ANALYSIS-Airline insurance claims near $1.6 billion premium level after crashes

Recasts lead, adds quotes from LMA from paragraph 14, changes datline to Feb 14

By Michael Jones

Feb 14 (The Insurer) - Expected claims costs from the Jeju Air and American Airlines disasters, coupled with the Air Busan fire and Bering Air crash, are nearing the total of around $1.6 billion paid by airlines in net annual premiums, several senior aviation insurance sources said, meaning the market is likely to incur a loss in 2025.

Preliminary claims forecasts have already reached around $1.4 billion to $1.5 billion in 2025, four senior aviation market sources told The Insurer.

Premiums, the fee charged by insurance underwriters to take on risk, have to exceed insured losses and expense costs for an insurer to make an underwriting profit. In the event of a loss, insurers typically respond by increasing rates and/or limiting coverage offered. Over the past decade, the airline all-risks market has only made a profit in two years, 2022 and 2023, one senior aviation insurance source said.

The American Airlines crash, in which 60 passengers and four crew members were killed after a mid-air collision with a U.S. military helicopter near Ronald Reagan Washington National Airport, is the most significant insured loss incident so far this year.

Although no official loss reserve has so far been set by the policy lead, Starr Insurance, preliminary liability loss expectations are forecast at around $15 million per passenger, equivalent to an overall loss of around $900 million, three senior aviation broking market sources said. Starr Insurance did not immediately respond to a request for comment.

Meanwhile, estimates for losses from South Korea's deadliest airline disaster, when a Jeju Air Boeing 737-800 crashed at Muan International Airport on December 29, killing all 175 passengers and four of the crew, have risen.

Preliminary market loss estimates for the Jeju Air crash were in the region of $200 million to $250 million in mid-January, although some insurers not involved had suggested a loss closer to $400 million.

One senior broking source not directly involved in the placement, speaking on condition of anonymity, said this week that expectations have moved slightly closer towards the figure of around $400 million.

And last week's Bering Air accident in Alaska, in which all 10 passengers died, will further add to the claims total for the airlines sector. The plane vanished on February 6 and was found the next day by the U.S. Coast Guard.

Two aviation insurance market sources said that while it was too early to set expectations, given that all the passengers were from Alaska, the liability loss would likely be significant.

In addition to these three events, the market is also set to pay out for the $38 million total loss from the Air Busan plane that caught fire at a South Korean airport on January 29.

WITHDRAWALS

Airline insurance rates have been falling for a number of years due to an oversupply of capacity in the market. But while the cost of renewing some smaller airline policies has dropped by double digits since the start of the year, underwriting sources said loss expectations would soon put the brakes on the softening.

And, for the first time in several years, the prospect of insurers withdrawing from the airline market looks very real.

“There is often pressure in the aviation sector and the market usually manages to deal with it, but in addition there is currently stress around rising loss values. In our view, the issues mainly relate to exposures and ratings across the airline sector", said Dele Fajimolu, senior executive, technical underwriting, at the Lloyd's Market Association.

“Developing a more stable market would require greater pragmatism around exposure, terms, conditions and values. This is a significant moment because of competing factors, which include the litigation in various jurisdictions and the attritional losses that are as important as sudden and unforeseen events," said Fajimolu.

Pressure will be most pronounced for what two sources described as the second tier of the market, those that exclusively offer so-called follow capacity. This is the panel of insurers which agree to terms provided by the lead insurer to complete the placement of insurance cover.

Market conditions for these players have become increasingly unattractive due to recent rate softening and increasing 'verticalisation', which is the gap in rating paid to the lead insurer on a policy and those on the follow element.

At last year's airline all-risks renewals, leaders offered rate reductions of around 15%, but oversubscribed placements meant that price reductions in the follow element were often well in excess of that.

Whether any of these players do withdraw will determine whether the softening remains on pause or resumes later in 2025, four senior market sources said.