In its Airline Insurance Insight for May, major aviation brokers, Willis Limited, anticipate that insurance premiums for the airline industry are probably about to head higher.
And, although written before this week's tragic loss of an Air France A330-200 with all passengers and crew, the brokers noted that "if the industry were to see a major loss it is likely that pressure on insurers to raise premium levels significantly would increase further.”
Noting that July is one of the three busiest months of the year for renewals, Willis says the July renewal period "offers the first real chance to see what treatment the U.S. carriers will receive from the world’s insurance markets." Last year, the month generated "over US$225 million in premium or 13% of the years premium income generated".
23 airlines are about to renew their insurance, "including Alaska Airlines, American Airlines and Federal Express" and Willis believes insurers will succeed "in their efforts to increase premiums for those risks renewing and are likely to seek even higher increases in the following months."
The insurance market has been highly competitive in recent years and this has driven returns down, but consolidation is now allowing the major insurers to be more aggressive on pricing. The cost of hull insurance depends on the size of the client and its record; for major airlines premiums tend to be around 1% of aircraft value, but can fluctuate between 0.5% and as much as 2.5%.
Despite the tendency for upward pressure on premiums, Willis saw the market as still being "finely balanced" in terms of pricing directions.
But the effect of a major loss, such as the Air France accident, will potentially be bad news for those US airlines which are about to renew their insurance. “Significant” price increases may now be in the wind for them.