The Aviation Working Party

1. The Aviation Working Party Justyn Harding (chairman) David Hart Phillip Tippin James Widdows The working party wish to acknowledge the valuable assistance provided by: Richard Power Cameron Johnston of BAIG

10. Features of the Aviation Market Rapidly increasing exposure Rapid technological change Dominance of small number of insureds, insurers & brokers Vertical placement Alliances and code sharing arrangements Variability of claim sizes Availability of reinsurance Cyclical nature of business

11. Increasing Exposure All sectors of the market are growing fast Large numbers of increasingly expensive new airliners being ordered as fleets are modernised Rising freight levels Increasing number of passengers More flights with smaller jets to provide better service More frequent flights to wider range of destinations More satellite launches

12. Technological Changes Accident rate four times higher for non-industrialised nations compared to industrialised Continuing process, always some accidents Will reach safety plateau Future Issues (a) Privatisation of ATC and possible conflict of interest (b) Need for secure communications (c) Regulation of crew drinking (d) Technological changes: cameras, radar to detect CAT Better information is available to the public on which airlines and aircraft are safe

13. Airline Safety New ranking system- Flightsafe Non judgmental - allows for past accidents (number & nature), and ten factors including: average fleet age, type of planes, maturity of airline and the control environment Air Canada renowned to be the safest airline, with British Airways ranked 9th and all five major US operators in the top 20 Worst operators: (a) Small ex Soviet Union airlines (b) Nigeria Airways (c) Myanmar Airways (d) Merpati

14. Consolidation in Market Only three brokers and four major manufacturers so have substantial power Airlines and manufacturers becoming more global, so industry needs to respond Merger of European and American insurance operations e.g. BAIG and AAU This has caused the vertical placing strategy

15. Vertical Placing Inefficient system that exploits poor market information Risk placed with following market first who will not know lead terms Different terms offered to leaders e.g. claims handling allowance or better rate Many slips for one risk so terms not obvious Difference between lead and follow terms can be up to 40% for airlines

16. Alliances & Code Sharing Allow greater range of destinations to be offered Invisible to public Passengers on a flight may be travelling under different compensation regimes Your paint, your claim adopted in practice

17. Claim Size Variation To a large extent caused by differing liability payments Hull values up to $225m Liability payments up to $10m per passenger in US ($3m average) Claims often split with products insurers Highest overall claim $800m (Swiss Air) Largest hull claim $150m Will only rise in the future Will rise as more operators move to unlimited liability working conventional defences

18. Reinsurance Substantial amount needed to limit exposure Reinsurance may end up with non aviation insurers - naive capacity Naive capacity enters market on back of good years for the aviation market and falling returns in its own markets Someone has to pay claims - this cycle the Australian reinsurers, REAC and GIO Availability causes extreme cyclical swings

19. Cyclical Market Rates are turning, particularly for airlines and these movements are dramatic Thai Airlines recently suffered a 20% rise despite its size and having had few losses (none in the last year). Indian Airlines facing 65% rise after two losses last year (A320 at Yangon and 737-200 at Patna) This comprises an increase of 14% in liability costs and 90% in hull costs

20. Airline Trends Bigger aircraft Unlimited liability US Courts & Inflation More traffic Approaching safety plateau Code sharing and the �deep pockets syndrome� Overall => losses to increase

21. General Aviation Trends More private wealth Implies more traffic Growth rate => airline growth 10%pa Overall => losses to increase

22. War Trends Middle East? Air rage and pilot suicide Hijackings Overall => losses not set to improve

23. Satellite Trends Cheaper launches Lower orbit launches Implies more failures? US manufacturers losing market share to Chinese Ageing satellite population increasing in-orbit risk Overall => losses likely to increase

24. In General Increasing costs Market WILL turn But retro market will turn first Could see a vicious 2000 year for arbitrageurs

25. Vertical Placing Smoke and mirrors placing Maximises opportunity for imperfect information Leading to inefficient market results Result of too few brokers, too many underwriters

26. Players in the market doing better than average by making money from their reinsurers. Somebody selling reinsurance too cheaply. Ultimately someone will end up sitting on a very poorly priced liability as losses work through retro layers. This cycle much of losses have ended up with REAC and GIO Late 1980s saw marine underwriters caught the same way. There is a macho image associated with aviation XL Lemmings

27. And still companies start up new aviation wings - DP Mann only a month ago. Situation is theoretically unsustainable, but will last as long as there are lemming insurers prepared to throw capital off a cliff. The ultimate question is a simple one. Are our lemmings dying off too quickly to survive, or is this ritual suicide a symptom of a constant level of overpopulation? For non-US risks last year, available capacity equalled 170% of the size of the aviation insurance market. Who are our next lemmings? Lemmings