September 2014 32 Bermuda:Re/insurance+ILS


“The abundance of available capacity and fierce competition means the voice of reason is sometimes drowned out by price.”


they diversify their portfolios. Wrigglesworth said he has seen a few new entrants already this year, driven by an appetite to develop by line. “There is a desire to diversify, and it’s one of the main drivers of the constant supply of new capacity.”


Currently, around 50 separate insurers are able to take a share of major international airline placements, which are written predominantly through just three brokers: Marsh, Willis and JLT. These firms have a commanding market share, while the competition between them is intense and prices tend to favour the insured. Wrigglesworth added that while there are some very knowledgeable, experienced leaders in the marketplace, “the abundance of available capacity and fierce competition means the voice of reason is sometimes drowned out by price”.


Aviation remains a favoured line among insurers as it is an uncorrelated line of business, but there are potential pitfalls in the pursuit of diversification in both insurance and reinsurance. As Wrigglesworth questioned: “Are rating agencies inquisitive about profitability by diversified line or is credit just given for the diversification in its own right?”


A final issue to tackle is the ramifications of these losses when


it comes to future rate heading. In recent times, an abundance of capacity has placed considerable pressure on pricing and terms and conditions across all aviation lines. AM Best says that international airline rates were significantly below peak levels at the beginning of 2014, and Wrigglesworth believes that this is due to consistent discounting that has taken place over the years.


It comes as no surprise that a number of significant sources in the marketplace are keen to eliminate the rate reductions of the last two or three years and get them back on track. Yet, in spite of a number of large losses in recent years, “the market has remained profitable, largely due to the positive development of prior year claims reserves, and fierce competition”, says AM Best.


AM Best says that for the niche aviation war risk market, losses this year will considerably outweigh premiums written and insurers are expected to react with substantial rate increases. “The market is able to respond quickly to large losses and escalation of political violence by imposing additional premium for airlines flying over areas deemed high risk,” said AM Best.


The three high-profile losses this year—the disappearance of Malaysia Airlines flight MH370, the downing of Malaysia Airlines flight MH17, and the hull loss of Air Algérie flight AH5017—should serve to halt the decline in aviation rates. However, increases will evidently be constrained by the wealth of capacity serving the market, so some uncertainty remains as to whether the aviation industry will regain its foothold as a high-flying specialty market of choice among diversified, global players.


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