M-2012-The Airport Casualty Market Overview

Prepared by Aon Risk Solutions Specialty | Aviation

The Airport Casualty Market Overview

January 2012

ACI-NA Annual Risk Management Conference

New Orleans

John C. Geisen

Senior VP – Aon Aviation

Aon Risk Solution | Specialty | Aviation

Contents

The Aviation Insurance Market

– The Aerospace Market

• The Airports Market

Airports Market Capacity

2012 Expectations

– Pricing

– Limit setting

– Other Cost Containment



The Aviation Market – What is it?

The market is comprised of insurance companies prepared to

underwrite/cover ‘fortuitous’ business risks in the aviation industry

It is a true financial market

– the commodity that is traded is insurance capacity to underwrite risk

The insurance market is international and it is accessed by brokers

worldwide

The risks are:

– airline

– helicopter

– general aviation

– corporate aircraft operators

– manufacturers, airport authorities, civil aviation authorities and aviation

service providers (aerospace)


Admin

Highlight


Aviation Insurance Market Principal Customers

Principal customers

– Airlines

– General aviation operators

– Banks and finance houses

– Airport authorities

– Air traffic control authorities

– Ground handlers

– Aviation refuellers

– Manufacturers (prime and component suppliers)

– Repair/service/maintenance/facilities

– Space

Limits

– Today provides maximum insurance limits of up to :

• Hull $250,000,000

• Liability $2,250,000,000

Aerospace


Aviation Markets by Estimated Income

Estimated Premium Income US$5.7bn

Airline Subscription Market

48 ‘Active’ Underwriting Units

Hull, Liability and Spares

Excess Liability - ‘non-war’

Hull War Subscription Market

15 Underwriting Units General Aviation Subscription Market/100%/Treaty

24 ‘Active’ Underwriting Units Hull,

Liability, Spares and War

Corporate/Government/Commercial

Private/Agri/Emergency Operators

Fixed Wing/Helicopters

Hull Deductible 100% Market

5 Underwriting Units

Aerospace - Liability

Subscription/100%

30 Underwriting Units

Airport Authorities/ATC

Manufacturers

Repair and Service

Ground Handler/Refueller

Financiers

Space

Hull/Contingent Cover

Excess AVN52 Subscription Market/100%/ Approx. 20

‘Active’ Underwriting Units



As goes a significant segment of the market, so goes the market you

face


The Aerospace Market


The Aerospace Market

Aerospace risks are categorized as follows:

– Manufacturers

• Prime engine and airframe

• Maintenance repair and overhaul (MRO)

• Sub-component manufacturers

– Service Providers

• Refueller/defuellers/refiners

• Fixed base operators

• Caterers

• Security screening companies

• Freight forwarders

– Airport

• Airports and associated ground service providers

• Air traffic control & Aviation Authorities


Aerospace Overview

The cost of insurance in the aerospace market is continuing to drop

slightly

– Our analysis shows a slight decrease of -2% for 2011

– This compares with a -3% reduction in 2010 and -2% in 2009

– However, the different aerospace sectors are receiving their own differing

levels of treatment

Renewals are being looked at on an individual basis

– Changes in loss records, exposures, limits and self insured retentions are

still having the largest impact on premiums

Wider issues in the economy are leading to insurance capital providers

scrutinizing their investments closely


Aerospace Overview

Many underwriters are utilizing premium modelling systems to dictate

pricing

– Demand for greater risk information (e.g. technical and contractual)

There is still high market capacity allowing for differentials and

improved composite pricing on desirable business

– Available capacity is in excess of US$2,000,000,000

– Although there are only a limited number of recognized lead underwriters

for high indemnity limits or major prime manufacturers

Excessive US court awards and increases to historical loss reserves

continue to concern the market

Loss levels are volatile

– The aerospace market has been relatively loss free over the last five years

– However, the recent high loss levels in the airline and helicopter industries

could yet filter through to aerospace if 2011 is an anomaly

Aon Risk Solutions | Specialty | Aviation

World Airline Premium and Claims 2001-2011

0.0

1.0

2.0

3.0

4.0

5.0

6.0

01 02 03 04 05 06 07 08 09 10 11

US

$ B

illio

ns

Hull/Liability Premium

Claims

Average 10 Year Premium

Average 10 Year Claims

Average Premium

2001-2010 $2.24bn

Average Claims

2001-2010 $1.80bn


Airline Impact on Total Market

2007 and 2008 had the second and third highest claims totals since 2001

respectively. In 2009, also one of the highest years for claims ever witnessed

in the airline insurance market, claims reached over US$2.34bn. The market

suffered an estimated US$2.1bn losses in 2010

2011 losses however are at an historic low

– The lowest levels seen since our monthly analysis began in 1996

– Around 50% of the average expected losses through 3 quarters of the year so far

