Airlines – Will Raised Geo-Political Tension and Risk Equate to Increased Insurance and Passenger Costs?

There has been much talk in the press and media over the past few days suggesting that the recent tragic disappearance of Malaysian Airlines Flight MH370 in March together with the indiscriminate shooting down of the same airlines Flight MH17 earlier this month, plus a rise in geo-political tension in various parts of the world, could well lead aircraft insurers to raise the cost of insurance to airlines for 2014/15.

Such fears emerge at the same time as officials from the UN International Civil Aviation Organisation meet with groups representing global airlines such as IATA plus those representing airports and air traffic control in Montreal, Canada to discuss how to respond to recent incidents and whether restrictions or a new approach is needed in relation to flying over war zones. On the latter issue, opinions from global airlines are mixed and I suspect rather than decide to restrict or ban flights across territory considered to be a war zone, the likely action arising of this conference is more likely to be that global organisations such as the UN and individual governments need to provide a better system of threat warning to airlines.

Insurers know more than most about risk and they will weigh and consider the market before taking any necessary action. Although we have incurred several tragic air incidents that have attracted global concern through the first seven months of this is year, I suspect that the reality is that action on the part of insurers will be limited. While the number of passengers carried on airlines last year was at record levels it appears that, driven by strong underwriting competition, insurance premium prices actually fell. One notes too that 2013 also witnessed the lowest number of airline industry incidents and casualties for many years although the value of hull claims was apparently relatively high and above the actual amount of premiums collected. While the loss of MH17 together with the unrelated loss of the Algerian Airlines plane, which crashed in apparent bad weather over the Sahara last week, could have some minimal impact on premiums I would suggest that on these incidents alone the insurance industry will not be panicked into raising premiums substantially higher. However, if as a result of increasing geo-political tensions in the Middle East, Ukraine and through parts of Africa the situation was to substantially worsen, we would need to anticipate premiums rising sharply for 2015. Of necessity airlines would be forced to passed any rise in costs I to passengers.

Some of the data that follows can be attributed to Aon Risk Solutions annual ‘Airline Insurance Market Outlook’. In 2013 total lead hull and liability premiums fell by 10% on average for the 2013/14 lead hull and liability airline insurance programmes. In terms of claims, according to Aon there were 35 (commercial aircraft) incidents and 153 fatalities in 2013 compared to a long term average of 69 incidents and 583 fatalities. Sadly the long term average loss of life has already been exceeded for 2014 through the inclusion of the three incidents mentioned above and for which 653 people were to tragically lose their lives.

According to the Geneva based Bureau of Aircraft Accidents Archives which has been tracking private and commercial aircraft accidents since 1918 (the organisation has recorded a total 21,600 events to date since it started), there have been a total ‘68’ crashes (of private civil aircraft and business jets, military transport and commercial aircraft types) so far this year compared to a figure of 139 incidents recorded for the whole of last year.

Perhaps the real point to make here is that while the amount of capacity and number of flights made by commercial aircraft continues to grow, the number of air accidents has continued to fall. That may be no consolation to the bereaved families of those killed in recent incidents but it does highlight the tremendous improvement in aircraft and in air safety as a whole despite the increase in numbers of people flying. Insurance companies and those that underwrite the airline industry are well aware that the statistics show an ever improving safety situation.

When it comes to lead hull liability premiums in Europe, around 75% of airline insurance programmes fell last year. While the overall Asia Pacific market rose by about 10%, lead hull and liability premiums have continued to fall. The number of aircraft insured in the Asia Pacific region had increased from a recorded 5,061 in 2012 to 6,154 in 2013. Airlines operating in Africa had the largest average hull and liability premium reduction of any region in the world last year with the number of claims below the long term average. A total of five known incidents occurred in the Africa region last year two of which involved aircraft built over two decades ago. In total the number of fatalities at 38 was significantly lower than the 165 lost in 2012.

Premiums also fell in Latin America and even the Middle East where continued investment in wide-bodied aircraft has meant that, although average aircraft values in the region are forecast to have risen by more than 15% during the course of the 2013/14 insurance programme, the average value of each aircraft is put at US$77million compared to a global average of around US$38million. In the mature North American market, in which a total of 7,448 aircraft are insured under the standard hull and liability programmes, there has been little change in premiums. The Aon report tells us that of the four accidents recorded in 2013 three involved cargo aircraft.

The prospect of potential surface to air missile attacks in areas of the Middle East occupied by ISIS such as in northern Iraq and Syria has added to concern that airlines flying over the region risk being attacked. Whilst unlikely such an attack can never be ruled out and airlines will need to take advice from governments or decide themselves whether to avoid flying over regions such as Ukraine, Syria, Iraq, Afghanistan, Israel, Gaza, Lebanon, Libya, Mali and even maybe Russia. Passenger safety and risk reduction is a paramount consideration for airlines, and while the cost of flying alternative and potentially longer routes to avoid troubled areas will need to be passed on to airline customers, I would not envisage this factor alone being a consideration in regard to insurance premiums.

 

CHW (London 29th July 2014)

Howard Wheeldon FRAeS

hwheeldon@wheeldonstrategic.com

Tel: 07710 779785

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