The normally stable aviation insurance sector has experienced an unexpected wave of financial tremors in recent months, leaving many anticipating potential rate increases and other market disruption.
At 9:30 p.m. Eastern Daylight Time yesterday, an Air Algerie flight carrying 110 passengers and five Canadians disappeared from radar and crashed on a flight from Burkina Faso to Algiers.
Earlier that same day, an ATR-72 twin-engine turboprop carrying 74 passengers crashed in Taiwan.
The two Malaysia Airlines crashes alone may have been enough to disturb the market, but add to that an attack on a Libyan airport that damaged 20 planes, as well as two Taliban attacks on Karachi airport in Pakistan, means the industry is currently facing hefty payouts without the premium dollars to back them up.
In fact, a New York Times report estimates that aviation war risk insurance claims for the last five months now total $643 million, while the sector typically gathers just $70 million in annual premiums.
Also problematic is the wording within Malaysia Airlines’ liability policy. A typical clause that stipulates sub-limits for search-and-rescue costs is missing from the airline’s coverage, meaning its cap — an unusually high $2.41 billion — is the only ceiling Malaysia Airlines faces.
That means the company could potentially see reimbursement form insurers for tens of millions of dollars under search-and-rescue costs, particularly if international governments choose to bill Malaysia Airlines for ongoing efforts to locate MH370, the flight that disappeared near Australia in March.
All of that activity has the potential to disrupt pricing structures in the aviation insurance industry, says Insurance Information Institute President Robert Hartwig.
“The accumulation of losses in the aviation insurance market will likely exert upward pricing pressure on coverages typically purchased by international carriers,” Hartwig said, “particularly those that operate in or traverse zones where military and political conflict has heated up — Ukraine, parts of the Middle East and North Africa, in particular.” (continued.)
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While the incidents have the potential to shake up the aviation insurance market, brokers stateside may not have much to worry about, however. Hartwig noted in March that North American airways have been free of any major disaster for some time.
“The safety record remains absolutely stellar,” said Hartwig.
He also added that he does not expect instability in markets, and that both insurers and reinsurers have capital on hand to pay the heightened claims.
Still, things are changing in the industry, he said.
“The risk profile of international aviation has shifted,” said Hartwig, “becoming riskier and justifying a response in terms of underwriting and pricing.”
