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2008: A Quantum of Solace? Ascend Worldwide, a UK-based aviation consultancy

Fri, Jan 30, 2009 — Paul Hayes

Articles, Featured

2008 was a “good” year in that, although the fatal accident rate was slightly greater than in 2007, there were fewer fatalities. And, from the point of view of insurers, there seemed to be the merest hint of light at the end of the tunnel instead of total blackness. Based on current estimate, the cost of claims during the year was some 20% less than in 2007, while estimates for written premiums in 2008 showed a small increase.

In 2006 we warned that premium income for airline business had fallen to the point where we felt it would be difficult for the market to cover its operating costs after paying the claims. Nevertheless, airline premiums continued to fall in 2007 so that our current estimate for written premiums for that year, at $1.6 billion, is some 20% less than the estimated almost $2.0 billion incurred cost of claims in 2007. It is too early to produce a robust estimate for the amount of airline premiums written in 2008. However, for the sake of this report, we have chosen to use a figure of about $1.8 billion – a 12.5% increase over 2007.

The apparent increase in written premiums in 2008 will be welcome but, in the past, one senior London market underwriter has noted that the market needed a $2.5 billion annual premium if it was to pay claims, cover operating costs and make a profit. There is still a long way to go!

Note that premiums slightly outdid claims in 2008. Source: Ascend

Note that premiums slightly outdid claims in 2008. Source: Ascend

It has been said that all previous underwriting cycles have “turned on a catastrophe.” However, although a major accident will concentrate underwriters’ minds and the events of 9/11 certainly resulted in huge increases in premiums, it is difficult to see how the data supports this view for most cycles. There has been no “catastrophe,” in insurance terms, in 2008, but it would seem that the market cycle may at last be turning. Whether increases will continue in 2009 and beyond remains to be seen and, in part, will depend on the claims experience. At least for now, the insurance market is going in the right direction.

In theory, there is still plenty of competition for airline business, with some 200% capacity in the market for a typical airline risk. In theory, there is 150% capacity for more “difficult” risks, although the actual capacity deployed in today’s market is no where near that mount. Simply put, the market has hardened.

Underwriters have significantly reduced the capacity that they are willing to employ – writing far less than their maximum line on risks and declining participation in the insurance programs of some airlines where the rate/premium has fallen below a level which makes sense in their business plans. Indeed, brokers have reported a level which makes sense in their business plans. Indeed, brokers have reported increasing difficulty in achieving a 100% placement at originally quoted terms. One broker has commented that he “lost count of the number of risks [airline placements] that hung at 65% [completion] during 2008.”

In order to compete, some insurers in the following market are getting a higher rate than the leader. We understand that any differential which may have existed in the past, between the rate achieved by the leaders and that achieved by the following market, has now narrowed to the point where it has disappeared. With many in the following market now reportedly achieving a higher price than the lead, brokers have coined such terms as “reverse verticalization” and “upwards verticalization” to describe the situation.

Airline accidents

2008 was disappointing in that the number of fatal accidents increased by some 17%, going from 24 accidents in 2007 to 28 in 2008. With growth in the airline industry now slowed, increases in exposure (number of flights) could not counter this trend, so the fatal accident rate also worsened to 1 accident per 1.3 million flights in 2008, an increase from 1 per 1.4 million flights in 2007.

Having said this, 2008 only looks poor in comparison with 2007 and 2006, as the number of fatal accidents in the year is close to the decade average of 27.2, and 2008’s fatal accident rate is better than the overall rate achieved in the nine years since 2000, which was 1 fatal accident per 1.2 million flights. 2008 also compares very favorably with the 1990s, which saw an average of 37.4 fatal accidents per year and an overall fatal accident rate of 1 per 700,000 flights.

Despite the increase in fatal accidents in 2008, the number of passengers and crew killed in these accidents actually decreased significantly, with only 539 reported deaths during the year. That is 25% less than in 2007, which saw 730 aircraft occupants being killed. On this basis, 2008 has turned out to be considerably better than most previous years; only 2004 had fewer deaths, at 434. The overall annual average for the decade is 798 passenger and crew deaths. For the 1990s, the average was 1,128 – twice as high as 2008. Therefore, 2008 turned out to be one of the safest years ever.

 On a more restrictive basis, fatal accidents involving passenger deaths on revenue passenger flights decreased slightly to 13 in 2008 – compared to 14 in 2007. Both numbers are considerably better than the decade average of 16. The 13 fatal accidents on revenue passenger flights in 2008 is only about half the 1990s average of 24.2.

Passenger fatality numbers largely mirrored these improvements, with “only” a reported 460 deaths in 2008, compared to 630 in 2007. Again, 2008 has been one of the best years ever. In recent years, only 2004 produced fewer passenger fatalities. The passenger fatality annual average for the decade, so far, is 690, while the annual average for the 1990s is 954.

The estimated passenger fatality rate for 2008 is 1 per 5.9 million carried. This rate is very much better than the 1 per 3.2 million for the overall nine-year period since 2000.

