Here's why airline rates are going up next year

Late last year, the airline insurance market was seeing massive downturns in premiums, partially due to increased safety of airline travel. However, the litany of airline accidents that happened this past year have caused an unexpected increase in airline premiums for 2015, despite earlier reports at the beginning of this year that said otherwise.

At the end of 2013, buyers of aviation insurance saw a benefit to a soft market with increased competition between several insurers. Rates were going down by 10%, and it was expected that $150 million would have been eroded away from the premium market, establishing a premium volume lower than what it was before Sept. 11, according to market overviews released by both Willis and Marsh & McLellan. “It remains unlikely that a single catastrophe or even a number of significant losses will do anything to halt the downward trend,” the Willis report stated.

But the trend has reversed–and in dramatic fashion.

Recently, Willis released a new report that forecasted P&C premiums in a number of categories were dropping, sometimes as much as 15%. But airline insurance was one of the few categories that predicted the highest expected premium increases, as high as 30%.

“The loss events that happened in the summer certainly changed the direction of the marketplace,” says John Rooley, CEO of Willis' Global Aerospace Americas, referring to the two Malaysian Airline incidents, which when coupled with other Aviation accidents during 2014 have made it a poor loss year for many insurers.

There have been a number of high-profile airline crashes in the past year alone, first starting with the Malaysian Airline Flight MH370, which disappeared from radar in March. At the time, it wasn't expected that the loss of MH370, alone, could drive insurance rates up, according to Aon's market outlook report released directly after the flight's disappearance.

“At this early stage of the year, we believe it is unlikely that this incident will be a catalyst for a shift in current market conditions, however should there be another large loss or a string of losses this could change,” the report said.

Four months later, with Malaysian Airlines Flight MH17 shot down over Ukraine, a number of insurers began scrambling to make up for the expected losses.

“Some insurers are looking to reflate the market but it's not necessarily sustainable while over capacity exists,” says Rooley. 

In essence, the continued soft market for airline insurers has continued to benefit buyers, making it difficult to raise rates too high.

“It's a perfect supply and demand situation,” he says. “They'll lose business if they push it.”

Evidence of that has already surfaced, with a number of airlines who have renewed their insurance but only seen modest increases as opposed to the soaring price-hikes that were initially predicted.

This year, Allianz released its global claims review study, which said that the cost of aviation claims, along with those catastrophic losses from earlier in the year, is pushing rates higher.  

“The increasing complexity of aircraft design has implications for claims cost,” Allianz's report said.

However, any claims inflation tends to become evident over longer periods of time, and this alone would not drive up rates significantly, Rooley said.

In fact, all agree that the airline industry has taken massive strides in safety, and the increases have little or nothing to do with unsafe travel.

 “The airline industry is safer than it's ever been,” says Rooley.