit balance deteriorated significantly.

This was the result of minor incidents and historic

claims being settled, rather than a disproportionate

number of incidents (see page 12).

As would be expected for flag carriers, the average

aircraft value is slightly above the industry average at

US$41 million per aircraft compared to an industry

average of US$37 million the sector’s AFV is more

than the rest of the industry put together.


30

InternationalDespite significant exposure increases during 2011,

lead hull and liability premium for the international

sector has been flat on average, meaning that rates

overall have fallen.

The exposure increases have been fairly universal,

with only six of the sector’s 25 carriers forecasting a

reduction in AFV, only three of which by more than

5%. This suggests that the sector is in fairly rude

health, despite the challenging economic headwinds.

It potentially reflects the sector’s position as enjoying

many of the benefits of flag carriers in terms of

economies of scale and bargaining power with both

the insurance markets and more widely without the

involvement of government. This forces them to be

more efficient and innovative and removes some

of the funding uncertainties that must be being

discussed as governments in many parts of the world

respond to fiscal constraints.

The sector’s average aircraft value is second only to

the others sector, which is mainly comprised of private

non-commercial Middle Eastern carriers.

Low-costSimilar to the international sector, low-cost carriers

enjoyed positive treatment from the airline insurance

markets, with average reductions in lead hull and

liability premium despite healthy increases in both

passenger and AFV forecasts.

The sector now represents around 12% of total

annual lead hull and liability premium, compared

to 5% in 2005.

Nine of the 32 low-cost carriers that meet the criteria

for inclusion in this data set have seen their AFV

forecast fall below the 2010/11 total, while only

four are expecting a lower number of passengers.

Interestingly, the majority of the reductions in AFV are

relatively minor, reflecting a reduction of fleet size by

three aircraft or simple depreciation.

In keeping with the sector’s philosophy, low-cost

carriers have the lowest insurance cost per passenger,

US$0.36 compared to an industry average of

US$0.63. This has fallen by 12% compared to

2010/11 programmes, a reduction that is broadly in

line with the industry average.

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31


CharterLead hull and liability premium is down 1% on

average, AFV down 2% but projected passenger

numbers are up 11% as a result of healthy projections

across the sector.

Over a third of the airlines in the charter sector have

a deteriorating credit balance, although six of these

are within US$3 million of their 2010/11 total,

suggesting that minor losses have reduced the

sector’s credit balance, rather than significant claims.

Overall the sector’s credit balance has appreciated.

Regional Lead hull and liability premium in the regional

sector increased by 5% on average for 2010/11

insurance programmes, but this was coupled with

significant increases in exposure, up 7% in terms

of AFV and 15% in terms of passenger forecasts.

While broadly in line with the industry averages,

this is something of a deceleration for the sector

compared with 2010/11 renewals, when regional

carriers had the highest AFV and passenger increases

forecast, as well as the highest increase in lead hull

and liability premium.

Of the 41 renewals in the regional sector, only four

are projecting a decline in the number of passengers,

while 10 are expecting to see their AFV fall.

The sector’s credit balance, the worst in the industry,

appears to have been gnawed away by a string

of minor losses: 19 of the sector’s 41 carriers have

seen their credit balance deteriorate over the last 12

months, 12 of which are within US$3 million of the

2010/11 credit balance.

CargoAfter suffering as badly as any during the worst of the

economic downturn, the cargo sector appears to be

investing in fleet once again, with nine of the sector’s

13 placements forecasting AFV increases.

Credit balance has also improved since 2010,

with only three airlines seeing deterioration in the

position, none of which is by more than US$1 million

suggesting minor rather than major losses are the

issue for the sector. Only a single carrier has a negative

five year credit balance with the airline insurance

market for 2010/11 placements.

Fleet value analysisExamining the sector by fleet value highlights the trend for rate reductions based on exposure growth to maintain the premium base.

