The Airport Casualty Market Overview

Transcription

1 The Airport Casualty Market Overview ACI-NA Annual Risk Management Conference Los Angeles, CA John C. Geisen Senior VP Aon Aviation January 2017 Prepared by Aon Risk Solutions Aviation

2 Contents The Aviation Insurance Market The Aerospace Market The Airports Market Airports Market Capacity 2017 Expectations

3 The Aviation Insurance Market As of the middle of Q4 2016

4 The Aviation Market What is it? The market is comprised of insurance companies prepared to underwrite/cover fortuitous business risks in the aviation industry It is a true financial market the commodity that is traded is insurance capacity to underwrite risk The insurance market is international and it is accessed by brokers worldwide The risks are: airline helicopter general aviation corporate aircraft operators manufacturers, airport authorities, civil aviation authorities and aviation service providers (aerospace)

5 Aviation Insurance Market Principal Customers Principal customers Airlines General aviation operators Banks and finance houses Airport authorities Air traffic control authorities Ground handlers Aviation refuellers Manufacturers (prime and component suppliers) Repair/service/maintenance/facilities Space Limits Today provides maximum insurance limits of up to: Hull U$450,000,000 Liability US$4,500,000,000 Aerospace

6 Aviation Markets by Estimated Income Aerospace - Liability Subscription/100% 25 Underwriting Units Airport Authorities/ATC Manufacturers Repair and Service Ground Handler/Refueller Financiers Space Hull/Contingent Cover Airline Subscription Market 48 Active Underwriting Units Hull, Liability and Spares Excess Liability - non-war 15% 29% Hull War Subscription Market 15 Underwriting Units 2% 3% 34% 17% General Aviation Subscription Market/100%/Treaty 24 Active Underwriting Units Hull, Liability, Spares and War Corporate/Government/Commercial Private/Agri/Emergency Operators Fixed Wing/Helicopters Hull Deductible 100% Market 5 Underwriting Units Excess AVN52 Subscription Market/100%/ Approx. 20 Active Underwriting Units 2015 Estimated Premium Income: US$4.3bn Aon Risk Solutions Global Broking Centre Aviation

7 The Aviation Insurance Market As goes a significant segment of the market, airlines, so goes the market you face Prepared by Aon Risk Solutions Aviation

8 5 Year Hull and Liability Premium vs Claims US$ Billions $2.0 $1.8 $1.6 $1.4 $1.2 $1.0 $0.8 $0.6 $0.4 $0.2 $0.0 Premium Claims The past three years have resulted in a nett loss for the insurance market These figures will be further compounded by Vertical pricing Reinsurance costs Company overheads Aon Risk Solutions Global Broking Centre Aviation

9 Current Losses There have been just two major losses in 2016 This puts losses below average levels for the year so far Losses ended 2015 at just below the 2014 total 2014 incurred losses were the highest since 2010 Both 2014 and 2015 were above short and long term averages The annual total for 2015 was $1.5 billion This is against a total premium income of just $1.2 billion US$ Millions $1,750 $1,500 $1,250 $1,000 $750 $500 $250 $0 Source: Aon ACRaSh Database Excludes September 11 th Losses Average Average Jan Mar May Jul Sep Nov Aon Risk Solutions Global Broking Centre Aviation

10 The Aerospace Market

11 The Aerospace Market Aerospace risks are categorized as follows: Manufacturers Prime engine and airframe Maintenance repair and overhaul (MRO) Sub-component manufacturers Service Providers Refueller / defuellers / refiners Fixed base operators Caterers Security screening companies Freight forwarders Airport Airports and associated ground service providers Air traffic control & Aviation Authorities

12 The Aerospace Market The pace of market softening continues to accelerate A premium reduction of 7% was recorded for 2015 A 10% premium reduction has been achieved 2016 to date Overcapacity is changing the course of the market Competition is plentiful and at times aggressive New entrants to the market are generating further competition Current markets are increasing their capacity Some insurers are able to write business 100% with limits up to US$1 billion for all aerospace classes Layering of risks is becoming commonplace Driven by markets wanting to participate on accounts having to differentiate themselves Expiring limits are being split into two layers with the excess being offered at competitive terms

