aerospace insurance

Aon Risk Solutions

]

aerospace insurance market outlook 2011

a safe haven?

aerospace insurance market outlook 2011

contents foreword executive summary

03 04

overview

05

losses overview financial overview

09 11

analysis

15

quarterly analysis sector analysis regional analysis liability limit analysis

16 17 23 28

outlook for 2011

31

inclusion criteria/notes

33

03 Aon aerospace insurance market outlook 2011

A safe haven? Aerospace Insurance Market Outlook 2011

foreword It is widely hoped that 2011 will see the confirmation of the economic recovery that will fuel growth in the aviation sector. The prognosis is generally positive, with airlines predicting passenger and fleet growth during the course of their 2010/11 insurance policies. Despite weathering the storm exceptionally well, the aerospace industry appears to be more reticent about the recovery than the airline sector, with the majority of operations expecting continued decline or at least flat growth in passenger numbers or turnover. This may be because the sector is one step removed from the traveler, and as a result has to wait for the airlines’ increased positivity to feed into to their balance sheets. While they may not have been as positive in their growth forecasts for 2011, the aerospace industry as a whole has enjoyed a fourth consecutive year with insurance prices gradually drifting down in the main. With the first quarter of 2011 behind us, it looks like the downward pressure is still in place and this year will mean that the soft aerospace insurance markets have been in place for half a decade. The main reason for the downward pressure is the ongoing improvements in safety and risk management that aerospace organizations across the industry are making and the recognition that they are gaining from underwriters as a result. Ultimately, aerospace has been and is likely to continue to be as a safe haven for capital providers.

What this means is that 2011 will be a good year for organizations across the industry to have a long look at their insurance policies and ensure that they are as efficient as possible. If the global recovery gains momentum then exposures could potentially increase rapidly as passengers return to airlines and airlines invest in fleets. If this is the case, then aerospace organizations will need to ensure that their insurance and risk management programs are as efficient as possible so that when they are shown to the insurance markets, underwriters have the confidence to provide most efficient coverage at the best price possible. This increasingly extends beyond the traditional aerospace coverages and into areas such as political risk for airports with international operations or manufacturers with global suppliers as well as ensuring that cyber risk is understood and managed. The benefits of working with Aon are significant in this respect. Our array of teams can help you understand the risk management implications of your activities, offering you help in understanding your supply chain risk as well the potential challenges from entering into a merger or acquisition. Please do not hesitate to get in touch with us if there is any aspect of insurance or risk management you think we might be able to help you with, or if you would like to discuss any of the issues raised in this report.

Peter Schmitz, Chief Executive Officer Aon Risk Solutions | Aviation [email protected]

Simon Knechtli, Head of Aviation Aon Risk Solutions | Aviation [email protected]

Aon aerospace insurance market outlook 2011 04

Compared with 2009, in reporting currency in 2010: overall aerospace lead premium fell by 3% airport lead premium fell by 7% manufacturer lead premium was static service provider lead premium fell by 5%

executive summary Premium: The lead premium total for 2010/11 insurance policies in the aerospace sector was US$774 million, compared to US$797 million for 2009/10 insurance policies on a like for like basis. This means that the cost of insurance in the aerospace sector has fallen for four consecutive years, reflecting the evolving perception of risk for the industry. On a non-like for like basis, the lead premium total for 2009/10 was US$783 million. Airport: The pace of reduction in the airport sector increased slightly for 2010/11 insurance programs, which has now entered its fifth consecutive year of lead premium reductions of between 2% and 7%. Confidence still appears to be in short supply, with airport authorities predicting passenger numbers will decline by 1% during the course of 2010/11 insurance programs, while air traffic control operations are suggesting that passengers will fall by 7% (see page 18). This is considerably more pessimistic than the forecasts being made by the airlines themselves, as detailed in Aon’s Airline Insurance Market Outlook 2011, available from aon.com/avaitioninsight. Manufacturer: Lead premium in the manufacturer sector was stable once again for 2010/11, reflecting the reduction in turnover caused by the global recession coupled with the overall perception of risk in the sector given the high cost of claims against manufacturers than can follow an aviation incident. The picture has changed somewhat however, with more than 60% of operations enjoying lead premium reductions compared to 45% for 2009/10 (see page 19). Service Provider: Operations in the service provider sector saw lead premium fall on average by 5% during 2010/11insurance programs. The sector has shown an impressive level of consistency having fallen on average by 6% for 2007/08, 2008/09 and 2009/10. Refuellers form a significant proportion of the service provider sector. Operations are expecting the amount of fuel they supply to fall slightly once again in 2010/11, reflecting both concern about levels of activity in the aviation activity as well as efficiency improvements across the industry (see page 21).

Risk insights Lead premium in the aerospace sector has fallen for four years, making conditions challenging for underwriters to say the least. This is unlikely to cause clients a large degree of concern, but the soft markets will ultimately come to an end and all sides of the industry need to understand each other’s position to ensure that changes in pricing are manageable and are aligned to any changes the risk being presented. At the same time, the risk profile of the industry appears to be evolving, which is likely to be a major factor in the ongoing soft markets. While airline claims have been high for the last couple of years, the actual number of losses has been below the long term average, which is likely to have a positive influence on risk models. As a result, while a five year soft market may appear to defy the logic of supply and demand, there are reasons for why it has happened.

Financial insights The aerospace industry weathered the global downturn relatively well, tracking the major global share indexes closely. Revenue forecasts for 2011/12 are relatively positive, and again closely aligned to the major global indexes. This is a significant improvement on the position that was being reported in 2009 and 2010. The insurance industry enjoyed a relatively benign year from a claims perspective overall. While this should have reduced pressure on aerospace underwriters, the significant claims as a result of the earthquakes in Japan and New Zealand and the floods in Australia are likely to have a significant impact (see page 11).

05 Aon aerospace insurance market outlook 2011

overview The aerospace industry continued to defy gravity during 2010, continuing a trend laid down in 2007.

Aon aerospace insurance market outlook 2011 06

The soft insurance markets in the aerospace sector have been in place for around four years, with even the recent global economic challenges failing to change the market direction.

overview Average percentage premium movement (original reporting currency percentage change) 6

Percentage change

4 2

After four consecutive years of prices falling overall, it seems likely that at some point the aerospace markets will turn and prices begin to rise, particularly after two relatively expensive years in the airline industry from a claims point of view.

-2 -4 -6 -8

Q1 ‘05

Q1 ‘06

Q1 ‘07

Q1 ‘08

Q1 ‘09

Capacity and exposure interplay

Q1 ‘10

Proportion of increases and decreases (percentage of lead hull and liability premium changes) 100

Percentage

80

60

40

20

0 2005

2006

2007

2008

2009

Increase

Stable

Decrease

Quarterly percentage premium activity 100

80

Percentage

The aerospace sector has seen average lead premium fall in the 14 of the last 16 quarters, a very consistent level of reduction that has been in place since 2007. Lead premium drifted down from US$782.49 million to US$773.46 million between 2009 and 2010 on a non-like for like basis. This means that the aerospace insurance market has fallen by around 17% since the start of this soft market.

