Aviation Insurance -
A Bright Future
Throughout its 100-year-plus history, oil price hikes started airlines called for more fuel efﬁcient
aviation insurance has been heavily aircraft. The Boeing 777 and Airbus offered the best available
inﬂuenced by progress in the airline and solutions. The Airbus A380 represents another milestone in the
aeronautical industries. development of aircraft:- the wing design, airframe materials and
other innovations have produced the world’s biggest commercial
The First Aviation Fatality passenger aircraft with a passenger payload capability of 550
It was 105 years ago that the Wright Brothers, Orville and souls. the A380 embraces fuel efﬁciency and endurance. Inside,
Wilbur, astounded the world with their successful ﬂight in a the cabins bring a new level of comfort and space to air travel.
heavier-than-air machine. A mere ﬁve years later the ﬁrst fatality Now in service with Singapore Airlines and Emirates, the A380
in aviation took place - Orville Wright was the pilot and he will become a workhorse of the airline industry, as will the
himself sustained serious injury. Boeing 787 Dreamliner which is due to enter service in the
near future. United Airlines have recently placed an order for 25
The Onset of Commercial Aviation 787s: other airlines will follow suit.
It is not known exactly when early aviators began to consider
their exposures and the potential liabilities their ﬂying machines In a different sector of the industry, growth potential continues to
presented. Damage to their aircraft was a risk that was present throw up opportunities. The concept of the VLJ (Very Light Jet) is
each time they ﬂew, but their exposure to claims by third just one such innovation. As more and more people travel short
parties was in evidence, but largely ignored until the advent of and medium haul, manufacturers offer improved design and
commercial aviation. performance capabilities for their aircraft.
The Dearborn: Ford Story Aviation Trafﬁc and Insurance Demands
In 1932, Henry Ford entered the aviation business, using the The graph below shows the growth in passenger numbers and
Ford Trimotor aircraft, which carried eight people. Near what aircraft values over the years. in real terms, the increase in values
is today the Ford Motor Company’s home plant and world is vast. The requirements for ever increasing levels of indemnity
headquarters is a small airport, Dearborn. He built the Dearborn for third parties has followed the same pattern. Airlines exist to
Hotel - still there today - as the world’s ﬁrst airport hotel. The carry people and freight from one place to another as efﬁciently
industry blueprint was then established - hotel, airport and as equipment and other factors permit. The accident rate for
scheduled services. Commercial air transport was now a reality. airlines is lower than for any other form of transport, and the
good news is that it continues to decline.
The First Aviation Policy - Marine Aviation insurers provide airlines with relief from the ﬁnancial
Underwriters burden by providing insurance against loss-through-accident.
At this time, the ﬁrst aviation policies were written by the marine [graph]
insurance underwriting community. Developments in aviation
insurance were encouraged by the signing of the Warsaw The Right Price
Convention in 1929 - the same year as Henry Ford introduced There are two lingering but basic questions here:
the Trimotor. The convention was an agreement to establish • What is the right price for this insurance?
terms, conditions and limitations of liability for carriage by air. A • Where will the capital come from to enable insurers to
few years later the International Union of Marine Insurance set underwrite the new generation of aircraft?
up an aviation insurance committee.
By 1934, there were eight European aviation insurance The answers are really dependent on a host of statistics. A
companies. Aviation insurance had now a clear personality of its few years ago there were 15,000 western built jets and about
own alongside traditional classes of insurance business. 8,000 turboprops in annual scheduled airline operation. They
moved about 1.6 billion passengers, Swiss Re estimates the total
Rapid Design Changes exposure from hulls alone to be US$550 billion, and liability
The Second World War provided a catalyst that spurred on limits are several times as great. Until recently typical amounts
advances in aircraft design, including RADAR, radio navigation were $250 million for hulls and a $1.5 billion limit for liability.
and avionics. Since then the pace of advance in technology has The advent of the Airbus A380 is fuelling the demand for hull
been revolutionary:- Fly by wire, Automated take off and landing values in excess of $300 million and liability limits of $1 billion
capabilities, GPS - the list goes on. or more. A study of the history of accidents provides actuaries
The jet engine, brainchild of Sir Frank Whittle, changed the and statisticians with the ability to develop a risk model that
course of aircraft design. Speed, altitude, reliability, endurance characterises the amount of exposure and likelihood of loss.