13 Aerospace Overview 2015 Multi year deals were being placed, but no more than have been seen in recent years The same can be said for the layering of risks, this was still popular but no more than has been recorded in the last couple of years Limits have also remained static Airport clients reported a 7% increase in projected passenger numbers Manufacturing clients reported a 4% increase in projected turnover

14 Aerospace Overview Renewals are still being looked at on an individual basis Changes in loss records, exposures, limits and self insured retentions continue to have the greatest impact on premiums Competition in all areas of aviation insurance is impacting the aerospace markets Excess capacity available for all but the most undesirable of risks For some sectors there is in excess of 300% available Although there are only a limited number of recognised lead underwriters for high indemnity limits or major prime manufacturers Layering is becoming more prevalent

15 Premium and Claims: Combined Aerospace (As declared for total 2015 renewals) US$ Millions $850 $800 $750 $700 $650 $600 $550 $500 $450 $400 $350 $300 $250 $200 $150 $100 $50 $0 Premium Claims

16 Aerospace Annual Renewal Breakdown Renewals 2016 Renewals Number of Renewals Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec * Figures To Date

17 Aerospace Annual Premium Breakdown $ Premiums 2016 Premiums $200 $175 $150 US$ Millions $125 $100 $75 $50 $25 $0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec * Figures To Date

18 Worldwide Aerospace Liability Premium Income Airport $57m ATC $25m Refuellers/Others $16m MRO $43m Manufacturers $524m Representing 15% of the Global Aviation Income

19 Key Insurance Market Issues Current attitude towards major aerospace renewals Premium shrinkage The effect on the market of a major loss volatility argument Drivers for Capital Providers Capital providers believe that the aviation insurance class offers low frequency/high severity losses from a narrow band of premium income/portfolio Every US$ of aviation income needs an equal backing of capital plus a strong margin of return (+20%) Alternative classes may provide safer havens and better margins of return but until they do, expect softness Return on capital adequate? Stay-in? On what basis? Near the trough? Re-allocate or continued attractiveness of diversifying risk portfolio Less or Uncorrelated to other cat loss Other diversification strategies beyond aviation risk underway

20 Premium Movements 2016: Aerospace The figures shown in the table below (including expiring figures) represent those of policies that have renewed in 2016, where we have two years of information and fall within our aerospace selection criteria only. Month No of Renewals 2015 Premium (US$m) 2016 Premium (US$m) Premium Movement (US$) Premium Movement (Original Currency) 1Q 35 $26.19 $ % -12% April 22 $60.10 $ % -12% May 8 $6.97 $6.96 0% -4% June 21 $52.77 $ % -9% 2Q 51 $ $ % -10% July 33 $ $ % -9% 3Q 37 $ $ % 23% ANNUAL AVERAGE/TOTAL 123 $ $ % -10% Aon Risk Solutions Global Broking Centre Aviation

21 Premium Movements 2016: By Sector The figures shown in the table below (including expiring figures) represent those of policies that have renewed in 2016, where we have two years of information and fall within our aerospace selection criteria only. Month No of Renewals 2015 Premium (US$m) 2016 Premium (US$m) Premium Movement (US$) Premium Movement (Original Currency) Airport 47 $42.95 $ % -10% Manufacturer 51 $ $ % -9% Service Provider 25 $10.77 $9.84-9% -13% ANNUAL AVERAGE/TOTAL 123 $ $ % -10% Aon Risk Solutions Global Broking Centre Aviation

22 Airports and ATC

23 Airport and ATC Market Conditions 2016 has seen an 10% premium reduction for the year to date Original currency premiums for 2015 renewals reduced by 8% If this continues it will be the largest annual reduction since 2005 Airports and ATC generated approximately 11% of the overall aerospace market premium in 2015 Airports made up the majority of this income Estimated passenger exposures increased 7% in 2015 Passenger exposures have only increased 3% in 2016 to date Capacity is abundant for airport liability risks The market is able to deploy over 300% for a US$1bn limit This is of course only theoretical for the most desirable of risk