The worst accident in 2008 was the Spanair MD-80 crash in August at Madrid, Spain, which killed 149 of the 166 passengers on board and 5 of the 6 crew when it apparently stalled on take-off and crashed beside the runway. Apart from this accident, there were no others where more than 100 people were killed, and only two others were more than 50 people died (Aeroflot Nord, B737, 88 killed, and Itek Air, B737, 71 killed).

2008 was disappointing, as the number of fatal accidents increased. Source: Ascend

2008 was disappointing, as the number of fatal accidents increased. Source: Ascend

Western-built jets

During 2008 Western-built jets, which carry more than 90% of the world’s traffic, suffered nine fatal accidents (involving passengers or crew), but which resulted in only 353 passenger and crew deaths.

The nine fatal accidents is disappointing, being up on 2007, when there were only seven such accidents, and also up on the average for the decade so far of 7.3. However, nine does show a small improvement over the 1990s average of 10.4.

Despite the relatively high number of fatal accidents in 2008, only 353 occupants died in these crashes. This is a considerable improvement on 2007, when 576 passengers and crew died. It is also better than the annual average for the decade so far of 522, and very much better than the 1990s average of 658. Of recent years, only 2004 saw fewer deaths, with 235 in that year.

There were six fatal accidents to passengers on revenue passenger flights during the year, resulting in 330 passenger fatalities. This shows a small improvement on 2007, when there were seven fatal accidents to passengers. The six fatal accidents in 2008 is almost identical to the average for the decade of 5.7. However, it is slightly better than the 1990s average of 7.7.

The 330 passenger deaths in 2008 compares very favorably with 2007, which had 541 passenger deaths, and with the average for the decade of 484. The average for the 1990s is 598. The passenger fatality rate for the year works out to 1 per 7.7 million carried, compared to 1 per 4.3 million carried in 2007, and an overall average of 1 per 4.3 million for the decade so far.

The number of airline insurance total losses (including non-operational ground losses) for the year, currently standing at 25, is 25% greater than 2007, when there were 20 such losses. It is the highest annual number recorded since 1996. The average number of total losses for the decade, so far, is 19.4, while that for the 1990s is 21.9.

The cost of major hull claims (total losses and major partial losses) in 2008 is $717 million. While slightly better than the $746 million in 2007, it is more than $150 million up on the decade average of $557.7 million and $100 million more than the average for the 1990s.

2008 marked an uptick in both jet and turboprop accidents for Western-built aircraft. Source: Ascend

2008 marked an uptick in both jet and turboprop accidents for Western-built aircraft. Source: Ascend

Western-built turboprops

Currently, we are aware of 36 total losses (including non-operational ground losses) to Western-built turboprops of 15 seats or more during 2008. This is more than twice the number recorded for 2007, when there were only 16 such losses. The 36 lost airplanes is also considerably worse than the annual average for the decade so far at 25.2 and for the 1990s at 31.2.

Despite the very high number of total losses, there was, fortunately, a “more normal” number of 12 fatal accidents in 2008. This still compares badly with five such accidents in 2007, and the average for the decade of 9.9, but is still much better than 17.5 for the 1990s.

These accidents resulted in the deaths of 124 passengers and crew. This compares to only 25 fatalities in 2007 and an annual average for the decade of 85. The 1990s average is 195.

However, the estimated cost of major hull claims (total losses and major partials) during 2008, at $91 million, is slightly down on the $101 million recorded for 2007. Nevertheless, $91 million is still relatively high when compared to the annual average for the decade of $75 million. The average for the 1990s is $96 million. Our estimate of incurred liability for this class of aircraft, at around $100 million, is about twice the 1990s annual average of $46 million and the average for the decade so far of $58 million.

 

Eastern-built jets

The overall experience of airline operated Eastern-built jets in 2008 continued to be good, with only two known total losses (including one non-operational ground loss). With only one fatal accident resulting in just four deaths, the record is one better than in 2007.

The number of total losses in the year was considerably lower than in the 1990s, when the average was 7.5. The average for the decade so far is 3.3.

 

Eastern-built turboprops

Eastern-built turboprops had a much better year with nine known total losses, compared to 17 in 2007. The annual average for the decade so far is 13.6, and the average for the 1990s is 11.3. Unlike many previous years, the number of losses occurring in Africa, at only three, showed an improvement. However, this low number may reflect inadequate reporting and more accidents for the year may yet come to light.

There were seven fatal accidents during the year, resulting in 67 passenger and crew deaths, compared to 11 fatal accidents and 122 deaths in 2007. The 1990s average is 5.4 fatal accidents and 87.7 fatalities, while the annual average for the decade is 7.7 fatal accidents and 98 fatalities.

 

Deliberate acts of violence

We are not aware of any significant losses from terrorism during 2008. The average annual number of deliberate acts of violence resulting in passenger or crew fatalities during the decade so far is one, while the average for the 1990s is 1.9.

paul.hayes@ascendworldwide.com


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