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A review of the aviation hull war market

Aerospace
COVID 19 Coronavirus

By David Langran and James O’Grady | September 29, 2020

David Langran, Atrium and James O’Grady, Willis Towers Watson, consider the impact on hull war insurers as a result of soft market conditions and increased quantum of losses.

The aviation war market finds itself in a position of rebalancing. Benign experience after 9/11 had driven capacity to all-time highs and rates to near-historic lows. This was interrupted with a jolt in 2014 when catastrophic losses in Libya, in tandem with other events in Pakistan and for Malaysian Airlines, wiped out years of underwriting profit. Underwriters hoping to recoup their losses with several loss-free years, as was largely the case after 9/11, were swiftly disappointed: the war market has suffered a steady stream of losses great and small from a diverse range of sources in the years since 2014. The vulnerability of a class where premium income was insufficient to bear even a single moderately large hull loss was highlighted again and again to participants. Despite this, rating failed to respond in kind, leading to numerous exits from the war market as underwriters and their managements despaired of ever realising profitable margin from the class. Hundreds of millions of dollars of capacity left the market, narrowing the options for brokers and clients considerably.

Hundreds of millions of dollars of capacity left the market, narrowing the options for brokers and clients considerably

Inevitably the tipping point between supply and demand was reached and rates began to inch upwards at the end of 2018 and early 2019. The decision to arbitrate the MH370 disappearance as a war loss in summer 2019, together with developments in the wider aviation market, led to added momentum for rating improvement, with substantial increases commonly seen on renewals by the final quarter of 2019. However, the continued precariousness of the war market’s position was starkly highlighted at the beginning of 2020 when the accidental shootdown by Iran of Ukrainian International Airlines flight 572, together with a significant general aviation loss in Kenya in an Al Shabaab attack on a U.S.-Kenyan airbase at the same time, wiped out premiums for a substantial portion of the market. Subsequently renewal rating has increased further on all hull war business. This represents the urgent transfusion of premium necessary to re-balance the war market and place it on a sustainable footing going forward.

The focus on COVID-19 has meant that conflicts and political tensions around the world have perhaps gone under-reported

It is also important to remember that the risk environment in which war underwriters operate remains extremely challenging. The focus on COVID-19 has meant that conflicts and political tensions around the world have perhaps gone under-reported. Libya, Syria and Yemen remain in conflict, posing considerable threat to aviation assets operating in or near all three. The Houthis in Yemen have seemingly renewed their attacks on Saudi Arabia, using drones and missiles against a wide range of targets including airports. A border dispute between China and India saw the first loss of life in fighting between these two nuclear powers since the 1970s and tensions remain high. North Korea demolished the liaison office that served as a de facto embassy between it and South Korea whilst issuing threats of military action against its southern neighbour. Turkey has been active in the Mediterranean, reportedly harassing a French naval vessel (which it has denied) in an apparent response to tensions arising from both countries’ roles in the fighting in Libya, threatening Greece with war for extending its territorial waters, and using its air force to attack Kurdish areas of Iraq and Syria. And the drivers of tensions between the U.S. and Iran that led to the shootdown of flight PS752 in January have not gone away.

The war market is experiencing rapid change in response to challenges to both the fundamental economics of the business as well as the geopolitical context

In short, the war market is experiencing rapid change in response to challenges to both the fundamental economics of the business as well as the geopolitical context in which we underwrite. It is re-positioning itself for a ‘new normal’ where losses are more frequent, but income is there to absorb them and allow underwriters a reasonable profit whilst supporting our clients’ operations. Ultimately, we exist in a context in which the consistency of losses experienced since 2014 now must be viewed as indicative of a trend rather than an aberration and the war market needs to adjust its underwriting accordingly.

Authors

Atrium Underwriters

Associate Director, General Aviation

Willis Towers Watson


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