Biko Meletse Willis South Africa 24 February 2015 - Airline Catastrophes & how this has impacted on the Industry
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Airline Catastrophes & how this has impacted on the Industry Biko Meletse Willis South Africa 24 February 2015
The Aviation Industry
The Early Years
“Until now I have never really lived! Life on earth is a creeping, crawling
affair. It is in the air that one feels the glory of being
a man & of conquering the elements. There is an exquisite
smoothness of motion & the joy of gliding through space – it is
wonderful!”
Gabriele d’Annunzio, 1909
“…last year some 80 people in the state of Missouri were kicked to death
by mules, over the same period only 8 commercial pilots lost their
lives. Fine, so long as one remembers that mules probably outnumber
airplanes by about 100,000 to 1.”
Washington Post, 1927
“Add a new thrilling experience to your holiday!”
Publicity Slogan for the LZ129 Hindenburg, 1937
| 1
The Aviation Industry
The Early Years
“It may with some degree of confidence be predicted that for some time to
come commercial aircraft will be mainly used for long hauls of mail,
well-to-do passengers, & high-grade goods of small bulk.”
Sir Osborne Mance, 1943
“The introduction of the 747 into commercial use will pose considerable
problems. It is not so much a new concept of machine, for the 747 is
based upon tried & proven aerodynamical concepts, but that the pure
size & complexity of the airplane are almost beyond comprehension to
an industry used to the DC8 & 707.”
David Dann, 1969
“In one fell swoop we have shrunken the earth.”
Juan Trippe, 1970
| 2
The Airline Industry
Today
The A380 aircraft was introduced into commercial service by Singapore Airlines in 2008
Development goes back to the late 1980’s
A380 Facts & Figures
72.7 metres long
Equivalent of 2 Blue Whale lengths
The wings are 54% larger than the B747
The aircraft weights 590 tons
If the wiring is laid end-to-end it would stretch from London to Edinburgh
320 miles
The aircraft can carry 3,000 suitcases & 525 pax & can fly at a speed of 620 miles per hour
Less than 3 litres jet fuel per 100 passenger
kilometres used matching the efficiency of
most modern compact cars
| 3
The Airline Industry
Today
3.1 billion passengers carried by airlines in 2013
8.7 million people employed directly in the aviation industry
35% the value of world trade shipments carried by air transport
| 4
The Airline Industry
Today – The Challenges
Industry competition fierce
Cut-throat business
Huge capital investment costs
Cost of an A380 in excess of USD400,000,000
Ongoing technological change & improvement
Volatile fuel costs
Fuel efficiency
1.5% industry targeted fuel efficiency from 2010 to 2020
Requires 12,000 new aircraft at cost of USD1,300,000,000,000
Greenhouse gas emissions
Public health threats
Ebola “The airline sector’s net
Security profit is less than zero.”
Warren Buffet
| 5
The Airline Industry
Catastrophic Events
Pose a threat to corporate survival
Reputational effects
Highly emotive
Publicised
Complicated & unpredictable liability issues involving different nationalities
Spread & penetration of USA litigation standards
Montreal Convention 5th jurisdiction
Large legal costs
Long tailed claims
Rise in criminalisation of air accidents & charges directed against management in
personal capacity
| 6
The Aviation Insurance Industry
“I looked at the damaged machine, & I thought of the future bookings that
would now have to be cancelled, of the wages that would still have to
be paid even though no money would be coming in, of expensive
advertising that would now have to be written off. I was in a black
despair. It was one of my passengers who jerked me out of it. She
asked whether the machine was insured. Of course it was!”
Sir Alan Cobham, 1926
“Willis Aerospace can trace its roots back to 1911 when an aviation policy
was placed for a flying school.”
| 7
The Aviation Insurance Industry
| 8
The Airline Insurance Segment
Some Factors
Airline insurance is situated in the international market place
Subscription market place
High value USD exposures
High value USD accumulation exposures
High value USD static asset exposures
Global Liability exposures
Long-tailed legal liability factors
Large associated legal costs
Airline insurance capital intensive
International capital providers
Long probability factors
“One-a-second exposure”
Lack of trending
| 9The Airline Insurance Segment
Causes of Losses: Airline Claims
9%
23% 4%
26%
12% 37%
8%
18% 15%
9%
16% 22%
No. of Claims By Value
Plane crash Plane crash
Ground handling Over/undershot runway/taxiway
Mechanical failure Ground handling
Hard landing Mechanical failure
Damage by foreign objects Hard landing
Other Other
| 10The Airline Insurance Segment
Causes of Fatal Accidents by Decade (percentage)
Cause 1950s 1960s 1970s 1980s 1990s 2000s All
Total Pilot Error 57 56 43 46 51 54 51
Pilot Error 42 36 25 36 28 29 31
Pilot Error (weather related) 10 17 14 18 19 17 15
Pilot Error (mechanical
6 4 5 2 5 4 5
related)
Other Human Error 2 9 9 6 9 7 7
Weather 15 9 14 14 10 8 12
Mechanical Failure 21 19 19 20 18 26 20
Sabotage 4 4 13 13 10 9 9
Other Cause 0 2 1 1 1 0 1
Concern regarding LOC-I
| 11The Airline Insurance Segment
Exposures
Hull All Risks coverage
Aircraft hull values USD 400,000,000
