The Wall Street Journal-20080116-Air Insurance- After a Dip- May Climb
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Air Insurance, After a Dip, May Climb
Plunging aircraft-insurance premiums have been a rare bright spot for airlines buffeted by soaring fuel costs. But that bright spot could be about to fade.
Last year was set to be the most profitable since 1999 for carriers, thanks to robust traffic. But it was the first unprofitable year in almost as long for the companies that insure their airplanes.
Aircraft insurers face a loss of some $300 million for the year, says aviation-consulting firm Ascend Worldwide Ltd. That means they may now add to airlines' pain by jacking up their premiums.
The insurers were hit by a combination of intense competition and expensive accidents, making 2007 the industry's first unprofitable year since 2000, according to Aon Corp., a major airline-insurance broker.
The number of accidents fell last year from 2006 and the total number of deaths also fell -- Ascend estimates there were 631 passenger fatalities, below the average of 718.9 annually for the decade so far. But the value of claims rose more than fourfold, to $1.8 billion from $400 million, Ascend estimates. Revenue from premiums, meanwhile, fell by roughly 10%, to $1.5 billion, Ascend says.
The aircraft-insurance market has grown increasingly competitive this decade thanks to a sharp decline in major disasters. Between late 2001 and 2007, insurers faced few big claims. Industry officials in 2006 began warning that the sector was getting lulled into a false sense of security -- and profitability.
Those warnings proved correct. Last year, two accidents involving new jetliners in Africa and South America killed more than 400 people and will cost insurers $700 million, Ascend says. The cost of small incidents has also risen recently, partly because new jetliners are more complex and expensive to repair than older models.
Expensive claims may have already slowed the drop in premium rates. Rates fell at around 20% in the first half of 2007, but only by around 10% in the second half, according to Magnus Allan, an Aon spokesman in London.
Stephen Riley, executive director at Global Aerospace Underwriting Managers Ltd. in London, said pressure is now growing for insurers to raise rates, or at least slow the rate of decline. Global Aerospace, a leader in the sector, and other established players have been ceding market share to new entrants who offer carriers lower rates. "We've been cutting back our exposure and getting more selective," Mr. Riley said.
Amlin PLC, another major underwriter, has also been reducing its portfolio to protect margins. Recent underwriting losses "should increase pressure on our competitors to raise future rates to more appropriate risk-adjusted levels," the company said in a statement on Friday.
Rising rates are unlikely to swing any carrier from profit to loss because insurance premiums generally account for less than 2% of airlines' cost, a tiny amount compared with fuel or labor. Insuring a jetliner costs about 0.1% of the aircraft's current value. Annual premiums range from less than $45,000 for a new single-aisle model from Airbus or Boeing Co. to about $145,000 for one of their new long-range widebody models, according to Ascend.
But with airline revenues poised to fall this year as major economies teeter on the brink of recession and with fuel prices rising, carriers remain focused on all costs where there is some room for negotiation.
Insurers, meanwhile, are unlikely to face damaging losses from aircraft claims because aviation remains a small part of the underwriting business. Industry officials are now watching to see which way premiums move. If underwriters face big losses in coming years, some may exit the market, Aon's Mr. Allan said. But having recently invested to enter the field, players are unlikely to leave quickly, he added. This continued competition would benefit airlines.