- all these elements combined to shape the evolution of air
transport. The Comet, Caravelle and early Tupolev jets led The Two Methods of Pricing
the way forward. In 1958 the Boeing 707 entered service with The traditional method of pricing is charging for expected losses
PanAm. Amazingly, examples of this aircraft are still in service plus income to cover overheads, brokerage and proﬁt margin.
around the world. At present, the industry needs to levy premiums in excess of £2
The seating capacity of the 737, typically 180, became insufﬁcient billion to achieve this. This number is having to change drastically
as ﬂying became more popular for business and holiday travel. now the A380 is in service.
Airlines were demanding bigger aircraft; more people on the The other method involves an element of load related to the
seats equals higher income. Enter the Boeing 747. It began level of risk of the subject matter. This may account for why one
service in 1969 with a capacity in the later series of 416 people. underwriter calculates a different premium from another.
At that time aircraft fuel - Jet A1 - was relatively cheap. When
Finding Adequate Capital Rendezvous in Monte Carlo, several different messages were
Insurers are also faced with the task of ﬁnding adequate new given. One, that aviation is a class that requires underwriting skills
capital to meet the potential obligations that the next generation that some of the companies do not possess. Two, that there is
of aircraft present. Reinsurance is a powerful source of capital for insufﬁcient business in some counties to make it ﬁnancially viable
the aviation insurer, but it is also an expensive one. The cost of to set up an aviation department.
reinsurance has to be evaluated along with other forms of capital It has been said that in business, in order to survive you have
to maximise return on equity. to be big, cheap or niche. Applying this formula to aviation
In a market of falling rates, is aviation attractive to reinsurers? insurance, in the context of emerging markets no-one will have
Aviation reinsurance is written on an excess of loss basis, where an entry position to match AIG or Global Aerospace.
there is more readily available potential reinsurance capacity
than with proportional treaty reinsurance. History has shown A Right Price - Not Cheap
that the aviation insurance industry has always risen to meet the Cheap is deﬁnitely not an option. Cheap, in the context
challenges of the future. There is no reason to doubt that as of aviation insurance, is synonymous with short-term life
another quantum step up the ﬁnancial ladder is taken, the market expectancy. There is a long list of insurers who have sought to
can and will provide adequate levels of capacity. build market share by undercutting rates. This is also a list of
casualties. There is a price for everything, and everything has a
Focus on Airlines value. This includes the right price for aircraft insurance.
In the context of aviation insurance, the focus is very much on
airlines. Certainly the bulk of the premium generated is by airline Be Niche
business. If we take a look beneath the aura of the A380, it is In the aviation insurance markets, there are such opportunities!
clear that there is growth, and long-term growth potential, for Globally, the aviation industry is expanding. The world economic
insurers whose portfolio is non-airline business. recession of the past year has, naturally, affected the aviation
Evidence of this can be found easily by looking at the product industry., but the long term effects are to force airlines to
range of manufacturers such as Beechcraft, Bombardier, Yakolev, become more lean and efﬁcient. Some will disappear as they are
Cessna. The new Cessna Citation X is aimed at the business unable to adapt to the conditions of the market.
and high net value individual , with a price tag in excess of $15 British Airways has suffered the consequences of the recession,
million. such that it is desperately seeking new strategic partners. Iberia
New airlines are entering the world markets, especially from the and BA may sound unlikely bedfellows, but combined, they
Indian sub-continent, Africa and the Middle East, presenting new would be the biggest airline in Europe.
opportunities for the insurer. We will see the Boeing 737 early In the GCC and MENA regions air operators are growing in
series around for many a year to come. numbers. It is interesting to observe how widely different the
The Russian insurance market is emerging. Moscow Re, Russian business models are.
Insurance Centre and several other new entrants into the Yes, the future is very bright, of that there can be no doubt.
market are providing secure capacity.
Can the Market Support the Growth Within the aviation insurance industry we see a great
of Airlines? opportunity. The challenge is to build an aviation insurance
The growth of the airline industry is a measure of new-found market within the UAE. ARM is dedicated to the task of creating
business activity, of new trading partners which in the past regional capability; to serve the needs of the private aircraft
have been difﬁcult to access. Participation in Russian aviation owner, air taxi operator and regional airline.
insurance business has attracted domestic insurers. At meetings We strive to make ARM synonymous with aviation insurance
with people in Moscow and more recently at the Reinsurance from the UAE
PASSENGER NUMBER BY AIRCRAFT
860 300 316.00
Number of Passengers
Aircraft Values ($ million)
400 416 150
8 0.43 1.00
Trimotor B707 B747 A380 Trimotor B707 B747 A380
Adapted and updated from an article by David Boorman,
published in the Middle East Insurance Review October 2007
David Boorman, CEO