60

40

20

0 2006 Q1

2007 Q2

2008 Q3

2009 Q4

2010

2010

The aerospace market is very diverse however, and the reductions are not being driven by a single factor across all the sectors. The interplay between capacity and exposure has played a major role over the last couple of years. Looking back to 2007, the high level of capacity in the aerospace insurance markets was generating a significant level of competition which in turn was putting pressure on the price of insurance. The aerospace sector was perceived as being relatively stable and while claims could be significant, they were relatively rare. As a result capacity increased and prices began to fall. The credit crunch meant that the main driver of the reductions evolved from the excess of capacity to the falling levels of exposures that typify any recession, particularly one as global as the one that we are tentatively emerging from. To put it bluntly, people reduced their discretionary spending on things like holidays and weekend breaks and the business community in many cases reduced travel plans from premium to standard class at best. As a result, aerospace exposure fell as airlines restrained their investment in fleet refreshment projects and airports saw their footfall decline.

07 Aon aerospace insurance market outlook 2011

This is obviously a broad simplification, but nevertheless we have now reached a point where exposures are beginning to rise, or at least their declines have stabilized. At the same time, with the global conditions improving for capital providers, there is less pressure on the underwriters. Equally, given the huge natural catastrophe losses that have occurred already in 2011, the aerospace sector is likely to continue to look like an attractive place to ensure that an overall book of insurance is as diversified as possible. As a result, capacity is likely to continue to be relatively healthy.

Using the insurance markets The way that aerospace companies place insurance has also evolved over the last few years and this is also playing a role in the creating downward pressure on insurance prices. Levels of self insured retention (SIR) have increased throughout the last half a decade. This follows the generally falling numbers of minor claims leading to some aerospace organizations increasing proportion of risk kept within a business as a cost efficient risk management strategy. Reserving practices have also evolved, with organisations now tending to put an amount aside, up to three times the potential claim, as soon as an incident occurs. Prior to this change, capital providers had been seeing the loss history of some aerospace organisations change dramatically at the conclusion of incident investigations when claims were subrogated against aerospace policies. By putting a reserve in place, underwriters are now more confident to support a risk, which has an impact on the prices that they offer. Finally, the aerospace sector is exceptionally sophisticated in the way that it learns from incident and quick to develop tools and technologies that reduce the severity of similar incidents in the future. There will always be the potential for catastrophic incidents to occur in the aviation industry, but with the amount that the industry learns from each incident, the insurance markets get a better understanding of the risk that they are being asked to support. The price reductions reflect this.

The story that wasn’t Despite the relative calm with which the aerospace industry and its insurance markets have faced the economic conflagration of the last two years, the amount of premium that is not included in the 2010/11 data significantly outweighs the additional premium. Just over US$45 million of lead premium has been taken out of the total annual aerospace pot in comparison with the 2009/10 data, with only just under US$7 million replenishing it, a deficit of US$38 million. The interesting part of the premium lost from the 2010/11 data is that 82% of it is the result of organizations extending their 2009/10 insurance policies into 2011/12. It is not limited to one or two large organizations, eight of the 14 aerospace organizations that were not included in the 2010/11 data set extended. Extending an insurance policy is normally a strategy that organizations implement during hard markets to put off a rise in the price of insurance for as long as possible, so it seems to be unusual that it is happening during the prolonged soft markets witnessed in the aerospace sector over the last four years. Many of the extensions however, are simply the result of activity to bring policies into line. A second factor is that large proportion of the total premium that was extended was formed of a single airport operation in Asia which is undergoing significant restructuring. As a result, it will be returned to the 2011/12 data. Stripping this organization out of the data, and the total lost premium in 2010/11 would have been just under US$13 million, far closer to parity with the number that was added. One interesting point to note at this stage is that despite the challenging economic conditions, no operations have been lost as a result of going out of business and only one of the 13 operations has come out as a result of consolidation. Looking at the data from a sector viewpoint, reflecting the direct influence of falling passenger numbers on the industry, seven airports left the data, although five of these were the result of airports extending their 2009/10 insurance policies.

Aon aerospace insurance market outlook 2011 08

Three manufacturers came out of the data, the result of consolidation, reduction in premium or limit or extensions into 2011. They were replaced by four new operations, three of which had increased their premium or limits to bring them into our criteria and one joining as a result of growth making it a top 100 manufacturer. Four service providers came off the list, two as a result of premium or limit reductions and two as a result of extending into 2011. Only one joined the list, having come out of a group program. Ultimately, discounting the airport operation that will return to the data in 2011, the picture is similar to 2009/10, when around US$8.8 million of lead premium was added to the data set while US$10.8 million was lost (see Aon’s Aerospace Insurance Market Outlook 2010, page 7, still available from aon.com/aviationinsight).

09 Aon aerospace insurance market outlook 2011

Losses in the aviation sector were high once again in 2010, and the aerospace sector is likely to take a significant hit from some of the largest losses.

losses overview Cumulative loss chart (including minor loss estimate) 2,500

After an exceptionally expensive 2009, claims in the airline insurance market were nearly as high in 2010. Overall claims, including an estimate for minor losses were US$2.1 billion, compared to US$2.3 billion for 2009 but US$1.5 billion on average since 1996.

2009 2010 Average 1996-2009

US$ millions

2,000

One of the main reasons that 2009 was so expensive was the loss of an Air France Airbus 330. With the recent recovery of the flight recorders the insurance market and the aviation industry as a whole is poised to gain valuable insight into the cause of the accident. This could have ramifications for the aerospace sector in 2011.

1,500

1,000

500

0 Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Cumulative fatalities chart (passenger and third party fatalities) 750

The aviation industry will always carry with it a considerable risk of catastrophic loss. Given the introduction of more wide bodied aircraft and super-jumbos, these statistics could be changed considerably by a single incident, but overall the loss statistics suggest that the risk profile of the industry is evolving.

2009 2010

Number of fatalities

Average 1995-2009 500

250

0 Jan

Feb

Mar

Apr

While the two years of high claims levels is concerning, there are positive developments. In 2010, total fatalities covered under standard hull and liability insurance policies were 601, compared to 621 on average since 1996. This means that the number of fatalities has been below the long term average for five consecutive years.

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Aon aerospace insurance market outlook 2011 10

Proportion of incidents by aircraft age range 100

Proportion

75

Interestingly, the largest proportion of fatalities covered under standard aviation liability insurance policies in 2010, 48%, occurred in incidents involving aircraft that were aged under five years old. This is the second consecutive year where this has been the case, with 60% of the fatalities in 2009 occurring in the same age range.

50

25

0 1995-2009 Average

2009

+16 yrs

5-10 yrs

11-15 yrs

Under 5 yrs

2010

Proportion of fatalities by aircraft age range 100

Just under 40% of fatalities occurred in incidents involving airlines in the 5-10 year age range. While this means that over 85% of fatalities in 2010 involved aircraft that were less than a decade old, in 2009 the number of fatalities in the 5-10 year age group was around 1% of the annual total. This highlights one of the many challenges of setting the price of aviation insurance, particularly when using fatality information which can fluctuate significantly from year to year.

The provisos There are a number of factors that need to be taken into account when examining the loss data, but it does at least provide some supporting evidence to the suggestion that the reliability of the global fleet is improving.

75 Proportion

The majority of incidents that occurred in 2010, 56%, were to aircraft that were 16 years old or older. This compares to a long term average of around 41%. While this could suggest that the age of the global airline fleet is a cause for concern, incidents involving aircraft aged between 11 and 15 years stood at 8% in 2010, compared with a long term average of 18%.

50

25

0 1995-2009 Average

2009

+16 yrs

5-10 yrs

11-15 yrs

Under 5 yrs

2010

Ultimately, aviation is an industry with significant potential for catastrophic losses and the price of insurance needs to reflect this. The difficulty for the aerospace sector is that the complicated nature of claims can make it a very drawn out process between an incident occurring and a claim being made against an aerospace organization. The high average age of the global fleet is at first glance a cause for concern, but this needs to be tempered by analysis of the types of losses that are occurring and recognition of the work that has been taking place to reduce the risk of similar incidents occurring in the future.