Total Renewals Premium

2010 2011 % change 2010 (US$m) 2011 (US$m) % change

US$5bn+ 39 38 -3% 1,113.57 1,049.07 -6%

US$2-5bn 27 30 +11% 281.98 274.73 -3%

US$1-2bn 31 35 +13% 171.05 168.82 -1%

US$500m-1bn 38 28 -26% 97.29 97.03 0%

US$150-500m 84 83 -1% 212.33 225.63 +6%

Total/Average 219 214 -2% 1,876.21 1,815.28 -3%

32


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Fleet Value Passengers

Total (US$bn) % change Total (m) % change

US$5bn+ 564,484.41 +6% 2,039.89 +5%

US$2-5bn 98,542.11 +6% 437.05 +17%

US$1-2bn 50,004.79 +16% 224.59 +25%

US$500m-1bn 19,396.38 +9% 49.68 +5%

US$150-500m 23,112.97 +6% 122.33 +15%

Total/Average 755,540.67 +6% 2,873.54 +8%

33


-10% 10%


0%

15% 6%US$150-500m

0%US$500m-1bn

-1%US$1-2bn

-3% 11%US$2-5bn

-3%Total/Average

-6%US$5bn+

Percentage lead hull and liability premium change by average fleet value 2011

0% 30%


15%

9%

6%

8%

15%

17%

25%

5%

5%

20%10%

US$500m-1bn

US$5bn+

Total/Average

US$150-500m

US$2-5bn

US$1-2bn

Percentage passenger projection change by average fleet value 2011Percentage average fleet value change by average fleet value 2011

0% 20%


15%

-6%

16%

9%

6%

6%

6%

6%

10%

US$150-500m

US$5bn+

US$2-5bn

Total/Average

US$500m-1bn

US$1-2bn

Average Liability Limit Cost Per Passenger Credit Balance (US$)

2011 (US$m) % change Total (US$) % change 2010 2011

US$5bn+ 1,763.16 +1% 0.51 -10% 1,004.26 802.54

US$2-5bn 1,410.00 +1% 0.63 -17% 5.58 176.75

US$1-2bn 1,042.86 0% 0.75 -21% 226.60 140.51

US$500m-1bn 1,001.79 -2% 1.95 -5% 166.67 171.49

US$150-500m 823.98 +3% 1.84 -8% 44.81 98.31

Total/Average 1,131.96 +1% 0.63 -11% 1,447.92 1,389.60

In line with previous years, airlines with the largest

average fleet value (AFV) have received the best

average premium movements. There are a number

of factors involved in this, including the economies of

scale that programmes of this size bring, as well as the

amount of an underwriter’s target that they can fulfil

at a stroke.

It should be pointed out that the US$5 billion+

segment is also the most profitable in the industry in

terms of the five year credit balance and generates the

most premium on an annual basis by some margin.

That said, looking at the data on a cost per passenger

basis which reflects the rating of a risk, shows that

the real cost of insurance has improved most for the

US$2-5 billion and US$1-2 billion segments. These

segments have also enjoyed the highest level of

exposure growth.

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Inclusion Criteria/NotesThe information featured in this report is representative of market

trends only. With vertical or fragmented marketing, sourcing exact

percentage rate movements and/or shifts in premiums can sometimes

prove difficult.

Our analysis is therefore representative of airline programmes with

an insured average fleet value equal to or greater than US$150

million. Average fleet values are the average projected value of a fleet

during the entire length of an insurance programme, rather than at

a specific date.

Flag carriers are classified as national airline, international carriers

are airlines that fly intercontinental but are not flag carriers.

Rate and premium movement percentages are based on the London

nett lead hull and liability terms.

Five year credit balance describes the difference between the total

value of claims and the total amount of premium collected over

five years.

Insurance cost per passenger is worked out by taking the total cost

of hull and liability premium for an industry segment and dividing it

by the total number of expected passengers.

Where airlines have replaced their programmes or have implemented

short-term policies, the full annual figures have been used for

calculation purposes on their accounts. If placements have changed,

through the addition or deletion of airlines, no allowance has been

made in the expiring figures.

Unless otherwise stated, all data is based on Aon market data.

Aon loss data is based on information from Aon Benfield Aviation

Reinsurance. Loss data excludes 9/11. The loss regions are

based on the domicile of the airlines involved, rather than where

the loss occurred.

It should also be noted that for comparison purposes all local

currencies are converted to US dollars.

This review focuses on western built, non-military aircraft and

airline organisations.

Unless otherwise stated long-term loss refers to the period 1995 to

2010.

Please note figures may differ due to rounding.

Due to the sensitive nature of the issues involved,

the losses overview features only those incidents with an incurred hull

and liability loss value of US$1 million or above.

35


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.

36


Ana

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Overview.The aerospace industry continued to defy gravity during 2010, continuing a trend laid down in 2007.

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

Simon KnechtliHead of Aviation

[email protected]

+44 (0)20 7086 4554

David Boyle

Head of APAC

[email protected]

+44 (0)20 7086 4940

John LevackHead of EMEA

[email protected]

+44 (0)20 7086 4555

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[email protected]

+44 (0)20 7086 4568

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[email protected]

+1 (0)214 989 2211

For more information, please contact:

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Aon Airline Insurance Market Outlook 2012 WEB

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