(excluding minor losses)

Total lead hull and liability premium is set to be around US$1.9 billion for 2011

– Claims continue to be low, with the potential of a profitable year for underwriters after

four challenging ones

– Airlines with poor loss records are seeing increases, but the market is generally soft

– Capacity looks likely to continue to be healthy in 2012


Airline Losses


Quarterly Airline Premium Movements

2007-2011

-35%

-25%

-15%

-5%

5%

15%

25%

35%

45%

Q10

7

Q20

7

Q30

7

Q40

7

Q10

8

Q20

8

Q30

8

Q40

8

Q10

9

Q20

9

Q30

9

Q40

9

Q11

0

Q21

0

Q31

0

Q41

0

Q11

1

Q21

1

Q31

1

Q41

1

% M

ove

me

nt


Premium and Claims: Combined Aerospace (As declared for total 2010 renewals)

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

$550

$600

$650

2005 2006 2007 2008 2009

US

$ B

illio

ns

Premium Claims


* Figures To Date

Aerospace Annual Renewal Breakdown

0

5

10

15

20

25

30

35

40

45

50

55

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Nu

mb

er

of R

en

ew

als

2010 Renewals

2011 Renewals


* Figures To Date

Aerospace Annual Premium Breakdown

$0

$25

$50

$75

$100

$125

$150

$175

$200

$225

$250

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

US

$ M

illio

ns

2010 Premiums

2011 Premiums


Worldwide Aerospace Liability Premium Income

Manufacturers US$ 584,350,000

Repair and Overhaul US$ 37,600,000

Airport US$ 79,500,000

Air traffic control US$ 29,500,000

Refuellers/Others US$ 45,300,000

Total 2010 Premium Income US$ 776,250,000

Once 2011 settles, we expect Aerospace Premium to be circa US$760 million

Representing 13.7% of the Global Aviation Income


Key Insurance Market Issues

Current attitude towards major aerospace renewals

– The high level of airline hull losses could affect the aerospace market

– The effect on the market of a major loss

Drivers for Capital Providers

– Capital providers believe that the aviation insurance class offers low

frequency/high severity losses from a narrow band of premium

income/portfolio

– Every US$ of aviation income needs an equal backing of capital plus a

strong margin of return (+20%)

– Alternative classes may provide safer havens and better margins of return

– Return on capital adequate? Stay-in? On what basis? Transfer capital to

lower risk and more profitable sectors?

– Or, continued attractiveness of diversifying risk portfolio

• Less or Uncorrelated to other cat loss


Premium Movements 2011: Aerospace

The figures shown in the table below (including expiring figures) represent those of policies that have

renewed in 2011, where we have two years of information and fall within our aerospace selection criteria only.

Month No of Renewals2010 Premium

(US$m)

2011 Premium

(US$m)

2011

Premium

Movement

(US$)

2011 Premium

Movement

(Original

Currency)

1Q 56 $79.30 $74.26 -6% -3%

2Q 65 $148.74 $150.08 1% 0%

3Q 70 $286.03 $276.08 -3% -2%

October 16 $102.40 $100.88 -1% -1%

November 11 $25.91 $26.29 1% 1%

4Q 27 $128.31 $127.17 -1% 0%

ANNUAL

AVERAGE/TOTAL218 $642.38 $627.59 -2% -2%


Premium Movements 2011: By Sector



Month No of Renewals2010 Premium

(US$m)

2011 Premium

(US$m)

2011

Premium

Movement

(US$)

2011 Premium

Movement

(Original

Currency)

Airport 75 $97.97 $93.00 -5% -7%

Manufacturer 102 $512.02 $502.63 -2% 1%

Service Provider 41 $32.39 $31.95 -1% 3%

ANNUAL

AVERAGE/TOTAL218 $642.38 $627.59 -2% -2%


Airports and ATC


Airport and ATC Market Conditions

The Airport and ATC sectors ended 2011 much as they did the 3 years

before with premium reduction. We saw a -7% (-5% in US$) reduction

in 2011.

This continued softening is due in part to superior loss experience and

more so due to new capacity fighting for share

The largest airports for the most part have already seen their most

aggressive results, with the next level of airports seeing the most

aggressive pricing year to date 2011, especially for those who may

have sat out prior softening.

