2017 represented a ‘Market Turning Event’ for the worldwide insurance industry in the wake of the North Atlantic hurricane season. 17 named storms, including 6 major hurricanes, caused unprecedented levels of destruction totalling at least $290 Billion (USD) of damages. Whilst not considered a “capital” event, this nevertheless had a direct impact on premium ratings and capacity in the global insurance marketplace, accelerating the end of an enduring ‘soft underwriting cycle’ with the Aviation class right at the front of the queue.
Fast forward to the start of 2020 and the impact since 2017 has endured: insurance capacity has decreased, and reinsurance costs have inversely increased. In place of the soft cycle, there has been a “correction” in underwriting practice with bottom-line profit now mandatory in any underwriting business plan. Insurers have focused on the concept of ‘risk by reward’, charging premiums which can sustain operating costs.
Further losses and the direct impact of the COVID-19 pandemic on the aviation industry during the second half of 2020 led to extremely difficult negotiations between clients and the insurance market, carriers having to deal with the impact of grounded fleets whilst still negotiating an enduring “hard” insurance market and increased premium ratings as insurers maintained 2020 business plans signed off at the end of the pre COVID-19 era.
Fast forward another 12 months to 2021 and there are early signs of optimism.
Air Travel is up despite social and travel restrictions, as many seek to travel internationally, however traffic is still far from pre-COVID-19 levels.
Insurers have been sympathetic to the tough times clients have experienced, easing pressure on premium rating increases in light of the probability of enduring difficulty in travel conditions. The insurance market is now experiencing a deceleration of rate increases into single-digits; subject to risk and performance, negotiations are now concluding to more acceptable levels for both insurers and clients.
Insurance capacity is increasing, with new carriers entering the market and existing providers wishing to write more business. This has resulted in final market supporting levels in excess of 100% of limits required, improving program composite premiums.
2021 losses have so far performed well with no major loss of note; however it should be noted that the final quarter of any year is the most anticipated renewal season. The role of the insurance broker has never been more important during this pivotal time for clients: relationships with insurers are as crucial as the provision of high-quality underwriting information in a timely manner. Given these conditions, renewal negotiations should conclude satisfactorily.
General Aviation (G.A.)
The G.A. sector is no exception to the impact of COVID-19, with operations deeply impacted, leading to the same tough conditions experienced by their airline counterparts. Insurers in this sector were the first to kick off the upwards rating trend in 2017/18 and have undergone several years of rating corrections. Capacity had already been impacted since 2017 due to ongoing losses in the sector with tens of Insurers withdrawing from the class.
The rating correction was considered long overdue as insurers were not making enough income to pay for attritional losses.
There are brighter times ahead as 2021 losses remain largely inactive. The same deceleration in rate increases witnessed in the Airlines market have largely been mirrored in the G.A. market. The old adage of “Size and volume of premium matters” has seen a return of Long-Term Agreements (LTA) – not seen for some 5-10 years – return on major risks accepted by some insurers. The major market risks with good claims performance are also receiving ‘As before’ ratings.
Whilst confidence is returning, a major market loss could destabilise momentum. Insurers are therefore paying greater attention to technical policy conditions, which could add supplementary costs in the event of a claim. Minimum earnings remain a primary consideration on any deal.
Lighter-class General Aviation capacity is still limited as insurers require minimum premiums for each risk. This has inevitably increased prices for operators and in some territories above local treaty levels.
It is important to note that this sector is incredibly bespoke with multiple variables ensuring that no one risk is the same. There is a wide consensus that the General Aviation class and its associated ancillary coverages will soon be the subject of automated binding technology and Artificial Intelligence. Many brokers will recall forming an orderly queue in Lloyd’s to quote a single aircraft and thinking out loud how inefficient the quoting process was, now a world apart on how we work today. If there is any silver lining from this terrible virus within this particular context, the move to virtual working and digital platforms has expediated inefficient processes by a factor of many years.
Reduced traffic and airport activities over the last 18 months have impacted many buyers in this sector. The Industry is improving but remains far from pre-pandemic levels.