Liability limits USD 2,250,000,000
Spares Location limits USD 500,000,000
War & Allied Perils coverage
Aggregate limits USD 1,500,000,000
Accumulation limit at Toyko
Airport USD7,000,000,000
| 12The Airline Insurance Segment
Historical Market Trends – Hull All Risks
Huge rate increases following 9/11 events
Reduction in frequency & severity of losses since 2001
Very few wide-bodied high value losses in past 10 years
Reduced fatalities
High capacity levels
New entrants
No significant departures
Buyers market
Consistent rate reductions over the years
Total market premium reduces continuously
Total market premium in 2013
USD1,400,000,000
Loss sensitive with possibility of future volatility
| 13The Airline Insurance Segment
5 Year – Market Results
$3 000 250%
225%
$2 500
200%
175%
$2 000
150%
$1 500 125%
100%
$1 000
75%
50%
$500
25%
$0 0%
2009 2010 2011 2012 2013
Premium $2 000 $2 065 $1 913 $1 677 $1 461
Claims $2 515 $1 988 $1 227 $946 $1 472
Loss Ratio 125.8% 96.3% 64.1% 56.4% 100.8%
| 14The Airline Insurance Segment
2014 – Major Airline Losses in Excess USD10 million
Date of Loss Operator Aircraft Type Location of Loss Fatalities
January 5th Air India A320 Jaipur International Airport, India 0
January 26th Pacific Air Express B737 Honiara Airport, Solomon Islands 0
February 13th Jetstar Asia A320 In flight, over Java, Indonesia (Ash Cloud) 0
March 8th Malaysia Airlines (MH370) B777 Unknown 239
March 13th US Airways A320 Philadelphia Airport, USA 0
April 14th Golden Myanmar A320 Yangon Airport, Myanmar 0
July 17th Malaysian Airlines (MH17) B777 Ukraine 295
July 23rd TransAsia Airways ATR72 Penghu, Taiwan 48
July 24th Swiftair / Air Algeria MD83 Mali 116
December 28th Air Asia A320 Indonesia 162
| 15The Airline Insurance Segment
2014 Major Losses > US$10m
Aeroflot
($16m)
US Airways ($18m)
Golden Myanmar
($10m) TransAsia
Air India ($16m)
($11m)
Malaysia Airlines
(MH370 $54m)* Jetstar Asia
($10m)
Air Asia (Indonesia)
($46m)
Pacific Air Express
($12m)
*Hull Reserve of US$108m is split 50/50 between Hull & Liabs & Hull War
| 16The Airline Insurance Segment
2014 – Hull All Risks Market Trend
Catastrophic losses – in particular MH370 & MH17 Liability reserves – produce an aggregated
market loss figure in excess of USD1,000,000,000
Many underwriters face 2014 trading loss
MH17
Underwriters initial reaction
“Market turn” has to occur
At least 30% increases
| 17The Airline Insurance Segment
Hull All Risks Market Trend
Q4 saw flat Hull All Risks rates
Q4 premiums +5%
2014 average premium increase +1.5%
Expected “market turn” does not occur
2015 conditions still appear favourable to airlines
Buyers market continues into new year
Catastrophic losses have therefore had very little market impact
Excess capacity a major factor
4 new underwriting entrants
Split market may develop between those who have suffered major losses and those that have not
| 18The Airline Insurance Segment
Airline Capacity
Hull All Risks
London
38%
Lloyd's
61.25%
RoW
41.60%
Europe
30.83%
Total Capacity*
217.35%
| 19The Airline Insurance Segment
Historical Market Conditions – Hull War & Allied Perils
$150
$125
$100
US$ Millions
$75
$50
$25
$0
05 06 07 08 09 10 11 12 13
Premium 145 120 126 130 130 125 100 85 75
Claims 0.00 0.00 0.03 0.00 0.00 0.00 0.00 0.55 20.5
| 20The Airline Insurance Segment
Historical Market Conditions – Hull War & Allied Perils
Clean loss history from 2002 to the end of 2012
Last large losses in 2001
Excess capacity of approximately 175%
Continuous rate reductions over the years in the absence of
losses
Soft market
Market premium estimated at USD75,000,000
“Call” rates for hotspots
Great concern over market premium as does not cater for a
single high valued aircraft
2013 LAM loss occurs
Pilot suicide
| 21The Airline Insurance Segment
Market Trends – Hull War & Allied Perils
Range of losses occur:
MH370
MH17
Karachi & Peshawar airport losses
Tripoli airport losses
Total annual market loss estimate
USD563,000,000
Large renewal rate increases forecast for balance of 2014 into 2015
Underwriters reaction:
Market needs to be reflated by +300%
Capacity levels still at 200%
Rate increases in 2014 fail at large
“Market turn” not attained
Modest increases to flat rating results in 2014
| 22The Airline Insurance Segment
2015 Market Outlook
There are only three major events that will significantly affect the current downward trend of Airline
Insurance Pricing
1. Reduction in Market Capacity due to:
Management disaffection towards current unsustainable premium levels resulting in complete
withdrawal from Airline Underwriting
A reduction in participation in order to minimise the “risk-to-reward” ratio
Investment Capital moving to opportunities with greater ROI than Airline Insurance
2. A significant catastrophe or series of major losses
2014 demonstrated that aviation experience alone will not be enough to drive a change in market
conditions and therefore wider industry losses would have to be experienced
3. A significant increase in attritional losses which erodes underwriters net retained premiums and
premium reserves to unsustainable levels
Underwriters will look for a more balanced portfolio between
airline, general aviation & other aviation segments to mitigate
the downward cycle in the airline segment.
| 23THANK YOU FOR YOUR ATTENTION
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