A.M. Best said the total insurance loss of Germanwings Flight 4U9525, which crashed in the French Alps on March 24, 2015 killing 150 people, may put further pressure on the beleaguered aviation war sector.
The total insurance loss for the plane will comprise passenger liability claims and physical damage to the Airbus A320 aircraft. Passenger liability claims will be covered as part of aviation “all risks” policies and will represent the majority of the overall loss. The level of liability costs are uncertain but will be linked to the nationality, earning potential and family status of the passengers and crew.
There is more certainty around the ultimate cost of physical damage, with the aircraft valued at USD$6.5 million. Early assumptions have indicated that the cause of the crash may be the result of deliberate pilot action. If this is correct, the insurers that underwrote the airline’s hull war policy, rather than its all risks policy, are likely to be liable, the ratings agency said.
“A.M. Best believes the majority of the loss will be absorbed by the Lloyd’s market, as well as a number of global insurers and reinsurers,” said Catherine Thomas, director, analytics.
Allianz Global Corporate & Specialty has been cited as the lead insurer of the Germanwings aviation all risks policy covering the flight, A.M. Best said.
According to Reuters, Allianz has estimated that a group of more than 30 insurers will pay $300 million in claims and costs stemming from the crash.
A.M. Best said it does not expect to take any rating actions in response to this single large loss given the diversified nature of business underwritten by these entities.
Germanwings is 100 percent owned by Deusche Lufthansa. A.M. Best currently has a Financial Strength Rating (FSR) of “A” on Delvag Luftfahrtversicherungs-AG (Delvag), the insurance captive of Deutsche Lufthansa-AG.
Delvag’s exposure to aviation hull and liability losses is materially reduced by a comprehensive reinsurance program placed with reinsurers rated A- or above, the ratings agency affirmed.
Pressure on Aviation War Sector
With an unusually high number of aviation losses in 2014, this recent loss may put further pressure on the beleaguered aviation war sector, Thomas added.
The Germanwings loss follows a series of high-profile aviation losses last year, including the disappearance of Malaysia Airlines Flight MH370, hull claims due to fighting at Tripoli airport and the downing of Malaysia Airlines Flight MH17.
“Premium rates for this business did rise in 2014 in response to claims activity. However, the level of increase was disappointing given the magnitude of losses, and upward momentum stalled toward the end of the year,” Thomas said.
On the whole, the aviation market has performed well over the past 10 years, with results repeatedly bolstered by substantial reserve releases, according to the Best’s briefing.
The Lloyd’s aviation sector reported a combined ratio of 133 percent for the 2014 accident year, with the small hull war market disproportionately affected by losses. However, in 2014, positive prior-year development reduced the reported calendar-year combined ratio for Lloyd’s aviation business by 30.5 points.
Abundant Capacity
Yvette Essen, director, industry research, Europe & emerging markets, noted: “Good results have attracted insurers to the sector, and for a number of years, abundant capacity has placed considerable pressure on pricing, as well as terms and conditions, across all aviation lines. At the beginning of 2014, rates were significantly below peak levels.”
The losses in 2014 have slowed the decline and there was an uptick in rates in the fourth quarter of the year, when the majority of major airline and war policies renew, the briefing said.
However, A.M. Best notes increases were largely limited to loss-affected accounts. The aviation market is still extremely competitive and pricing is likely to remain under pressure this year, in spite of this latest major loss.
Source: A.M. Best Company