Air France Crash Likely to Further Pressure Aviation Insuran

The crash of Air France Flight 447 off the coast of Brazil will have an impact on an aviation insurance market that had already been hardening and is under pressure from the global financial crisis to tighten up underwriting performance.

Magnus Allan, aviation insurance analyst at broker Aon Corp., told BestWeek Europe that while the crash will have its impact, it should also be remembered both that the market was already hardening before the crash and that the crash comes at a time when the aviation industry has had an otherwise good safety record.

?The industry has been relatively safe over the past five years,? Allan said. ?And that?s looking at the long-term record as opposed to the short term. It will give underwriters pause for thought, however.?

Allan said the crash was first big casualty loss for the industry for some time, as past crashes had seen some lucky escapes for passengers. He highlighted the crash of British Airways Flight 38 at Heathrow Airport in January 2008, where the Boeing 777-200ER suffered a sudden loss of power just before landing. There was also the spectacular ditching of US Airways Flight 1549 in New York's Hudson River in January 2009.

In both cases, although the planes were effectively written off due to damage, there were few injured passengers and no deaths.

The loss of the Air France plane, with the death of all 228 people on board--the first catastrophic loss in several years--has caused the number of cumulative fatalities recorded by Aon to rise sharply.

The cause of the Air France crash remains unknown, and as BestWeek Europe went to press, the black box flight recorders had still not been located. It is not yet known if the recorders can be recovered once they are located due to the depth of the ocean in the area.

According to Aon?s latest bulletin on the state of the airline insurance market, average hull and liability premiums rose by around 10% as of May 2009. Aon estimates the hull value the Air France Airbus A330 at $99 million.

The report, written by Allan, added that underwriters were ?very concerned? that if conditions remain unchanged, 2009 could prove to be a third unprofitable year in a row after the poor returns from 2007 and 2008.

Aon said underwriters are taking a tougher negotiating stance, and that this was true even before the Air France crash occurred. At the same time, the ongoing global financial crisis means returns from financial results are likely to be low, driving airlines to push as hard as they can to get the best possible deal on the cost of their insurance.

May is a quiet time for the airline renewal market, with just 16 renewals taking place, according to Aon. The fourth quarter of the year is traditionally the busiest time in the market, with 97 airlines renewing their insurance in that period of 2008.

Aon?s compiled figures show annual hull claims for 2009 so far are more than 50% above the long term 1995-2008 average, with fatalities now running 20% above the long-term average. Aon said the aviation industry is going to have to have an exemplary safety record for the rest of 2009 in order to withstand pressure for further aviation insurance premium increases.

On the plus side, Aon said the financial crisis has so far not badly impacted the aviation industry, with just one airline closing down its operations. Aon adds that five other operations have not renewed their insurance between January and May 2009, but that four of these have extended their insurance policies and the fifth has joined a group policy.

The Aon report points out that this indicates activity in the first five months of 2009 is being dominated by the renewals of smaller operations, which might be seen to be at risk from the economic downturn, especially with oil prices having hit record levels in 2008 before falling back down again.

Aon concludes that any airline is likely to be relatively robust if it can survive the impact of the financial crisis. But even as there are positive signs coming from the industry, Aon said confidence is fragile, and if a major operator was to find itself in trouble, this would have a major impact on the market.