Aon warning of hardening rates will add pressure to aviation industry
The collapse of the XL Leisure Group will cost insurers £42m and some of this loss will be clawed back through an expected hike in aviation insurance premiums. The Civil Aviation Authority’s compensation scheme will be able to claim money from insurers that guaranteed a £42m XL bond that the company was obliged to put up in order to renew its Air Travel Organisers Licence. XL is added to the lengthening list of airlines that have gone bust in 2008 – it follows the closure of Zoom Airlines and US-based Gemini Air Cargo earlier this year. And the financial difficulties of airlines are set to increase – in addition to the soaring cost of fuel, as the aviation insurance market begins to harden, airlines insurance premiums could begin to rise.
Aon reported this week that, in general, airlines’ lead hull and liability premiums had reduced by 1 per cent in August. However, the broker warned that, over the next few months, getting a reduction in the cost of insurance will be “very difficult” for airlines. “There is little doubt that the insurance markets are starting to harden after five soft years, but it is unfortunate that it is taking place at a point that adds to the airline industry’s economic troubles”, Aon said in its latest airline insurance market report.
Airlines that reduce the size of their fleet may not necessarily see a corresponding reduction in their insurance premium. According to Aon, underwriters are increasingly attempting to impose “minimum premium agreements” on airline insurance programmes in order to guarantee a certain level of income regardless of the size of the fleet or estimates of passenger numbers – both of which are used as criteria to determine the size of premiums.
Of course, when airlines go out of business it means they will no longer be buying insurance, with the knock-on effect that insurers lose premium income. However, Aon figures reveal that, despite the collapse of XL and a number of other airlines this year, the loss of premium has been relatively insignificant – the broker estimates that, as a result of airlines going bust this year, only $20m, or 1.35 per cent, of the total amount of lead hull and liability premium has been lost.