Some underwriters bemoan the fact that attritional losses are eating up

an unhealthy level of premium income with little set aside for

catastrophe loading, even though the results have remained profitable

– Less likelihood to absorb a bad hit without repercussions


Premium Movements 2011: Airports



Month No of Renewals

Estimated

Passenger

Movement

Estimated

Aircraft

Movement

2010 Premium

(US$m)

2011 Premium

(US$m)

2011 Premium

Movement

(US$)

2011 Premium

Movement

(Original

Currency)

1Q 25 5% 12% $43.42 $39.36 -9% -7%

2Q 22 14% 21% $26.43 $26.38 0% -1%

3Q 21 2% -1% $17.93 $17.61 -2% -14%

October 6 2% 3% $7.56 $7.16 -5% 2%

November 1 5% 1% $2.62 $2.50 -5% -5%

4Q 7 2% 3% $10.18 $9.66 -5% -2%

ANNUAL AVERAGE/

TOTAL75 8% 9% $97.97 $93.00 -5% -7%



Airports average quarterly percentage premium movement(original

reporting currency percentage change)



The airport sector has been consistently soft since 2007, driven by the

surplus capacity. This is being used to generate competition between

underwriters and deliver cost savings for desirable risks.

During the depths of the global economic downturn, the driver of airport

insurance price reductions was falling exposure.

The improved economic conditions during 2011 have meant that

estimated exposures appear to be on the rise again, but the

resurgence of significant economic concerns, particularly in Europe

and to a lesser extent North America, is likely to mean that forecasts

are less positive for 2012/13 placements.

– Our analysis so far this year for aircraft movements show a 3% increase

over the next year with greater growth outside of North America but a

“feeling” the economic malaise will subside. Interestingly in the ever busy 3

week 2011 holiday travel season in the US, passengers were estimated to

be off from 2010 by 1% so that “feeling” may not sustain


Airport Market Conditions

The 5% reduction in lead premium in the airport sector during 2011

continued a soft market trend that has been in place consistently since

the start of 2007. The 2011 market is the softest the market has been

since the soft market started, with the sector falling by 5%, 4%, 2%

and 7% in 2007-2010.

The five year soft market means that there are now many questioning

when the bottom of the market will be reached. While potential

capacity continues to be healthy for well presented risks, it seems

possible that 2011 could be the bottom

Prices in the sector might start to rise if passenger numbers recover

but all evidence suggests a flat 2012.

Ultimately, the position is very challenging for underwriters at the

moment. On the one hand the market has been soft for a very long

time, but at the same time capacity remains ample enough to hold

increases in check


Market Capacity

US Airports/Service Providers with a US$1 Billion Limit Quota Share Structure : 264% of Need


ACE Global London Synd. 2488 15.00%

Allianz Group 10.00%

Alterra (Max Re.) 3.00%

Amlin Syndicate 2001 8.50%

Antares Syndicate 1274 3.50%

Aviabel 0.50%

Axa Corportate Solutions 10.00%

Berkley Aviation 5.00%

Catlin Syndicate 2003 20.00%

Chartis 30.00%

Chaucer Syndicate 1084 5.00%

Faraday Syndicate 435 7.50%

Global Aerospace 20.00%

Hiscox Syndicate 9475 5.00%

Inter Hannover 5.00%

Kiln Aviation Synd. 510 5.00%

LaReunionAerienne 8.00%

Mitsui 3210 12.00%

Munich Re. 10.00%

Partner Re. 3.50%

QBE Syndicate 5555 10.00%

SCOR 2.00%

Sirius 1.50%

Starr Aviation 10.00%

Swiss Re 15.00%

Talbot Syndicate 1183 7.50%

Tokio Marine and Nichido Fire Ins. 1.00%

Torus 3.00%

Travelers Syndicate 5000 5.00%

USAIG 15.00%

XL Specialty 7.50%

It should be noted that underwriters are unlikely to participate up to their maximum capacity.. The actual available

capacity is dependant on a number of variables and underwriters’ desire to participate on any particular risk

US Airports/Service Providers Capacity Single Market Structure

Market Commentary

ACE

US domestic leader/largest market share

of airports in the US and the only market

able to provide $750M in limits. $100M

primary with dedicated London slip

above

Chartis Aerospace Very aggressive US market, just behind

Ace in share, able to provide $300M in

house with admitted security. Will either

lead or follow in a vertical placement.

Global Aerospace Underwriting

Managers (GAUM)

US domestic security up to $300M

capacity on a first layer of a horizontal

layered program. Also available to follow

selected leaders only.

Starr Aviation

Capacity to $300M on under 5M

enplanements and GA airports on

admitted paper – surplus capacity of

250M on over 5M enplamentment

airports

Phoenix Aviation Managers Capacity of $200M on domestic Old

Republic security. Prefers to follow on of

the three leaders above.