24 Premium Movements 2016: Airports The figures shown in the table below (including expiring figures) represent those of policies that have renewed in 2016, where we have two years of information and fall within our aerospace selection criteria only. Month No of Renewals Estimated Estimated Aircraft Passenger Movement Movement 2015 Premium (US$m) 2016 Premium (US$m) Premium Movement (US$) Premium Movement (Original Currency) 1Q 14 2% -3% $14.05 $ % -6% April 12 5% 0% $9.20 $ % -13% May 3 5% 0% $2.12 $ % 6% June 6-6% -6% $6.09 $ % -11% 2Q 21 1% -3% $17.41 $ % -9% July 12 5% -25% $11.49 $ % -15% 3Q 12 5% -25% $11.49 $ % -15% ANNUAL AVERAGE/ TOTAL 47 3% -10% $42.95 $ % -10%

25 Market Capacity

26 US Airports/Service Providers with a US$1 Billion Limit 300% Historical Capacity A 16.00% A- 3.38% Other 10.00% AA 3.00% Allianz 3% 250% 200% GIC 10.00% (A-) AA % Swiss Re 23.00%, Inter Hannover 7.50%, Tokio Marine 6.75%, Munich Re 3.00% 150% 100% 50% Sirius 3.00%, Aviabel 0.38% Allied World 8.50%, LRA 7.50% A % Catlin 25.00%, GAUM 17.50%, ACE 15.00%, Axis 15.00%, Brit12.50%, Mitsui 12.00%, Hiscox 10.00%, Axa 8.50%, Faraday 8.50%, Amlin 7.50%, Antares 6.00%, Argo 5.00%, Chaucer 5.00%, Partner Re 5.00%, Travelers 5.00%, SCOR 2.50% 0% ( ) Figures in brackets show AM Bests ratings 100% Total Capacity % 0%

27 US Airports/Service Providers : Quota Share Structure Allianz 10% Partner Re 3.50% QBE 7.50% Starstone 5.50% Sirius 5% Antares 5% InterHannover 3.50% Global 10% AIG 15% Starr 10% USAIG 15% XL Catlin 7% ARGO 3% $300M $50,000 SIR retained by insured $50k Sample Vertical or quota share structure with US, London and Continental capacity following lead above SIR

28 US Airports/Service Providers Capacity Single Market Structure Although participating on quota shares and leaders, there are also some players that will write 100% of an airport s liability risk in their own right or via a dedicated primary/excess mechanism Players of Note in the U.S. include AIG Berkley Chubb Global Aerospace QBE Phoenix Starr Swiss Re XL Catlin

29 US Airports/Service Providers Capacity Single Market Structure $300M $300M Excess Horizontal Layer 200M xs 100M 100% $100M Primary 100% Primary 100% $5,000 SIR retained by insured $5k $5,000 SIR retained by insured $5k Sample Horizontal structure with excess capacity following lead above SIR and primary and single insurer above SIR, if any

30 US Airports/Service Providers Capacity Single Market Structure Market Commentary Chubb AIG Aerospace Do not participate on Quota Share for US risks Airport Liability up to $1billion limit with War/Tria sub-limited to $750mil limit. Split between Primary $100mil limit with Excess $650mil limit. Option for additional $250mil limit (excess of $750mil) London Market placement. Able to can write US / North American Airports 100% to 1 Billion Berkley Global Aerospace QBE Old Republic Starr Aviation Swiss Re XL Catlin $100 Mil Limit with main focus on small to medium size airports. On the larger - Airline type airports more likely to look to quota share approach Stated max up to $500M capacity on 100% basis or first layer of a horizontal layered program. Select exceptions of 100% above that on case by case basis. Will lead and available to follow selected leaders only at up to a 20% share. Capacity of up to $300M on primary for Airports Capacity of $300M primary limits including War and TRIA. on domestic Excess liability limits (above $300 million) for unique risks. Capacity to $750mil 100% Starr Indemnity & Liability admitted paper. Can write quota share for >$750mil limits, typically following lines up to $350mil capacity via Starr Surplus Lines Insurance Company, non-admitted. Capacity to $350M on GA risks including airports. On quota share approach, prefer no bigger share than lead. Currently does not deploy more than 150M on any given risk. War risk to 150M but can go to 250M Has $750m in capacity on 100% airport business, but it really depends on the individual risk and category of airports as to how much they will deploy