11 Aon aerospace insurance market outlook 2011

The main factors that determine insurance premium and rate changes are a company’s specific requirements and exposures, loss estimation, and the company’s financial profile. That said, the performance and perception of the aerospace sector overall can impact an underwriter’s appetite to support a placement, and as a result have an indirect impact on the price of insurance.

financial overview An insurer’s financial strength is also a strong factor in the direction of rate changes, primarily driven by bottom line profitability, loss experience and total capital.

The scale required to efficiently operate in the aerospace sector means that the industry is dominated by large publically listed companies.

This means that in order to successfully gauge the future direction of the cost of aerospace insurance, it is worth examining the financial performance of both the sector and the insurance companies that support it.

As non-listed companies are affected by the same fundamentals that influence investor appetite, particularly revenue opportunity and cost drivers, the share price performance of major aerospace companies against broad indices such as Standard & Poor’s 500 (S&P 500) and the Bloomberg European 500, can be a good guide to the industry’s financial outlook and ultimately the demand and price of insurance.

Aerospace sector performance Aerospace Americas share price performance

With aerospace companies not particularly well represented in the official sub-sectors of the major indices we have created an internal Americas and European reference index to compare price and financial performance.

160

Index performance

140

The two aerospace share performance charts show how an American and European index of aerospace companies has moved in comparison with the S&P 500 and the Bloomberg European 500 respectively.

120

100 S&P 500 index Aon Americas aerospace index 080 Mar 2010

June 2010

Sep 2010

Dec 2010

Aerospace European share price performance

Index performance

160

From the end of March 2010 to end of March 2011, an investment in a composite of the larger aerospace companies from the Americas would have yielded a positive return of approximately 54%. An investment in the larger European aerospace companies would have yielded lower returns of approximately 26%. This is a welcome turn around from 2010, when a comparable investment in either the S&P 500 or a composite of the larger aerospace companies would have yielded a negative return of around 20%. Similarly, the Bloomberg European 500 Index would have delivered a negative return of around 25%.

140

120

100 Bloomberg European 500 index Aon European aerospace index 080 Mar 2010

Interestingly, while the total market capitalization of the reference companies only makes up 3% and 1% of the broad indices respectively, they demonstrate a very high performance correlation.

June 2010

Sep 2010

Dec 2010

Aon aerospace insurance market outlook 2011 12

Financial outlook

A review of the financials of the 38 aerospace companies used in our internal indices (25 Americas/13 European) indicates how the industry broadly maintained positive revenue growth throughout the global recession as compared to the significant negative growth recorded in 2009 by the broader market indices.

Americas annual percentage revenue growth 25

Aon Americas aerospace index

Index performance

S&P 500 index

Consensus forecast for aerospace companies within our internal reference indices predict continued revenue growth throughout 2011 and 2012.

15

Increases in the delivery of large commercial aircraft and traffic growth (particularly in emerging markets) are expected to significantly contribute to this growth in revenue. This bodes well for related exposure variables and thus insurance demand.

5 0 -5

-15 2005

2006

2007

2008

2009

2010

2011(f)

European annual percentage revenue growth 25

Aon European aerospace index Bloomberg European 500 index

Index performance

15

5 0 -5

-15 2005

2006

2007

2008

2009

2010

2011(f)

13 Aon aerospace insurance market outlook 2011

Aerospace perceived as relatively safe

Underwriter financial performance

Credit default swap analysis

The fourth quarter reporting season was overshadowed, as usual, by the release of the full year financials. The disproportional contribution from the strong finish to the year, relative to the more difficult beginning, was apparent.

Index performance

150

Average of 15 prominent aerospace companies CDS index of 125 investment grade companies

Overall, the most striking part of the financials is that barely two years past the global economic nadir only traces of the credit crunch remain. Most importantly, underwriter equity for the top 25 global carriers has grown by 35% or US$147 billion in just two years and has been replenished to a level of substantial surplus relative to regulatory requirements.

125

100

75 Mar 2010

June 2010

Sept 2010

Dec 2010

Investor perception of the risk of default can be gauged from the price of credit default swaps (CDS) listed in the Markit CDX index of 125 US investment grade companies compared to a list of 15 prominent aerospace companies. The price of CDS measures the percentage annual cost to insure the bond investor against a potential default of the company which has issued the bond. As with the comparison of share price performance, the average CDS price of aerospace companies correlates quite well to the broader Markit index. This suggests that the aerospace sector is not considered to be of any particular concern. The absolute current average level of 88bps is relatively low and especially low when compared to the 300bps peak experienced throughout the global credit crises.

The recent global downturn on the other hand, is more difficult to exorcise from the income statements. Its impact is mainly demonstrated through the continuation of low global interest rates (adversely affecting investment income) and insufficient growth in exposure variables to mitigate the soft rate environment. Despite a lack of dramatic events, both quarterly and full year numbers produced a number of interesting insights for insureds in terms of future pricing and carrier solvency.

Highlights included: Growth in premiums earned remains sluggish but more aligned on a full year basis between life and non-life lines. A clear theme coming from the earnings calls was the return to growth, albeit slight, of the commercial exposure variables. The renewal rate for commercial markets remains soft in almost every line and region, encompassing both direct and reinsurance segments. Annual investment income is in line with the strong recovery witnessed in 2009, as carriers are still benefiting from lower impairment charges and much improved realized gains. Nevertheless, Q4’10 results are beginning to reflect the greater impact of the lower yield environment from the low global interest rates and the more stabilized financial market with overall investment income falling 17%. Underwriting profitability generally decreased in the year with 20 of the top 25 companies covered reporting a higher annual combined ratio. In general, the frequency and severity of commercial claims fell, but the many instances of natural and man-made catastrophes throughout 2010 increased the absolute losses compared to 2009.

Aon aerospace insurance market outlook 2011 14

For 2011, insureds should generally continue to benefit from lower premiums and stronger carrier fundamentals. In terms of how 2011 is developing, the level of natural catastrophes is now well ahead of the destructive and ultimately expensive start to 2010. In fact, Q1’11 will be the most expensive catastrophe loss first quarter on record. The losses are still considered by analysts to be “earning” over “capital” events however, in that they are unlikely to lead to an industry wide reported loss. Naturally the rate for coverage in affected areas is likely to be significantly impacted. A US dollar based index of the 25 companies within Aon’s Global Carrier Insights report (Aon 25 Global Carrier Index) has outperformed broader indices on an annualized basis. Equity analysts face a challenge in making a strong case for the insurance sector in either direction at this point. Relatively low valuations would negate a case for a broad sell off but persistently low interest rates and anemic premium growth do not make a compelling buy argument. In the absence of more fundamental rationale, the only catalyst that could increase investor sentiment in the sector in a meaningful way may be the upswing in M&A activity and a fresh round of real and rumored discussions. The above is an excerpt from Aon’s Q4’10 Global Carrier Insights report on the latest financial and market performance of 25 major listed insurers. All pricing data and publically available financial information sourced from Bloomberg.

15 Aon aerospace insurance market outlook 2011

analysis Aon’s strength in the global aviation insurance markets means that we have access to some of the most comprehensive data sets available. In this section, we examine the aerospace industry by sector, region and liability limit.

