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Aviation insurance buyers face bumpy renewal season

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Commercial airlines are experiencing an uneven recovery out of the pandemic and early indicators point to a similarly variable experience when it comes to their upcoming insurance renewals.

While the overall buying experience may be more positive than last year, ongoing challenges such as the lag in business and international travel compared with U.S. leisure travel and recent hail losses to aircraft parked on the ground will affect airline negotiations with insurers, experts say.

The airline industry is still recovering from the huge drop in air travel after the COVID-19 pandemic hit last year, said Garrett Hanrahan, Dallas-based global head of aviation at Marsh LLC.

Through October, total airline seat capacity this year was down nearly 40% compared with 2019, and those rates fluctuate by region, Mr. Hanrahan said. “It’s all linked to COVID,” he said.

“On average I wouldn’t be surprised if we see some (insurance) rate increases, but they are going to be much more dampened than they were last year. There’s no one-size-fits-all,” Mr. Hanrahan said.

Jeff Bruno, Morris Plains, New Jersey-based president and chief underwriting officer at insurer Global Aerospace Inc., said this year’s renewals will be “a mixed bag.”

“Exposures vary widely from risk to risk, as do agreed minimum premiums, deposits, individual loss experience and audit experience from prior periods,” he said.

While most airlines in the U.S. seem to be trending rapidly towards 2019 passenger levels or higher, insurers remain concerned about hull claims inflation; social inflation, or higher court awards and settlements; and the market’s overall lack of profitability prior to the pandemic, Mr. Bruno said.

“The fear is if we find ourselves at or above 2019 exposures because of claims inflation, we’re likely to exceed 2019 loss activity. If the market doesn’t continue to adjust pricing upward at some point underwriters are likely to be playing catch-up again,” Mr. Bruno said.

While insurers may want rate increases, they may struggle to achieve them because the premium base will inflate due to the rebound in domestic passenger traffic, said Jason Saunders, Atlanta-based president of Willis Towers Watson Aerospace, a unit of Willis Towers Watson PLC.

“For those airlines that have performed well from a loss standpoint I would expect the rate increase will be minimal if any. … Rate increases will be offset to an extent by the exposure increases which will drive premium,” Mr. Saunders said.

In its Insurance Marketplace Realities report due to be published this month, Willis predicts airline rates will be flat to plus 10%. That compares with predicted rate increases of between 25% and 40% at the same time last year.

Another positive factor for buyers is that fresh capacity is entering the market and established insurers are releasing more capacity, potentially increasing competition for business.

“I certainly expect to see more competition this year in the fourth quarter than we did in 2020. More capacity makes the placement easier. It also drives competition among the markets to drive the best price for the buyer,” Mr. Saunders said.

Certain markets are expanding their lines and their ability to participate on airline risks, Mr. Hanrahan said. An insurer that only had 2.5% capacity in 2019 and 2020 may take 7.5% in 2021, he said.

Minimum premiums, which insurers applied at last year’s renewals to protect their premium base when airline exposures were down, are also likely to come under some pressure, brokers say.

“The percentages we envision will be reduced,” Mr. Saunders said. Whereas before insurers were perhaps seeking a minimum premium of 85% of the premium they quote, “now it’s going to be some number less than that,” he said.

It remains to be seen whether minimum premiums can be negotiated down, Mr. Hanrahan said, adding that the minimum premiums insurers applied last year were on muted exposures due to COVID-19.

“It is going to be a much more individualistic process this year than it has been in the past with the market looking at what exposures airlines have,” he said.