Airline insurance ‘defies rational thought’

The continuing decline in airline insurance premiums “defies rational thought”, according to stockbroker Westhouse’s insurance analyst Joanna Parsons.

Parson’s comments follow a report by broking group Willis, which predicted that the downward slide in airline premiums would continue unabated despite the crash of the Asiana Airlines Boeing 777 at San Francisco airport on 10 July.

The Willis report said airline rates fell 5% in the first half of 2013, equivalent to $13m (£8.6m) being eroded from the overall market premium. This is despite consisted mid-single-digit growth in exposures.

Average hull rates are down 11% and average liability rates per passenger are down 13%, resulting in the overall insurance cost per passenger falling by 12%. Excluding Asiana, Willis estimates the losses in H1 to be $488m.

Parsons said in a research note: “The fact is that aviation, and airline insurance in particular, is a class that defies rational thought. It is highly competitive with ample capacity and heavily reliant on reinsurance arbitrage to make money.”

However, she added: “Like all classes, it is perfectly possible to technically underprice a risk and still be profitable – if there are few losses.”