Aon aerospace insurance market outlook 2011 16

The quarterly and monthly results for 2010 highlight the aerospace sector’s continued consistency, with only a single month with relatively low activity bucking the overall trend.

quarterly analysis Number of renewals

2009 Premium (US$)

2010 Premium (US$)

2010 Premium Movement (US$)

2010 Premium Movement (RC)

1st Quarter

58

85.42

84.31

-1%

-4%

2nd Quarter

60

161.18

155.95

-3%

-4%

3rd Quarter

67

300.91

287.36

-5%

-3%

4th Quarter

60

249.72

246.53

-1%

-3%

Total/Average

245

797.23

774.16

-3%

-3%

Number of renewals

2009 Premium (US$)

2010 Premium (US$)

2010 Premium Movement (US$)

2010 Premium Movement (RC)

30

46.11

45.70

-1%

-5%

Jan Feb

8

15.86

15.93

0%

-3%

Mar

20

23.46

22.68

-3%

-4%

Apr

25

93.94

90.40

-4%

-5%

May

13

14.64

14.04

-4%

-4%

Jun

22

52.60

51.51

-2%

-2%

Jul

48

236.50

226.11

-4%

-5%

Aug

12

53.78

49.78

-7%

-5%

Sep

7

10.62

11.47

8%

13%

Oct

22

112.07

107.04

-4%

-7%

Nov

20

84.73

85.28

1%

0%

Dec

18

52.92

54.21

2%

-3%

Total/Average

245

797.23

774.16

-3%

-3%

Aerospace monthly renewal profile 12

1

11

2 3

10 9

1. 2. 3. 4. 5. 6.

Jan Feb Mar Apr May Jun

‘10: ‘10: ‘10: ‘10: ‘10: ‘10:

Aerospace monthly premium profile 12% 3% 8% 10% 5% 9%

7. 8. 9. 10. 11. 12.

Jul Aug Sep Oct Nov Dec

‘10: ‘10: ‘10: ‘10: ‘10: ‘10:

20% 5% 3% 9% 8% 8%

12

1

5 7

6

3

11 4 5

10 6

4

8

2

9

8 7

1. 2. 3. 4. 5. 6.

Jan Feb Mar Apr May Jun

‘10: ‘10: ‘10: ‘10: ‘10: ‘10:

6% 2% 3% 12% 2% 7%

7. 8. 9. 10. 11. 12.

Jul Aug Sep Oct Nov Dec

‘10: ‘10: ‘10: ‘10: ‘10: ‘10:

29% 6% 1% 14% 11% 7%

17 Aon aerospace insurance market outlook 2011

Trends in 2010 were little changed on 2009, with manufacturers receiving a relatively flat renewals while airport and service providers saw their premium fall.

sector analysis  

Renewals

Premium

  2009

2010

% change

2009 (US$m)

2010 (US$m)

% change (US$)

% change (RC)

80

79

-1%

116.33

107.56

-8%

-7%

119

123

3%

634.87

621.32

-2%

0%

Service Provider

46

43

-7%

46.03

45.28

-2%

-5%

Total/Average

245

245

0%

797.23

774.16

-3%

-3%

Airport Manufacturer

Renewals by sector 3

Premium by sector

1

3

1

1. Airport: 33% 2. Manufacturer: 50% 3. Service provider: 17%

3

22

1

1. Airport: 14% 2. Manufacturer: 80% 3. Service provider: 6%

2

Percentage lead premium change by sector (US$)

Percentage lead premium change by sector (reporting currency)

Service provider: -2%

Manufacturer: 0%

Manufacturer: -2%

Total/Average: -3%

Total/Average: -3%

Service provider: -5%

Airport: -8%

Airport: -7%

-10

-5

Percentage %

0

-10

-5

Percentage %

0

Aon aerospace insurance market outlook 2011 18

Airport (including air traffic control)

Downward exposure

Airport average premium movement

Interestingly of the 46 airport authorities that have reported passenger number forecasts for the duration of the 2010/11 insurance programs, nearly half expect their passenger numbers to continue to fall. Overall, passenger numbers are only forecast to increase by around 1% at airport authorities, while air traffic control (ATC) operations are forecasting a reduction of 7%. This suggests that there is still a considerable amount of caution in the airline sector despite the increasing economic confidence evident in many parts of the world.

15

Percentage change

10 5 0 -5 -10 -15 -20 Q1 ‘06

Q1 ‘07

Q1 ‘08

Q1 ‘09

Q1 ‘10

The 7% reduction in lead premium in the airport sector during 2010 continues a soft market trend that has been in place consistently since the start of 2007. The 2010 reduction is the softest the market has been during since the soft market started, with the sector falling by 5%, 4% and 2% in 2007, 2008 and 2009. The four year soft market means that there are now many questioning when the bottom of the market will be reached. While potential capacity continues to be healthy for well presented risks, it seems possible that 2011 could see insurance prices in the sector start to rise if passenger numbers recover. Ultimately, the position is very challenging for underwriters at the moment. On the one hand the market has been soft for a very long time, but at the same time with exposure falling in 2009 as a result of the global economic conditions, 2010 has simply represented a recovery. This could make it difficult to press for exposure related increases during 2011 unless the forecasts are for significant rises. Programs based in Europe form 69% of the premium, the majority of airports in the data set, basically the result of the different regional approaches taken to the insurance market. The Americas and Asia Pacific represent 14% and 11% of the sector’s total premium, with the remainder comprised of Africa and the Middle East. The main reason for this global disparity is the ownership and insurance approaches taken with many countries tending to insure either domestically or under government policies.

In terms of the number of aircraft expected to pass through airports the picture is similar. Airport authorities are predicting a 4% reduction in the number of passengers, while ATCs are suggesting that aircraft numbers will grow by around 3%. While these figures may seem to be on the cautious side given the more positive economic prognosis for many countries, it should be pointed out that the base is relatively small. It is also influenced by changes at three airports, one of which is being forced by competition authorities to divest itself of one of its major assets and another which is serving a country that is still in extreme economic difficulties. At the same time, the airlines themselves are somewhat more positive on passenger forecasts. For their 2010/11 insurance placements, the airlines forecast a 10% increase in passenger numbers on average, with Asia Pacific, Europe, and Latin America in particular expecting strong growth (or at least recovery following the reductions expected in 2009). Further details of the airline insurance market can be found in Aon’s Airline Insurance Market Outlook 2010, available from aon.com/aviationinsight

19 Aon aerospace insurance market outlook 2011

Outlook for 2011

Manufacturer

The airport sector is a barometer for aviation activity as a whole. As a result, its direction in 2011 will provide a strong indicator of how the aviation industry will perform in the longer term.

Manufacturers average premium movement

In terms of the direction of the insurance market, in the absence of a major incident, it is likely to continue to respond to exposure changes, with airports that are growing seeing an increase in their lead premium, while those that are not growing seeing the opposite. Ultimately, as the average premium movement change chart shows, the sector has enjoyed an exceptionally benign insurance market over the last four years, but given that there has not been a major incident involving an airport for some time, it is perhaps unsurprising that prices have been drifting downwards. At the same time, however, global underwriting operations are unlikely to remain in a market unless there is a chance of a reasonable return. If prices continue to decline then capacity could begin to drain away. The resulting reduction in competition could see prices begin to rise, although the factors outlined in the overview section of this document should keep any rises at a manageable level (see page 05).

10 Percentage change

At this stage, airports that are recovering and seeing their exposures grow are being balanced by those based in economies that are still distressed. In all likelihood, the sector is likely to continue in its current direction unless the global economic recovery becomes more uniform.