Whilst capacity has decreased within the General Aviation and Airlines sectors over the last 5 years, the Aerospace class has remained relatively stable. Whilst there has not been an influx of new insurance markets, confidence has always remained for insurance companies, even on the lighter non-critical Aerospace.
A market correction was also widely considered to be necessary. Momentum with insurers was not as fast as some would have hoped. Whilst premium ratings have increased, this has not been nearly enough to pay for the major losses in recent years, and some would argue further years of correction are needed to bring the sector to sustainable levels. That being said, insurers are offering greater capacity on low to medium risks which does bring much-needed healthy competition.
Whilst originally considered something of an “offshoot” of the wider Aviation class of insurance due to the fact it shares the same reinsurance treaty pool, Space is now considered a sub-sector in its own right.
In accordance with the very nature of space transport, the space insurance industry is a high-risk, high stakes venture, shaped by a number of forces which make it extremely unique. History shows that the space insurance market industry is sensitive to loss events and behaves in a cyclical manner. This is unsurprising, considering that space insurers earn the majority of their annual premium from the few insured launches that take place per year and that two large losses can wipe out the entire insurance premium generated in a year.
Broadly speaking, there are two main types of space insurance purchased by the main stakeholders, Asset insurance protecting the hull and third party liability insurance. The space insurance market generates the bulk of its premium from launches of traditional large, expensive geostationary (GEO) satellites.
Until as recently as 2012, the space insurance market generated strong returns, with losses few and far between compared to other classes of insurance. In the intervening years, market capacity consolidated as profits have still generally outweighed losses, despite the increased incidence of attritional losses as well as at least 2 yearly catastrophic losses occurring on an annual basis.
In 2019, a hitherto unseen combination of several catastrophic insured losses (both at launch and in-orbit) and a continued decline in market profitability due to a lower number of satellite launch risks led to numerous renowned insurers withdrawing from the market and a severe hardening of prices overnight, sometimes by a factor of up to 300%.
The hardened premium rating environment market led to difficult conversations with clients as they had only witnessed continuing yearly decreases on their premiums, despite in some instances providing yearly claims. This was considered to be widely needed as premium levels were openly recognised by all to be insufficient.
Since early 2020, the market has stabilised with rate increases decelerating and in some instances renewing on an “as expiring basis”. New insurance markets have entered, ensuring that capacity is not a problem, however there exists a patent disparity between manufacturers and launch vehicles, with insurers now openly favouring “proven” technology with clean claims records over accounts that have presented claims historically. Brokers must now work closer than ever with their clients to ensure that underwriting information is presented in a timely manner ahead of renewals and new technologies for launches clearly presented.
The COVID-19 pandemic saw some disruption as launch windows were inevitably delayed however there has been relatively little impact and, if anything, the intervening period has further emphasised the ongoing reliance on space infrastructure as a medium for businesses.
The coming years represent an incredibly exciting time for the industry as new sector players continue to innovate with new launch vehicles and smaller technology. With access to space more open that it has ever been, there are new risks – in-space manufacturing, space tourism, resource mining and an emphasis on returning to the moon and Mars beyond – which require the creativity and input of insurers and brokers alike.
- See https://assets.lloyds.com/assets/pdf-market-turning-event/1/pdf-Market-Turning-Event.pdf for a definition of this concept by Lloyds of London.
- See https://www.ecb.europa.eu/pub/financial-stability/fsr/focus/2008/pdf/ecb~ca9bd70e2b.fsrbox200812_13.pdf?c51db03c92dc29fff5ab7e34cee09bc3 for a brief explanation of underwriting cycles within the insurance industry.
- The accepted minimum threshold for profitability in any one year is that there must be sufficient premium to indemnify 2 large value (insured) launch failures, representing the historical median for launch failures annually. See Spacenews, Space insurance rates increasing as insurers review their place in the market, Foust, J., September 2019, available at https://spacenews.com/space-insurance-rates-increasing-as-insurers-review-their-place-in-the-market/ (accessed 12 March 2021).