Airline Insurance Premiums Still Falling in Buyer’s Market

 - July 22, 2013, 1:10 PM
The IAG group, consisting of British Airways and Iberia, was the largest operator to renew its insurance cover during the second quarter of this year. BA recently enlarged its fleet with the delivery of its first Airbus A380. (Photo: Airbus)

Airlines may still be struggling with rising costs associated with factors such as fuel and taxes, but they are winners when it comes to insurance premiums. New data released by insurance broker Willis shows that premiums have continued to fall this year. “The balance of power in airline insurance purchasing remains firmly in favor of the buyers,” concludes the London-based group in the second-quarter edition of its Airline Insight report released on July 15.

According to Willis, downward pressure on premiums results from low levels of insurance losses combined with “abundant” capacity among insurers. The company does not see the situation changing soon. “As a result the downward slide in premiums looks set to continue unabated,” it said.

Analysis by Willis shows that airline premium levels fell by 5 percent in the first half, which resulted in insurers’ collecting $13 million less in premiums. At the same time growth in risk exposure remains in the mid single digits, suppressing rating levels to the extent that average hull rates now stand at 11 percent and average liability rates per passenger have fallen by 13 percent. As a result, the overall insurance cost per passenger has dropped 12 percent. Perhaps counter-intuitively, premiums had continued to fall despite the rise in exposure, said Willis.

The latest Airline Insight report concludes that airline insurance market activity increased following a quiet first quarter. Average fleet values and estimated annual passenger numbers continued to rise in both April and May, while hull and passenger liability rates continued to fall. June saw the largest level of premium reductions by percentage of any month since December 2012.

Losses for the first six months of 2013 stood at $488 million, including an estimate of additional losses incurred. By contrast, premium income for the same period totaled just $237 million, resulting in a loss ratio of more than 200 percent. However, according to Willis, those figures don’t reflect an uncommon situation at the half-year mark because a relatively small number of carriers have renewed cover this year. The largest single loss so far this year resulted from the April 13 crash of a Lion Air Boeing 737-800 at Bali in Indonesia. Willis predicts that the July 6 crash of an Asiana Airlines Boeing 777 while landing at San Francisco will do little to alter the downward trend in insurance premiums.

IAG (the combined British Airways/Iberia group–the largest operator to renew during the second quarter) operates a fleet valued at more than $40 billion and carries more than 160 million passengers a year. The second largest airline to renew its insurance cover–China’s Hainan Airlines–operates a fleet worth more than $17.5 billion and carries some 53 million passengers annually.