15

5 0 -5 -10 -15 -20 Q1 ‘06

Q1 ‘07

Q1 ‘08

Q1 ‘09

Q1 ‘10

The manufacturer sector is responsible for 50% of the total number of aerospace renewals and 80% of the premium, reflecting the cost of claims against the sector in the event of an incident. Premium is flat once again, a second successive year of stability. The sector has been operating at around parity for the best part of four years now, held in check most recently by the recession induced fall in turnover in the sector as a whole. Prior to this, the high level of capacity was keeping prices stable. The bottom line is that while claims can be exceptionally expensive for the manufacturer sector, they have been relatively rare over the last few years as a result of the improving manufacturing quality, technology and testing programs. As a result, the risk profile of the sector is evolving, and holding down the cost of claims. Of the 123 renewals that met the criteria for inclusion in this report, 62% enjoyed a reduction in the cost of their insurance in 2010, an improvement on the 45% reported for 2009. This suggests that underwriters are generally more confident in accepting risk from the sector than they have been despite the potential for involvement in catastrophic airline claims.

Aon aerospace insurance market outlook 2011 20

There was an increase in the number of manufacturers with negative credit balances, reflecting the high level of claims that were made in 2010. Our analysis shows that there was a small increase in the number of manufacturers with negative credit balance however the sector remains profitable on a five year basis. One of the difficulties of using five year credit balance as a gauge of market direction is the long tail nature of claims in the aerospace sector, where claims, particularly against manufacturers, can take up to five years to develop. What is does highlight is the challenging claims position that the aviation sector as a whole has faced over the last couple of years. Of the 103 manufacturing programs that we have turnover forecasts for, half expect their turnover to decline during 2011, the same proportion that expected a decline in 2010. Component, airframe and engine manufacturers expect turnover in reporting currency to rise on average by 4%, an improvement on the 3% decline expected in 2010, again suggesting fragile rather than surging confidence. Focusing on the MRO sector, which was expected to benefit from fleet improvement rather than renewal projects during the recession, the 2% average turnover growth forecasts are well down on the 9% expected last year. This suggests that the sub-sector is expecting significant fleet investment programs to commence as economies around the world recover and airlines renew their fleets.

Outlook for 2011 The direction of the manufacturer insurance markets in 2011 will hinge on two key factors. Primarily if the global economic conditions continue to improve and become more uniform, then passengers will be attracted back to the aviation sector which in turn will lead to an increase in demand for services provided by all parts of the manufacturer sector, whether as part of fleet renewal or fleet update programs. The second factor will be the level of claims. If the high level of claims in the airline sector are shown to be the ultimate responsibility of operations in the manufacturer sector, then prices are likely to begin to rise. The difficulty from the point of view of forecasting the likely direction of the manufacturer insurance market in 2011 is that both of these factors are exceptionally difficult to gauge even at this point in the year.

21 Aon aerospace insurance market outlook 2011

Service Provider Service provider average premium movement 15

Like the airport sector, the service providers in this data set are predominantly based in Europe, mainly as a result of the large proportion of the industry in the Americas and Asia that place insurance locally and many not meeting our criteria for inclusion (see back page).

10 Percentage change

Finances have become tighter across the industry as a result of the global economic conditions, and operations have looked to ensure that their insurance policies are as efficient as possible. Factors such as self insured retentions have continued to rise.

5 0 -5

Refuellers

-10

Refuellers represent over half of the total premium for the service provider sector, contributing just over US$23 million of the US$45 million total.

-15 -20 Q1 ‘06

Q1 ‘07

Q1 ‘08

Q1 ‘09

Q1 ‘10

The service provider sector, which is comprised of refuellers, ground handlers, caterers and airport service providers has been the most consistently soft sector of the aerospace industry since 2007. That said, the 5% average premium reduction in 2010 is lower than the airport sector, presumably the result of changing airport exposures. The sector has shown remarkable consistency over the last four years, with lead premium falling by 6% on average in 2007/08, 2008/09 and 2009/10 insurance programs. As we stated last year when average lead premium in the service provider sector had been falling for 13 consecutive quarters, sooner or later the market will hit the bottom and prices will start to rebound. Ultimately, total lead premium in the sector has fallen from US$53.78 million in 2006 to the current US$45.28 million on a non-like for like basis. It should be pointed out that this is the smallest of the sectors, with only 17% of the total renewals representing only 6% of the total lead premium, and as a result any change in overall premium will have a more pronounced impact on the percentages. Ultimately, 19% of service providers saw the cost of their lead premium rise, only slightly better than the 23% market average.

Given the global economic challenges the aviation industry has faced, the fluctuating price of oil and the pressure from some quarters to reduce the industry’s environment impact, it is interesting to note that the amount of fuel to be provided is expected to fall for the third consecutive year. While the decline, 1% in 2008/09 and 2% in both 2009/10 and 2010/11, is unlikely to generate headlines, it is at least consistent. Of the 21refuelling operations that provided a gallonage forecast, 10 are forecasting a reduction in the amount of fuel provided, while 11 are suggesting that it will increase. As a result of the changes, the sub-sector saw its average cost of lead premium fall by 6% for 2010/11 insurance programs. Of the 33 refuelling programs in this data set, 28 saw their premium stay stable or fall for their 2010/11 insurance policies. It will be interesting to see how this statistic holds up if the economic conditions improve over the next twelve months given that airlines expect to increase their fleet value on average by 6% during 2010/11 (for more details, please see the Aon Airline Insurance Market Outlook 2011, available from aon.com/aviationinsight). If the amount of fuel continues to remain stable, this would suggest that the fuel consumption improvements that the industry has been discussing for the last five years are real.

Aon aerospace insurance market outlook 2011 22

Service Providers

Outlook for 2011

Looking at the sub-sector without the impact of refuellers, lead premium fell by around 1% on average, influenced by two of the 10 programs having negative five year credit balances and a third where the credit balance has fallen. Stripping these three renewals from the data, and the sub-sector’s premium would have fallen on average by 7%.

The outlook for 2011 is pretty much in line with the outlook that we provided for 2010. There has been talk in the market for the last three years suggesting that the service provider book was as low as it could go while still remaining viable. This does not seem to have had a great deal of impact on the direction of the sector in 2010, but if the economic recovery becomes more solid in 2011, exposure and as a result premium, could begin to rise.

While this is not as positive as the 12% decline reported for 2009/10 renewals, this does highlight the sub-sector’s attractiveness to underwriters as a result of the relatively simple claims that tend to be the norm. There are fewer complex technical issues involved in a service provider claim and responsibility for an incident can generally be apportioned relatively quickly in comparison with, for example, an airline or airframe manufacturer. With more up to date claims information, underwriters have the confidence to treat the sub-sector more favourably, it seems.

