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Technical Rating Models and Airline Risk Differentiators

This detailed analysis by Dan Boultwood delves into the complexities of airline risk assessment within the context of today’s economic climate. It explores the challenges faced by insurers, including the impact of financial markets and recession on airline operations. Key topics include premium income versus operational costs, experience rating, and the use of technical models to predict expected claims. Boultwood further discusses the significance of safety management systems and qualitative assessments, ultimately highlighting the importance of data-driven underwriting in navigating the airline industry's unique risks.

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Technical Rating Models and Airline Risk Differentiators

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  1. Technical Rating Models and Airline Risk Differentiators Dan Boultwood 9th December 2009

  2. Background; Current Climate • Financial markets and world recession – airline crisis • Insurers capital cost and return on equity • Airline Losses – rating cycle – market capacity Technical Pricing / Pricing Model – Dan Boultwood/08 Dec 09

  3. What are Insurers trying to achieve? • Net airline premium income greater than operational costs and claims incurred • Attritionals losses (below $10million) / large losses ($10-$250 million) / catastrophe losses (greater than $250million) • Technical models aiming to calculate the expected claims for the year • Expected claims Vs technical target premium Technical Pricing / Pricing Model – Dan Boultwood/08 Dec 09

  4. Actuaries and Underwriters • Underwriters are for intuitive pricing based upon personal experience • Actuaries are for technical premium based upon historical data Underwriters Confidence in • expected loss ratio Actuarial • Net result of Premium + Investment Return on equity Operational expenses and loses Technical Pricing / Pricing Model – Dan Boultwood/08 Dec 09

  5. Experience Rating – I.T. + Actuarial • Each airlines historical loss experience for an expected loss cost • The industry loss experience (Global) since 1999 • Key metrics assume that the past is a reasonable guide to the future • Data adjusted for inflation, loss development, changes in exposure • 95% comfort in historical data Technical Pricing / Pricing Model – Dan Boultwood/08 Dec 09

  6. Exposure Rating - Human Experience Evaluation • Selecting base rates • Peer grouping • Risk profile • Aircraft Type • Make and model, age, registration, seating capacity, values • Operations • Passenger or cargo – domestic or International – passenger mix – load factors • Departures • Route network – charter or scheduled – ACMI • Additional exposures • Maintenance, ground handling, refuelling, catering, other services Technical Pricing / Pricing Model – Dan Boultwood/08 Dec 09

  7. Airline Differentiating Risk Factors – Soft Factors Technical Pricing / Pricing Model – Dan Boultwood/08 Dec 09

  8. Safety Equipment Airline Underwriting – Dan Boultwood & Adam Spicer/11 June 2009 Page 7

  9. Safety Equipment • TCAS - Traffic Alert and Collision Avoidance System • EGPWS – Enhanced Ground Proximity Warning System • FADEC – Full Authority Digital Engine Control • ACARS - Aircraft Communication Address Reporting System • Wind Shear Altering and Detecting Systems • QAR – Quick Access Recorders Technical Pricing / Pricing Model – Dan Boultwood/08 Dec 09

  10. Safety Management Systems • FOQA - Flight Operations Quality Assurance Program / Flight Data Monitoring • LOFT - Line Orientated Flight Training • EFB - Electronic Flight Bags • ALAR -Approach Landing Accident Reduction / Stabilized Approach Monitors • LOSA - Line Operated Safety Audit Technical Pricing / Pricing Model – Dan Boultwood/08 Dec 09

  11. Safety Awareness / Culture • SMS system • Human factors • Voluntary reporting system • Crew • Cockpit Resource management • Company Technical Pricing / Pricing Model – Dan Boultwood/08 Dec 09

  12. Audits / Oversight • Regulatory bodies – good and bad • IOSA - IATA operational safety audit - benchmark • Codeshare partner audits – peer review Technical Pricing / Pricing Model – Dan Boultwood/08 Dec 09

  13. Other Factors • Technical dispatch reliability – statistics and lies!! • Key management personnel experience • Major shareholder or financial backers Technical Pricing / Pricing Model – Dan Boultwood/08 Dec 09

  14. Qualitative Information - Pilots Airline Underwriting – Dan Boultwood & Adam Spicer/11 June 2009 Page 13

  15. Qualitative Information • Flight Crew and Pilots • Minimum Pilot Requirements • Training provided and frequency • Pilot work force Technical Pricing / Pricing Model – Dan Boultwood/08 Dec 09

  16. Thank you Q & A

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