Aviation Insurance Market - Which Way Forward? November 2006 Charles.J.B. Searle.

Aviation Insurance Market - Aviation Insurance Market - Which Way Forward?Which Way Forward?

November 2006November 2006

Charles.J.B. Searle

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Act I - Setting the sceneAct I - Setting the sceneabduction, seduction and destructionabduction, seduction and destruction

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The historic market cycleThe historic market cycleHard and Soft MarketHard and Soft Market

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Net

Airl

ine

Pre

miu

m U

S$

milli

ons

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

Est

imat

ed W

orld

AF

V U

S$m

illion

s

Premium AFV

Hard Market

Soft Market

Hard Market

Soft Market

Hard Market

Soft Market

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Act II - The current market environmentAct II - The current market environmentA tragedy in waiting ?A tragedy in waiting ?

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Historical Airline Premium & ClaimsHistorical Airline Premium & Claims1995 to 2005 to date1995 to 2005 to date

0.0

500.0

1,000.0

1,500.0

2,000.0

2,500.0

3,000.0

3,500.0

4,000.0

4,500.0

5,000.0

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Est 2006

Hull Liability Attritional Premium

$865m estimated marginbefore year becomes a loss

Including estimated attritional losses

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2006 - Airline Capacity2006 - Airline Capacity(Non - US major airline - based on US$1.5 billion)(Non - US major airline - based on US$1.5 billion)

Lloyds37.75%

ROW54.85%

London40.00%

New Capacity27.50%French

15.00%

Rest of World:Al Khazna 0.15%Alliance Re 0.50%ADNIC 0.25%Aviabel 1.00%AXIS 5.00%Converium 2.00%Delvag 0.50%GIC 5.00%Glacier Re 2.50%Interhannover 4.00%Kric 3.00%Misr 0.50%Munich Re 10.00%Nissay 0.20%Partner Re 3.50%QIC 1.25%Sirius White Mountain 2.50%Swiss Re 12.50%Tokio 1.50%

French:LRA 10.00%AXA 5.00%

London:Allianz 10.00%Aspen 2.50%Wurtt 1.50%Generali 1.00%AIG 10.00%Global 12.50%Liberty Mutual 2.50%

Lloyd’s:ACE 10.00%Amlin 5.00%Atrium 2.00%Catlin 2.00%Faraday 4.00%Kiln 2.00%St Paul 2.75%Wellington 5.00%XL 5.00%

New Capacity :Berkley Aviation 3.00%Dong Bu 1.00%Inter Aero 5.00%LIG 2.50%Max Re 3.50%QBE Limit 5.00%Starr Aviation 7.50%

Total Competitive Capacity: 175.10%

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0.0000%

0.0200%

0.0400%

0.0600%

0.0800%

0.1000%

0.1200%

0.1400%

0.1600%

0.1800%

0.2000%

Avg Mkr Hull Rate

Rating IndexesRating Indexes

0.0000

0.1000

0.2000

0.3000

0.4000

0.5000

0.6000

0.7000

0.8000

0.9000

Net RPK Rate

2000 2001 2002 2003 2004 2005 2006 2000 2001 2002 2003 2004 2005 2006

Hull rates are at the same level as in 2000

RPK rates are still 100% higher than pre 9/11

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ManufacturersManufacturersNet Liability Premium Vs Liability ClaimsNet Liability Premium Vs Liability Claims

$0

$200

$400

$600

$800

$1,000

$1,200

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Manufacturers Premium Manufacturers Claims

Millions

10 Year Summary (1996 - 2005)

Total premiumUS$6,381m

Total ClaimsUS$4,930m

Profit/LossUS$1,451mManufacturers

Claims figures do not include IBNR nor have they been adjusted for inflated

Annual Average Premium US$638m

Annual Average Claims US$493m

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Manufacturers Comparison of Loss ReservesManufacturers Comparison of Loss Reserves2003, 2004 Vs 20052003, 2004 Vs 2005

$200

$300

$250$250$267

$282

$400

$245

$200$200

$410

$690

$425

$480

$514$500

$200

$300

$550

$700

$550$530$540$535

0

100

200

300

400

500

600

700

800

1997 1998 1999 2000 2001 2002 2003 2004 2005 - Est

Losses Valued at 31st Dec 2003 Losses Valued at 31st Dec 04 Losses Valued at 31st Dec 05

%/ $ Inc.in Reserves

118.4%$290m

35.0%$140m

87.9%$248m

106.0%$283m

180.0%$450m

120.0%$300m

$1,711 million deterioration

0.0%$0m

Million ($)