23 Aon aerospace insurance market outlook 2011

Each region had a different experience with aerospace underwriters during 2010, with prices tending to change according to changes in the level of exposure at individual operations.

regional analysis  

Renewals

Premium Manf %

Service Provider %

Airport %

-9%

22%

19%

59%

-2%

-2%

93%

3%

4%

44.49

-3%

-6%

62%

10%

28%

299.13

285.18

-5%

-4%

64%

9%

26%

0%

19.98

20.07

0%

2%

81%

9%

10%

0%

797.23

774.16

-3%

-3%

80%

6%

14%

2009

2010

% change

2009 (US$m)

6

4

-33%

5.15

4.69

-9%

Americas

80

78

-3%

426.95

419.74

Asia Pacific

48

45

-6%

46.02

Europe

99

106

7%

Middle East

12

12

245

245

  Africa

Total/Average

Composition

Renewal by region

2010 % change % change (US$m) (US$) (RC)

Premium by region 1

5

1

2

1. Africa: 2% 2. Americas: 32% 3. Asia: 18% 4. Europe: 43% 5. Middle East: 5%

1. Africa: 1% 2. Americas: 54% 3. Asia: 6% 4. Europe: 37% 5. Middle East: 2%

5

4

4 2

3

3

Percentage lead premium change by region (US$)

Percentage lead premium change by region (reporting currency) Middle East:

Middle East: 0%

2%

Americas: -2%

Americas: -2%

Total/Average: -3%

Total/Average: -3%

Asia Pacific: -3%

Europe: -4%

Europe: -5%

Asia Pacific: -6%

Africa: -9%

Africa: -9%

-10

-5

0

Percentage %

-10

-5

0

Percentage %

5

Aon aerospace insurance market outlook 2011 24

Americas Premium change by region, Americas 15

Percentage change

10 5 0 -5 -10 -15 -20 Q1 ‘07

Q1 ‘08

Q1 ‘09

Q1 ‘10

After two years of being the only region to see its average cost of lead premium rise, 2010/11 aerospace insurance programs in the Americas saw a reduction of 2% on average. Aerospace activity in the region is dominated by the manufacturer sector, which comprises 93% of the lead premium total, with airports providing 4% and service providers 3%. While a significant proportion of this dominance reflects the sheer size of some of the manufacturers in the Americas, it also reflects that a large number of airports place their insurance in domestic markets and as a result they are not included in this data set. Obviously as global brokers we would always point out the benefits of placing insurance globally given that it gives clients access to expertise, experience and sometimes economies that may not be available through local markets. Only 16% of renewals in the Americas saw the price of their aerospace lead premium rise for their 2010/11 programs, well down on the 40% reported in 2009/10. All of the increases were to manufacturer operations. This reflects the caution that underwriters tend to treat placements in this sector, given the size of awards and the length of time it can take for claims to filter through to insurance policies. It should also be pointed out that there tends to be a lower capacity for US risks because of the potential for high award levels across all sectors.

Reserving practice has continued to evolve over the last few years, with operations taking into account the potential for a claim to come through onto their insurance policy up to five years after the incident actually took place. As a result, realistic reserves are tending to be put in place, rather than simple reactions to a claim once it has been subrogated in part or total onto an insurance policy. Looking at airports in the Americas, and confidence in the economic recovery does not seem to be significantly higher than it was for 2009/10 insurance programs, with only three of the eight airports in the region forecasting an increase in passenger numbers. This broadly corroborates the data coming out of the airline sector, which suggests that passenger numbers are expected to grow by a tepid 3% average fleet value growth with a slightly more positive 7% growth in passenger numbers (for further information and analysis of the airline insurance market, please see Aon’s Airline Insurance Market Outlook, available from aon.com/aviationinsight). It should be pointed out that while the number of passengers has declined as a result of the economic challenges, the maturity of the aviation sector in North America at least means that rapid surges in passenger numbers are unlikely. Of the 55 manufacturers that reported turnover forecasts, 56% forecast a reduction in turnover during the course of their 2010/11 insurance policies. This is a higher proportion than the 49% reported in 2009/10, and supports the suggestion that aerospace operations in the Americas do not feel themselves to be out of the woods yet. Please note that there are only three aerospace operations based in Latin America that meet our criteria. As a result, we examine the Americas as a whole rather than breaking it down into North and Latin America. If you would like analysis that is more closely aligned to your region and sub-sector, please contact your Aon representative or email [email protected]

25 Aon aerospace insurance market outlook 2011

Asia Pacific

That said, the region’s proportion of premium generated by the manufacturing sector has grown from 55% to 60% between 2009/10 and 2010/11 insurance programs, although the number of manufacturer renewals in the region has been broadly stable. It should also be pointed out that this is only 4% of the global manufacturing premium total.

Premium change by region, Asia 15

Percentage change

10 5

An impressive 61% of airports that said that they expected passenger numbers to rise during the course of their 2010/11 insurance programs. There are a number of factors involved in this growth, including a recovery from the decline in passenger numbers in Asia during the 2009/10 policy period. The region’s airlines also projected the strongest rate of growth in passenger numbers.

0 -5 -10 -15 -20 Q1 ‘07

Q1 ‘08

Q1 ‘09

Q1 ‘10

Aerospace operations in the Asia Pacific region enjoyed the best treatment from the insurance markets in 2010, with lead premium falling on average by around 6%. The region has been enjoying gradually improving treatment from the insurance markets over the last three years, with a 3% reduction for 2009/10 renewals and a 1% reduction for 2008/09. The reductions have been fairly universal across the region, with only 16% of renewals being placed at an increased price compared to an industry average of 23%. The increases were generally the result of exposure changes and claims, although the region generally enjoys a positive perception in the insurance markets because it is generally less litigious than some others. Its make up is also likely to be a factor, with only 60% of the region’s activity coming from the manufacturing sector, somewhat lower than the 80% global average. The reason that this is important is that underwriters tend to be least happy to support the manufacturing sector because of the size and potential complexity of its claims. With lower numbers of this type of risk, average lead premium changes are likely to be more positive.

Three of the region’s five component manufacturers have ambitious growth plans, resulting in the sub-sector seeing an average lead premium increase of more than 10% for 2010/11 insurance placements. Similarly, the only engine manufacturer in the region that meets the criteria for inclusion in this data set is reporting a significant increase in turnover and as a result premium. That said, Asia Pacific is still a relatively small proportion of the total in terms of manufacturing premium. Like the airports, service providers in the region have enjoyed relatively positive treatment from the insurance markets, with lead premium down by 8% on average. As we pointed out in the Aerospace Insurance Market Outlook 2010 (available from aon.com/aviationinsight), eight of the region’s nine service providers are refueling operations, which tend to have fairly favorable passage through the insurance markets. While Asia Pacific represents around 17% of the total aerospace renewals that meet the criteria for inclusion in our data set (see back page for further details) it only represents 5% of the total lead premium.

Aon aerospace insurance market outlook 2011 26

Europe

Around 21% of the 108 aerospace renewals that are based in Europe saw their lead premium rise, compared to 22% globally.

Premium change by region, Europe

Of the 41 airport operations that reported aircraft movement figures, around 27% expect activity to increase during the course of 2010/11 insurance programs. In terms of forecast passenger numbers, slightly more, 31%, say that they expect better figures for the duration of their 2010/11 insurance programs. This translates to an average reduction in passengers of around 3%, coupled with a 1% reduction in forecast aircraft departures. These figures contradict the forecasts made by the airline sector somewhat, where passenger numbers are forecast to grow by 11% with average fleet values are forecast to rise by 3% in the region.

15

Percentage change

10 5 0 -5 -10 -15 -20 Q1 ‘07

Q1 ‘08

Q1 ‘09

Q1 ‘10

The largest region in terms of renewals (44%) and second largest in terms of lead premium (37%), European aerospace operations saw premium fall by around 4% on average for 2010/11 programs, slightly better than the 3% global average. This continues the slow drift down that has been apparent for four years, with lead premium falling by 3% for 2009/10 programs and 4% for 2008/09 programs. The decline was even more pronounced for 2007/08 policies when premium fell by 7%. As mentioned elsewhere in this report, and indeed in the last edition of this report, there is likely to come a point where the market has fallen so far that it has to harden if it is to remain viable for underwriters, but there is little evidence of this happening at this stage. Certainly the evidence coming from the insurance markets so far in 2011 is that the trend is likely to continue unless there is a string of major incidents. Europe continues to have the highest number of renewals in the aerospace industry, although this reflects the nature of the sample with many aerospace programs in other regions globally placed in local markets. Ultimately, in terms of premium, the region represents 69% of airport premium, 30% of manufacturer premium and 57% of service provider premium. As a result, the European numbers are very close to the global averages.

