Aviation insurance buyers had reason for some satisfaction in 2006, as fierce competition from underwriters looking to maintain their portfolios in the face of low loss levels helped keep their costs down.

On the other hand, there is also reason for concern, with some experts predicting the insurance industry will not have the funds needed to pay out the mega-losses that could result from a major airline crash--and just barely enough to cover another benign year like 2006.

Steve Doyle, head of Chicago-based Aon's aviation practice, said that total lead premium--premium available to the lead underwriter on a specific risk--was down nearly 20 percent for the year.

"The question this poses is how much further can the airline insurance market fall without a return to the boom-and-bust market cycle," Mr. Doyle wrote in Aon's Airline Market News, published in January.

Insurers have made significant investments to attract and retain staff, thus increasing their need for premium revenue. "It seems unlikely that this can be sustained if the market is to remain profitable," Mr. Doyle wrote in the Aon report.

Insurance buyers may have to wait until April to get a good direction of where the market is heading. "Capacity levels are unlikely to change quickly with the levels of investment made to introduce new underwriting operations and influence the underwriting year," the Aon report said.

Programs with good loss records are liable to continue to attract strong reductions during the early months of 2007, "although some underwriters are likely to be examining their commitment to the airline market, given the current environment," Mr. Doyle observed.

"Rather than when the market will harden, the key question for 2007 will be how much further it can fall before there is change in the underwriting stance," he added.

The London-based aviation consulting group Ascend said this month that aviation insurance premiums are running dangerously low, threatening the industry's ability to cope with major losses.

Ascend estimates the aviation industry incurred losses of around $1.4 billion last year. The impact of this is that written premiums for airline hull and legal liability have now fallen below $2 billion, which it said was some $500 million below the level insurers have previously indicated they would need in order to build up the necessary reserves for future disasters.

Gehan Talwatte, Ascend's managing director, said the industry is running a real risk of being caught short. "The past five years have been good for the industry in terms of safety, but it cannot afford to become complacent," he said in a statement.

Mr. Talwatte added that if you take away 30 percent of the premium needed to meet market-running costs, it leaves only about $1.4 billion to pay actual claims--exactly coinciding with the level of losses incurred in 2006.

"Nothing is being put aside as a cover for a major catastrophe," he noted.

Thomas G. Kaiser, executive vice president of the Special Risks Division at Arch Insurance Group, said the challenge for today's airlines remains the ability to obtain the appropriate limits for the worst-case scenario.

"The big driver is the potential for a collision of two 747s over a city, and to make sure there is enough liability limits to deal with such an awful event," he said.

With airlines buying $2 billion-plus in liability limits per occurrence, "it requires the entire industry to participate."

The industry has recovered since the attacks of Sept. 11, which represented the most serious set of losses in decades, with five years of relatively low losses, Mr. Kaiser said.

Technical improvements for the airline industry--including advanced avionics, such as terrain-finding radar, and instruments to prevent mid-air collisions--all make for safer airplanes. But on the other hand, a stressed air-traffic control system could negate all those improvements in the blink of an eye, he noted.

The potential to have a disaster is really one of possible human error arising from "a problem with a person, and not the technology," he added.

Mr. Kaiser estimates that prices for the combined property-casualty airline packages were down 15 percent this past year.

In another twist, with a new mega-merger of airline carriers being rumored daily, insurers have to plan for an increasingly consolidated industry.

"Airline consolidation does not necessarily mean fewer planes to insure. What it tends to mean is stronger financial companies that are willing to take on more risk themselves," according to Mr. Kaiser.

The aviation market consists of three pools, with varying insurers participating. "Each one brings about $200 million in capacity to the table," Mr. Kaiser noted.

Pool participation has remained fairly stable over the years, with insurers deciding that this is the best way to take part in the business, he added.

Mr. Doyle said that airline account renewals are no longer crammed into December--with that figure at about 70 percent, down from 80 percent in 2003.

"The main reason for the decline appears to be the movement of a number of programs out of the renewal season in an attempt to gain some differentiation from the rest of the market," Mr. Doyle said.

The federal government continues to recognize that under the Aviation War Risk Insurance Program, terrorism acts aimed at the state need not be covered under commercial policies.

"But the majority of other governments expect aviation operations to cover the risk under commercial policies," noted Mr. Doyle. "Many believe that this is distorting the insurance aviation market, and we continue to lobby governments to follow the U.S. lead."

Special Reports /

As Aviation Prices Plummet, Sellers Fear Worst-Case Scenario

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