0.0%$0m

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2006 - Manufacturers Capacity2006 - Manufacturers Capacity(Non - US manufacturer - based on US$1.0 billion)(Non - US manufacturer - based on US$1.0 billion)

Lloyds55.00%

ROW37.50%

London51.00%

New Capacity 17.50%

French 13.50%

Rest of World:AXIS 5.00%Converium 2.00%Glacier Re 3.00%Interhannover 3.00%Munich Re 10.00%Partner Re 2.00%Swiss Re 12.50%

French:AXA 6.00%LRA 7.50%

London:AIG 10.00%Allianz 15.00%Aspen 5.00%Generali 1.00%Global 17.50%Wurtt 2.50%

Lloyd’s:ACE 15.00%Amlin 5.00%Catlin 5.00%Faraday 7.50%Kiln 2.50%St Paul 2.50%Wellington 12.50%XL 5.00%

New Capacity :Max Re 2.50%QBE Limit 5.00%Starr Aviation 10.00%

Total Maximum Capacity: 174.50 %

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Tied up in red tapeTied up in red tape

=

+

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2006 - Airline Excess AVN52 Capacity2006 - Airline Excess AVN52 Capacity(Non - US major airline - based on US$1 billion)(Non - US major airline - based on US$1 billion)

Lloyds42.05%

ROW101.00%

London37.50%

USA 100.00%

Rest of World:AXIS 30.00%Glacier Re 4.00%Interhannover 15.00%Kric 3.00%Lancashire 25.00%Swiss 20.00%Tokio 2.00%Wurt 2.00%

USA:Berkshire Hathaway 100.00%(via Global)

London:AIG 25.00%Allianz 10.00%Aspen 2.00%Liberty Mutual 0.50%

Lloyd’s:ACE 5.00%Aegis 0.50%Amlin 2.00%Atrium 1.50%Brit 4.00%Catlin 4.50%CV Starr [1] 7.50%Faraday 2.50%Hiscox 1.50%Kiln 0.30%Liberty Syndicates 2.00%MAP 2791 1.50%PW Hardy 0.50%Reith 1.50%St Paul 1.00%Talbot 1.50%Watkins 1.00%Wellington 1.75%XL 2.00%

Total Capacity: 277.55%

[1] CV Starr to begin writing from 1/11

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Third Party War LiabilityThird Party War LiabilityRating HistoryRating History

20012002

2003

2004

2005

Rate Development

0.00

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0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00

Initial $1.25 Surcharge+ Additional for $1bn limit

Surcharge rolled in at discount+ Additional for $1bn limit

Additional capacity drives rates down

Dev

elop

men

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ioU

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200

1 as

bas

e ye

ar 1

.00

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Act III - Which way forwardAct III - Which way forwardWill the market go astray?Will the market go astray?

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Landing and take offLanding and take off

2007 2008 2009

?

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A380 – too large to insure?A380 – too large to insure?

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400

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800

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Now B747-400D Future A380

Max. Capacity

Potential Maximum

The introduction of the Airbus A380 in 2007 will mean a large increase in exposures to airlines and airports.The A380 will have an average seating of around 550, with a potential maximum (restricted to certain specific regions) of 990.

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Looking at 60 of the major international airlines worldwide we can see that the majority buy $1.5 billion or above.

Combined Single Liability LimitCombined Single Liability Limit

2

11

3

25

1

6

1

1

9

2.25 billion

2.00 billon

1.75 billion

1.50 billion

1.35 billion

1.25 billion

1.20 billion

1.15 billion

1.00 billion

# of Airlines

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The tip of the icebergThe tip of the iceberg

Are too few of the risks ofthe aviation industry

insured in the Aviation Market?

Insured

Uninsured

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Surviving the test of timeSurviving the test of time

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Marsh LtdAviation and Aerospace PracticeTower PlaceLondon EC3R 5BU

Tel: 020 7357 1000Fax: 020 7929 2705

The information contained herein is based on sources we believe reliable and should be understood to be general risk management and insurance information only. Marsh makes no representations or warranties, expressed or implied, concerning the accuracy of information contained herein or the financial condition, solvency, or application of policy wordings of insurers or reinsurers. The information is not intended to be taken as advice with respect to any individual situation and cannot be relied upon as such. Insureds should consult their insurance and legal advisors with respect to individual coverage issues.

This document or any portion of the information it contains may not be copied or reproduced in any form without the permission of Marsh Ltd, except that clients of Marsh Ltd need not obtain such permission when using this report for their internal purposes.

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