The average amount of fuel expected to be provided in Europe is forecast to fall by around 5%, backing up the aerospace forecasts for air traffic. The region has one of the more vociferous environmental lobbies, with airlines responding by trying to reduce fuel consumption by as much, as publically, as possible.

27 Aon aerospace insurance market outlook 2011

Middle East

Africa

Despite the challenging economic conditions of the last two years, aerospace activity in the Middle East has continued to climb, albeit slowly. While the number of renewals in the region has stayed constant, the level of lead premium has risen by around US$1 million.

Africa is the smallest region in terms of aerospace activity, contributing less than 1% of the US$776.16 million global lead premium total.

That said, there is still some way to go before the region can lay claim to becoming a new global force in the aerospace sector. It currently represents around 3% of the global lead premium total, meaning that, like Africa, it is very difficult to discuss changes in premium in the region because a major change at any of the small number of participants will have a significant impact on the region as a whole. Airports in the region represent around 2% of the global lead premium total, manufacturer 3% and service providers 4%. As a result of no claims in the region, its five year credit balance has improved since last year.

Activity in the region is dominated by the airport sector, which provides around 70% of the total lead premium. Overall, operations in the region enjoyed a 5% reduction on average on their lead premium during 2010. The region’s prospects in the insurance markets have oscillated over the last three years, with an average 10% reduction in 2008/09 followed by a 1% reduction in 2009/10. It should be noted that given the limited size of the aerospace industry at this point in Africa, changes to a single operation can have a significant impact on the region’s totals and averages. As a result, it is difficult to provide in depth analysis.

Aon aerospace insurance market outlook 2011 28

Segmenting the aerospace sector in this way does not always provide a direct indicator of the size of an organization, but the level of liability does give a good indicator of an organization’s risk profile and the market impact that it has.

liability limit analysis  

Renewals

 

Premium

2009 % change (US$m)

Composition

2010 % change % change (US$m) (US$) (RC)

2010

US$2bn+

16

17

6%

303.12

297.65

-2%

-2%

95%

1%

5%

US$1.5-1.99bn

19

18

-5%

112.18

109.11

-3%

-2%

76%

5%

20%

US$1-1.49bn

102

111

9%

230.31

223.44

-3%

-4%

70%

8%

22%

US$750-999m

41

36

-12%

49.59

47.57

-4%

-5%

84%

6%

9%

US$500-749m

40

38

-5%

51.49

49.61

-4%

-3%

51%

24%

25%

US$0-499m

27

25

-7%

50.53

46.78

-7%

0

76%

9%

15%

Total/Average

245

245

0%

797.23

774.16

-3%

-3%

80%

6%

14%

Renewals by liability limit

6

Premium by liability limit

1. US$2bn+: 7% 2. US$1.5-1.99bn: 7% 3. US$1-1.49bn: 45% 4. US$750-999m: 15% 5. US$500-749m: 16% 6. US$0-499m: 10%

1 2

5

4 3

Manf %

Service Provider % Airport %

2009

6 5 4 1

3 2

1. US$2bn+: 39% 2. US$1.5-1.99bn: 14% 3. US$1-1.49bn: 29% 4. US$750-999m: 6% 5. US$500-749m: 6% 6. US$0-499m: 6%

29 Aon aerospace insurance market outlook 2011

Percentage lead premium change by liability limit (US$)

After doubling between the 2007/08 and 2008/09 data, the number of airports with a liability limit of more than US$2 billion has stabilized, unsurprisingly given the global economic conditions. It will be interesting to see if this number increases as the economic conditions improve and the aviation industry starts to grow once again.

US$2bn+: -2% US$1.5-1.99bn: -3% Total/Average: -3% US$1-1.49bn: -3% US$500m-749m: -4% US$750-999m: -4% US$0-499m: -7% -10

-5

0

Percentage %

Percentage lead premium change by liability limit (reporting currency)

As you would expect given the nature of the business, the US$2 billion+ segment is dominated by manufacturers, which deliver 95% of the global premium total. As mentioned elsewhere in this document, there is often a concern about the size of potential claims for manufacturers, so it is unsurprising that there was a 2% average increase in lead premium for manufacturers in this segment in comparison with an industry average of 3% fall. Among the 17 renewals of all classes in this segment, there was a reduction of 2% in average lead premium.

US$1.5-1.99bn

US$0-499m: 0%

Of the 18 renewals with a liability limit of between US$1.5-1.99 billion, 22% saw their lead premium increase. While this may not be the most interesting statistic in the world, it does suggest that the industry is past the high point of the recession. In 2009/10, 53% of aerospace operations in this sector suffered an increase, well up from 33% in 2008/09 and only 13% in 2007/08.

US$1.5-1.99bn: -2% US$2bn+: -2% US$500m-749m: -3% Total/Average: -3% US$1-1.49bn: -4% US$750-999m: -5% -10

US$2bn+

-5

Percentage %

0

Again, manufacturers in this segment have seen their lead premium rise by around 2% on average, while airports, considered to be less of a risk, have seen it fall by around 7%. There has also been a reduction in the proportion of airports in this segment, reflecting the challenging economic conditions. In 2009/10 renewals, airports represented 25% of the segment, but this has fallen to 20% for 2010/11 renewals.

Aon aerospace insurance market outlook 2011 30

US$1-1.49bn

US$500-749m

The number of aerospace operations with a liability limit of between US$1-1.49 billion grew by 14% during 2010/11. As the largest sector in terms of the number of placements and the second largest in terms of premium, it is unsurprising that the segment was close to the market average in both US dollar and original currency terms.

Operations with a liability limit of US$500-749 million saw their lead premium fall on average by 3% in reporting currency, around the same level as the industry average.

Nearly half of the airports in this data set fall into this segment, as do a little over 40% of the service providers. Of the 26 refuelling operations in this segment only three saw their lead premium increase, none of which appears to have been the result of increased gallons of fuel forecast to be supplied. This is a similar proportion to what has been forecast over for the preceding two years, as a result of increased expectation for fuel efficiency.

US$750-999m Operations with a liability limit of between US$750 million and US$999 million enjoyed the best treatment from the insurance markets on their 2010/11 insurance placements, with a 5% average reduction in lead premium. Within this, the service provider sector stands out, having received an average reduction of more than 20%, as a result of all four operations in this sector enjoying reductions of at least 10%. This appears to have been the result of claims at three of the four operations, all of which are refuellers. Airports in this segment also enjoyed relatively positive treatment from the insurance markets, with seven of the nine seeing their cost of lead premium fall on their 2010/11 insurance policies. This was mainly the result of exposure reductions. Manufacturers were also relatively well treated, with an average reduction of 2% compared to a flat sector average.

Airports enjoyed an average reduction of 13% on their 2010/11 insurance policies. All except one of the ten of the airport operations in this segment saw premium remain flat or fall. The exception is an airport based in the Americas which projected robust exposure growth for the period. For service providers, the reduction was a more modest 4%, based on four of the sector’s six renewals in the segment enjoying reductions. Of the two increases, one was the result of an incident which has led to a reduction in its five year credit balance, while the other forecast exposure growth. Manufacturers in the segment saw the cost of lead premium risk by 2% compared to the 2009/10 placements, driven by premium rises of more than 10% at five of the segment’s 22 operations.

