Aviation Tug Of War Continues

"The survivors in the direct and reinsurance market will have to report exceedingly good prospects for profits, otherwise, they will be pulled out of aviation insurance," Mr. Thomsen said.

(See NU, March 18, page 6, for a related IATA article.)

"Aviation reinsurance capacity was provided in an unprofessional manner for years," he said. Further, he added, the overcapacity in the direct market was used by brokers to drive rates into the groundto 30 to 40 percent of the necessary level.

"Instead of getting out of the business, direct underwriters transferred almost all of their retained risk into the reinsurance market. This always works only for a limited time period, and this time, Sept. 11 put an end to it," he said.

Graham Nichols, the outgoing chair of the Aviation Insurance Offices Association in London, recently gave a report on the status of the aviation industry, in which he said the last five years showed negative cash flow, and, as a result, the market was in terrible shape before 9/11.

"One of the lessons that can be learned from these events is that the principles of insurance cannot be ignored," he said. "This is particularly relevant to aviation as a class of business where such high catastrophe exposures are seen. Insurers have to be profitable regularly and consistently in order to create sufficient reserves for major catastrophes."

During a speech at the IATA meeting, Christopher Duncan, vice president finance and chief risk officer for Delta Air Lines in Atlanta, Ga., reminded aviation insurers that U.S. airlines are having financial problems themselves. They cannot afford the $1.25 per passenger surcharge for $50 million of third-party war risk cover that insurers requested after 9/11, he said, noting that U.S. air carriers had losses in 2001 of $7.2 billion.

"Were well aware of the fact that [airlines] have serious financial problems. However, to put it bluntly, thats not our problem," according to Michel Rohr, underwriter aviation and associate director for Swiss Reinsurance Company in Zurich, in an interview.

He said aviation insurers have had losses over the entire decade prior to 9/11. "We think its nothing but correct that the insurance industry should be reflated, rewarded, whatever," he said.

The worldwide aviation market reported an average hull and liability combined loss of $1.5 billion for each year during the 1990s, according to statistics in the AIOA annual report.

The aviation insurance industry has reserved $4.2 billion for the potential losses of 9/11, even though there are some observers who speculate that the insurance industry might not be requested to pay that, Mr. Rohr noted.

"If it happens, then we can talk about it, but today as we speak weve got it in our books and, therefore, we think the insurance industry should be reflated and the money should flow in our way," he said.

"I can only speak for the insurance industry, and even more so for Swiss Re," Mr. Rohr said. "Weve got an obligation to our shareholders and we have lots of exposure even without the war risk."

The move to "reflate" the market wont be accomplished in only nine months, he said. "We need a considerable, higher amount of premium to flow into the insurance market for two or three years."

Mr. Rohr emphasized that the aviation insurance industry is not blaming the airlines for the fact that they have paid so little over the last five years. Rather, its because the insurance industry offered all the airlines prices that were "so ridiculously low," he said.

However, any risk manager or CFO of any airline in the world has to understand that the aviation market is more cyclical than other markets, he said.

"I say to each and every risk manager, if you want to ride the cycle, then please do so, but be aware that you might be forced to explain to your CFO why you have to pay five times more than last year, even without having a loss for your specific airline," he said.

Then on the other side of the equation, risk mangers can congratulate themselves for getting a 100 percent reduction in 1998-1999 for no reason, even for some airlines with losses, he said.

However, Deltas Mr. Duncan told IATA meeting attendees that the aviation insurance industry is taking advantage of the post-9/11 market in order "to demand and receive a massive amount of money." (He noted that Delta alone is paying $2.5 million a week for its terrorism surcharge.)

He said the marketplace had an understandable knee-jerk reaction in the weeks after 9/11, but nearly seven months have passed.

"Why are we still doing the same thing we were doing right after 9/11?" he questioned. "The answer is because the marketplace can. They have the market power to be able to do it."

As a result, the American Transport Association in Washington is going ahead with the formation of a risk retention group for the U.S. airline industry, called Equitime. (See NU, March 18.)

"The reason why most of the insurance industry doesnt want Equitime to get up and running is because with the war risk surcharge, they can demand and receive massive amounts of premium increases," he said. "We cant afford it. So were trying to do everything we can to take the risk off the table and [stabilize the] marketplace."

"To me its incredible that on the one hand you can cancel war risk and say this is an uninsurable risk, and on the other hand say, please dont [form Equitime] because it will pull some of the premium out of the marketplace. Its hypocritical."

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, April 8, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.