Traditionally, this sector has been more profitable than other aviation sectors, such as airlines, however underwriters, under pressure, are now focussing on addressing profitability across their whole portfolio.
Since our last publication there have been reports in the market of some significant losses in the aerospace infrastructure sector. In particular, a number of these look likely to impact on the manufacturers sub-sector.
The Southwest Airlines uncontained engine failure incident, which led to a fatality, may lead to other passenger and crew claims which could impact against the aircraft, engine and component manufacturers policies. We understand a loss reserve could reach USD 50 million.
The EC130 Helicopter crash in the Grand Canyon also looks likely to lead to plaintiff activity which will impact on the manufacturers policy. A reserve is estimated at USD 75 million.
The runway excursion of Embraer’s prototype KC-390 military aircraft in May, looks set to be a total loss under the manufacturers hull and liability policy and we understand that this could be reserved in excess of USD 100 million.
Meanwhile, recent liberalisation of grounding language within the manufacturer’s policies has coincided with some unusual potential liability losses presenting from the sector. Historically coverage within this sector was very restricted and as a result within the past three decades there have been only a handful of successful claims. However, more recently insurers have recognised the need to modernise coverage and this evolution has led to the inclusion of partial grounding/non-occurrence grounding and/or provided coverage resulting from non-performance of aircraft arising from the efficacy of parts manufactured.
While this enhanced coverage is beneficial to clients, we understand that there has been a number of grounding occurrences recently which could trigger claims under the extended language with loss reserves estimated in the range of USD 250-300 million (typical policy sub-limit of individual policies). However, dependent on the interpretation and circumstance of the respective dates of loss and/or occurrences it is possible that multiple policy years could be impacted.
Looking ahead what can we expect to see in this sector?
While as a whole capacity remains plentiful in the aerospace infrastructure sector, the market environment is becoming more challenging. These latest incidents and their potential reserving levels will further support the current resolve of underwriters, who are selective in their participation and seeking to increase prices.
In the manufacturers sub-sector, underwriters might typically be expected to review elements of coverage. However their ability to apply underwriting modifications will be fairly limited in the short term, since many manufacturer insurance programmes are placed on 36 month, fixed price and coverage contracts.
In the current market, airports, service providers and non-critical products risks, with good loss ratios, which purchase lower limits and can be written on a 100% basis, remain attractive and will achieve the most competitive results.