US$0-499m This is the smallest segment in terms of premium, and was basically flat in terms of lead premium change for 2010/11, a slight degradation of conditions in comparison with 2009/10 renewals when premium fell on average by 2% in the segment. Airports again enjoyed the best treatment from the insurance markets, with an average reduction of 10%, although this figure was significantly influenced by a single renewal without which the reduction would only have been 4%. From a service provider point of view, there was a 6% reduction, although there are only two operations in the segment when looked at this way. In terms of the manufacturers, the reduction would have been 11% if the five operations that had increases were discounted. The increases were a mixture of exposure growth and claims.

31 Aon aerospace insurance market outlook 2011

outlook for 2011 The gradual decline of the price of lead premium in the aerospace insurance market has continued so far in 2011. While at first glance the potential for a fifth year of falling prices is difficult to justify, the industry’s evolution provides clues as to why it is happening.

Aon aerospace insurance market outlook 2011 32

Postcards from 2011

The definition of risk

While it is still relatively early in the year in terms of the number of insurance programs that have been placed, preliminary data for 2011 basically seems to support the suggestion that 2010 trends are likely to continue, with overall lead premium falling on average by 1%.

Ultimately, the gradual decline of the price aerospace insurance reflects the relative efficiency of the insurance markets as a way of pricing and supporting a risk. As a result, while the overall trend is likely to continue to drift down, there will be operations in the industry that see price rises as they increase their exposure, suffer losses or restructure their operations.

This breaks down to 7% reductions for both airports and service providers but a 12% increase for manufacturers, mainly as a result of improving turnover forecasts. Given that Q1 has only represented around 10% of total annual premium for the last five years, the numbers at this point in the year tend to be slightly more erratic. At this stage however they broadly point to a continuation of the overall trend.

Pray for rain? After four years of soft market conditions, and facing the possibility of a fifth, some observers may be asking whether 2011 is finally the time when capital providers reduce their commitment to the sector. Prices have been falling for nearly half a decade and only a catastrophic claim or extreme event seems likely to change the direction of the market in the near term. This perhaps misses the point however. The primary driver of pricing in the majority of insurance markets is the risk being presented. If that risk is perceived as declining, then prices will fall to the point that underwriter models show that they are unlikely to make a return. At this point, some will stop accepting new or renewed programs which will mean that capacity will contract and prices will climb. This will continue until the potential return for capital providers matches the perception of risk. In the case of the aerospace sector, despite the relatively high level of claims over the last couple of years, the overall risk is declining as a result of continuing improvements in technology, testing environments, crew training and the amount of information that is being gained from every incident that does occur.

The most efficient way of ensuring that any price rises are kept to a manageable level is to be as transparent as possible with the insurance markets, build positive professional relationships and keep them informed of changes to an insurance program. If all parties involved in an insurance and risk management program understand how the risk is evolving, then price increases, while sometimes unavoidable, should at least be realistic, predictable and manageable. This is likely to be particularly important during 2011 if the global economic recovery begins in earnest and aerospace exposures begin to recover as a result of more people travelling and more airlines investing in their fleets. “Lead premium in the aerospace insurance markets has been declining for nearly five years and there does not seem to be much prospect of it turning in 2011 except where exposure grows,” observes Danny Green, head of Aon’s aerospace team in the UK. “Ultimately this is great for our clients, but also reflects the work that is being done across the aviation industry to improve safety and reduce the number of incidents. Aviation will always be an industry that presents a high level of risk, and incidents can never be entirely ruled out, but if the industry continues to improve its safety record then underwriters’ risk models will continue to improve and prices will continue to fall.”

33 Aon aerospace insurance market outlook 2011

inclusion criteria/notes The information featured in this report is representative of market trends only. With vertical or fragmented marketing the exact percentage rate movements and/or shifts in premium can sometimes prove difficult. Aon defines the aerospace industry as being comprised of airframe, engine and component manufacturers, airports and air traffic control organizations, caterers, retailers and ground handlers, refuellers, repair and service operations, security companies, financiers and other service providers. We group these into three sectors, manufacturers, airports and service providers, based on their risk profiles and operation type. We focus throughout this review on lead premium in reporting currency (RC), unless stated otherwise. Looking at changes in premium that has been converted into US dollar terms can complicate the picture because it represents changes in the price of currency, rather than changes in the cost of insurance. Given the low level of activity from an aerospace point-of-view, outside of Embraer, we have included Latin American operations within the overall Americas regional summaries. The airport sector includes air traffic control (ATC) operations. The manufacturer sector includes maintenance, repair and overhaul (MRO) operations because of their similar risk profiles.

Feedback on issues, suggestions for future coverage, comments and editorial enquiries, please contact: Magnus Allan [email protected] +44 (0)20 7086 1277 For information and analysis, please contact: Paul Mitchell [email protected] +44 (0)20 7086 3641 Financial information and analysis provided by: Nicholas Keye, CFA [email protected] +353 1 266 6419 We must point out that due to the nature of this type of document, Aon cannot be held responsible for any loss or damages caused through the use of any information contained herein. While we try to comment on issues we know to be fact, we are fully aware that in gathering the information contained herein from various sources there is always the possibility of inaccuracy. We can therefore only claim that the information is correct to the best of our knowledge at the time of publication.

Aon aerospace insurance market outlook 2011 34

If you would like to discuss your aerospace insurance requirements, please contact:

Based in Dublin, Ireland, the Aon Centre for Innovation and Analytics provides Aon colleagues and their clients around the globe fact-based market insights. As the owner of the Aon Global Risk Insight Platform (GRIP), one of the world’s largest repositories of risk and insurance placement information, the centre analyzes Aon’s US$54 billion global premium flow to identify innovative new products and to provide Aon brokers with insights about which markets and carriers provide the best value for Aon brokerage clients.

Aon Analytics provides clients with forward-looking business intelligence, comprehensive benchmarking and total cost-ofrisk analysis as well as global market insights using proprietary technology like the Aon Global Risk Insight Platform to enable more informed and fact-based decision making around risk management, risk retention and risk transfer goals and objectives.

Aon Global Risk Insight Platform (Aon GRIPSM) is the world’s leading global repository of global risk and insurance placement information. By providing fact-based insights into Aon’s US$54 billion in global premium flow, Aon GRIP helps identify the best placement option regardless of size, industry, coverage line or geography. The web-accessible data produced by Aon GRIP helps Aon brokers evaluate which markets to approach with a placement and which carriers may provide the best value for clients. It also helps Aon brokers to negotiate from a position of strength, making sure every conversation is based on the most complete, most current set of facts.

Simon Knechtli Head of Aviation [email protected] +44 (0)20 7086 4554 Danny Green Head of Aerospace [email protected] +44 (0)20 7086 3633 Oyin Heath Aerospace Specialist [email protected] +44 (0)20 7086 4525 Aon’s aviation newsletters and reviews, which provide industry analysis of both the airline and aerospace insurance markets, updates and special reports, are available from aon.com/aviationinsight where you can also subscribe to the distribution lists.

Aon Risk Solutions | Specialty | Aviation 8 Devonshire Square London EC2M 4PL UK +44 (0)20 7623 5500 [email protected]

aon.com/aviationinsight Published by Aon Risk Solutions | Specialty | Aviation Registered office 8 Devonshire Square London EC2M 4PL UK © Copyright Aon Limited 2011. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any way or by any means, including photocopying or recording, without the written permission of the copyright holder, application for which should be addressed to the copyright holder. Aon Limited is authorised and regulated by the Financial Services Authority. OS 32563 écoutez creative - 05.11 FP ref: 6573 RH ref: 6337

This document has been produced using a minimum of 50% recycled material from a sustainable forest.