Although participating on quota

shares and leaders, there are

also some players that will write

100% of an airport’s liability risk

in their own right or via a

dedicated primary/excess

mechanism

Estimated Market Share in US in

order of size for the top 5

Ace

Chartis

Global

Phoenix

Starr



2012 Expectations

Outlook for 2012

– Economic concerns continue to be reflected in airport exposure forecasts,

although the metrics appears to be improving. The airport sector is a

barometer for aviation activity as a whole. As a result, its direction in 2012

will provide a strong indicator of how the aviation industry will perform in the

longer term.

– In terms of the direction of the insurance market, in the absence of a major

incident, it is likely to continue to respond to exposure changes, with

airports that are growing seeing an increase in their lead premium, while

those that are not growing seeing the opposite. As economy of scale

mattters, “cost per” metrics work inversely to exposure, all else being equal

– The Reno air show loss may be just such a major incident with full limits

tendered by the sponsor and market rumors that the airport market could

be touched by a claim reserved at much more than US airport premium

– Increased Reinsurance expense and the ability to pass that cost along to

customers are two different realities

– Always perilous to discuss the bottom, but we are closer than in year’s past

so plan accordingly


Other Topics

Limit Analyses by Aircraft Type

– One activity we are seeing amongst airport risk managers is the linkage to

type of aircraft by airfield and limit demands or needs

• Expectation is in 2012 some will have greater scrutiny in this area and if the

market remains soft, will consider whether to enhance limits bought, if not

premium paid

• An EU example


Liability Limit versus Largest Aircraft Type

Largest Aircraft

Type Insured

Liability

Limit EUR(m)

A380 Insured Q € 1,500

A380 Insured M € 1,300

A380 Insured O € 1,300

A380 Insured L € 1,000

A380 Insured I € 800

A380 Insured G € 750

A380 Insured C € 600

A380 Insured B € 500

Largest Aircraft

Type Insured

Liability

Limit EUR(m)

B747/B777 Insured N € 1,300

B747/B777 Insured K € 1,000

B747/B777 Insured J € 950

B747/B777 Insured H € 800

B747/B777 Vienna Int'l € 750

Largest Aircraft

Type Insured

Liability

Limit EUR(m)

B777/A330 Insured E € 750

B777/A330 Insured A € 220

Largest Aircraft

Type Insured

Liability

Limit EUR(m)

B747/A340/A330 Insured D € 750

Largest Aircraft

Type Insured

Liability

Limit EUR(m)

B747/A340/A330 Insured P € 1,500

Largest Aircraft

Type Insured

Liability

Limit EUR(m)

A340/A320 Insured F € 750

Potential Loss Scenario


0

500

1,000

1,500

2,000

2,500

A300 A310 A320 A330 A340 A380 ATR 42 B747 B767 B777 MD-11

US

$ (

Mill

ions)

US$1.25m per passenger US$2m per passenger US$4.5m per passenger

Other Expectation Topics

Risk management in the Airport sector is focusing on the same things as their

peers in other sectors - as the market has softened, the opportunities for cost

containment will change

Due to different toolsets in the past and the fact market reductions may be

fleeting for some, we are seeing changing emphasis on retained cost of risk

and a resurgence in activity like TPA audit and performance assessment

methods

– e.g. LAMBDA

• Wholly objective means of measuring the effectiveness of defense counsel using actuarial

methodology, focused on metrics highly-correlated to cost or outcomes

• Defense counsel as a “cost-driver”

• Retrospective and Prospective modeling details “Leakage” and potential savings based upon

actual performance. Low cost & efficient solutions providing ROIs ranging from 30:1 to 134:1

Risk Maturity Index

– Launched with the Wharton School at Penn, on the premise there is a direct correlation between

risk maturity and financial performance

– Allows risk and finance leaders to assess their risk management framework and upon completion,

receive a risk maturity rating, suggestions for improvement and insights into their level of maturity

against all participants


Thank You


John C. Geisen,

Senior Vice President

Aviation National Practice Group

Aon Risk Solutions

5600 West 83rd Street,*

8200 Tower Suite 1100

Minneapolis, MN 55437

Mobile 612-839-9260

Office 952-807-0643*

Fax 312-381-0574

[email protected]

*new address and office phone

effective January 23

M-2012-The Airport Casualty Market Overview

Documents

aviation industry

civil aviation authorities

true financial market

bn airline subscription

cost of insurance

insurance companies

insurance capacity

active underwriting