31 2017 Expectations

32 Current Aerospace Market Conditions Capacity: Capacity continues to swell as a result of the low interest rates that have been leading to low returns in other financial markets. Even if there are major claims, capacity is now so great that the miss factor should mean that the market avoids hardening. Airport: The cost of insurance in the airport sector continues to fall, down 8% in 2015 and 10% in 2016 thus far. This continues an uninterrupted trend that has been in place for nearly a decade. Manufacturer: As safety training, technology, loss and risk analysis all improve, the reductions in the price of insurance in the manufacturing sector have begun to accelerate. There was a 4% reduction in premium in 2015 and there is a 9% reduction so far in It will always be the most expensive sector in the aerospace industry as a result of its risk profile. Service Provider: The long-term soft conditions mean that total annual premium in the service provider sector is now around a quarter of the size it represented a decade ago. Prices fell by 18% in 2015 and 13% so far in 2016.

33 Outlook 2017 Remaining soft - with a raft of capacity available and a lack of major losses it is hard to envisage a noticeable shift in market conditions in The overall market income is less than half the average insured limit for the 226 recorded renewals, so there is significant potential that a major loss could have a pronounced effect on underwriter profitability. If there is a major loss in the airline sector that can be translated into a claim against an aerospace organisation, the level of claim is likely to be exceptionally high, not simply because of the high value of the equipment potentially involved, but also the potential liability claims associated. As a result, while it may seem as though there is a significant gap between premium and claims, if there is a major loss, the gap could be swiftly closed. With the amount of capacity currently running at levels where all but the very largest aerospace risks could be comfortably placed in the markets more than twice over, there is a strong potential that if there is a catastrophic loss, many markets will emerge unscathed simply because they were not involved in the risk programme. This could create a two-tier market, with underwriters that have suffered a loss attempting to harden the market while those that avoided it continuing to hold prices down. In such a situation price rises are unlikely to be sustained for long.

34 Other Trending Topics in this Market Cyber Cyber risk is evolving from stolen data to impacting power plants, semi autonomous vehicles and physical infrastructure itself and any strategy that is integrated for the Internet of Things, will likely include Scenario plans for what once was thought to be unlikely. Time spent on effective response reducing the severity of an attack versus prevention only Cyber security governance and advisory services that you will likely need to invest more heavily in risk budgets includes penetration testing, incident response, digital forensics, ediscovery and due diligence capabilities. Comprehensive and integrated enterprise-wide coverage against cyber risk, wherever loss expectation exceeds retention appetite Unmanned Auto and Aerial DOT green light on land vehicles..but with a 15 point federal vehicle safety assessment requirement while less hands on re aerial Impacts Small unmanned aerial vehicle manufacturers, unlike other aircraft to date, will no longer be FAA certified, which could have a profound impact on liability in light of the fact plaintiffs have often needed to argue faulty design (of FAA approved designs?) or faulty manufacture. Projections are that by 2050 unmanned autos and ride sharing will be so prevalent that auto premiums will be 40% less and traffic fatalities will reduce 90% - too impactful for airports not to allow/address Dramatic lessening of active auto vehicles is far reaching - Parking structures as revenue sources for airport authorities? Traffic control at point many customers enter /exit premises? Does Wildlife prevention strategy include the risk of trespassing by unmanned aerial vehicles? U.S. Transport Index Points To Recession? Shifts in its index of train, truck, boat & plane activity highlights changes in economic growth, leading the wider economy by about 4 months. Per U.S. BTS, the index has taken a negative turn into the summer of 2016, according to CNBC calculations.. Alternative Capital Growth Aon Securities, the investment banking and ILS-focused unit of brokerage Aon, expects alternative capital to grow to between $120 -$150 billion by the end of Trump Change At the end of June 2016 alternative capital amounted to $75.1 billion, an increase of 10% when compared to Has your airport utilized such tools at cat reinstatement?

35 Thank You / Questions? John C. Geisen, Senior Vice President Aviation National Practice Group Aon Risk Solutions 5600 West 83rd Street, 8200 Tower Suite 1100 Minneapolis, MN Mobile Office Fax john.geisen@aon.com