The Future of Aviation Insurance in 2015

From the Aviation Law Blog by Bob Cotter and Marty Montemore

The year 2014 was devastating for the aviation world. Major incidents resulting in the tragic loss of hundreds of victims covered the headlines throughout the year, including the most recent disappearance of an AirAsia Jet carrying 162 people. The weight of these catastrophes on relatives and loved ones is unimaginable.

These disasters also affect the aviation insurance market. But, what will the consequences look like moving forward into 2015? Allianz released its global claims review study for 2014, which said that the cost of aviation claims along with those catastrophic losses are pushing rates higher. It said, “The increasing complexity of aircraft design has implications for claims cost.”

International military aggression fuels increased war-risk insurance rates

Malaysia Airlines Flight MH17 was shot down over Ukraine last July, and fighting broke out at a Tripoli airport while militants attacked a Karachi airport last June. These war-risk incidents resulted in substantial losses for insurers and thus resulted in war-risk insurance rates going up dramatically. They could also affect the aviation hull and liability market.

Specifically pertaining to the war risk market, ratings agency AM Best predicted a surge in premiums as a result of global conflicts, saying, “For the niche aviation war risk market, losses … will considerably outweigh premiums written and insurers are expected to react with substantial rate increases. The rate increases will be constrained by the high level of capacity serving the aviation market.”

Global insurance firm Willis’ head of transportation broking and chief executive of Aerospace, Philip Smaje, estimated that hull war rates could rise as high as 300 percent due to the recent disasters

Incidents resulting from weather inclemency take a toll

The disappearance of Malaysia Airlines Flight MH370; the loss of an Air Algerie flight in Mali during a sandstorm; the crash of a TransAsia Airways plane in Taiwan that went down trying to land in typhoon conditions; and the recent loss of Virgin Galactic SpaceShipTwo, which was underwritten by aviation underwriters rather than space underwriters, are all examples of recent tragedies that can affect insurance rates in 2015 as well.

“Given the recent losses vs. premiums collected, that would suggest aviation insurance rates in general will increase,” said Dominic Burke, CEO of London-based brokerage Jardine Lloyd Thompson Group P.L.C. However, “the aviation market behaves in its own distinctive way,” he said.

Aviation travel is still one of the safest and most reliable forms of transportation. However, chances are likely that there could be an increase in premiums due to these tragic events of 2014.

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