Domestic Flight Path

Market capacity always ebbs and flows over time. But despite Canada having the second-largest general aviation market in the world, little domestic capacity had returned to Canada during the last two market cycles. As a result, there has been a distinct lack of a domestic aviation market in Canada.

Consequently, much of the Canadian aviation business had been placed in a London-centric manner, since the London (England) insurance market is still the largest single centre for aviation insurance. Lloyd’s, of course, is not a single entity but a collection of individual risk-takers who make up a market within a market. The other members of the insurance market are various companies whose underwriting rooms are located in the city of London within close proximity to the Lloyd’s building. The London market has the premier position as lead underwriter of all the worlds’ aviation business outside the United States.

As everyone is aware, global market capacity rises and falls. It is interesting to note that in Canada, the change in capacity over the market cycle is exaggerated, as the global group of play- ers that write aviation business also need to meet Canadian licensing parameters. In addition, any U. S.-tied capacity gets arrested due to OFAC limitations, since much of the servicing of Cuba comes from Canadian operators.

One benefit of having domestic capacity available for airline placements is a spillover effect into the other classes of aviation business we write. If one can write lines on a brokers’ portfolio of airline accounts, it does give an underwriter the ability to consider other aviation classes when the broker is prioritizing market approach. There is also the relationship factor that becomes much stronger with a domestic presence.

Worldwide, there has almost always been overcapacity; this has translated into a strong competitive aspect to the market. The almost-perpetual state of competitiveness has posed a challenge for insurers to maintain underwriting discipline and underwrite the business at an acceptable rate. The size and value of the individual aircraft lost — and, as a result, the sizes of the total bill each year to pay for these losses and other numerous partial and attritional losses — produces potential large variances in annual loss consequences. These two factors work together to create an airline sector with highly volatile results.

Aviation as a class can be broken down into various subsectors. A basic and common classification includes the subsectors of airline, manufacturers, general aviation and space. In the airline sector, the global aviation market consists of something in the region of 300-400 risks (depending on how you classify an “airline”). Individuals in this category would operate 16,000-20,000 jet and turbo prop units; from these, premium must be generated to pay the claims arising from the sector. Statistically, there are somewhere between 20-30 total losses each year (interestingly, this figure has been steady since the 1950s, notwithstanding the enormous growth in the industry over the intervening years).

Currently there is approximately US$1.5 billion worth of premium within the global pool (post 9-11, it was US$3.8 billion). Incurred losses are averaging US$1.5 billion; of that, US$750 million on average is considered attritional.

No single insurer has the financial resources to retain a risk of the size of a major airline or even a substantial portion of such a risk. Each airline insurance policy has to be effected with a number of insurers each taking a share.

At one time, all airline risks were placed on a complete subscription basis. In other words, there is one set of terms and all participating underwriters wrote the risk on that basis. Today, most airline risks are placed on a verticalized basis to ensure the lowest possible pricing is achieved. In effect, each participating insurer bids for their share, negotiating a price for their particular share. One underwriter acts as leader for technical matters, such as agreement of terms and conditions other then pricing, as well as administration of claims. The leader sets the initial terms from which many of the follower’s terms are predicated (i. e. pending the pecking order… 5%, 10%, 15% off leader). In order for another broker to develop alternate terms in such a finite market, they need a valid and known alternate lead. Being known as a viable lead prioritizes you as a market in the broker’s mind.

With this in mind, Catlin Canada has stepped in as a lead insurer. It is the first time any Canadian airline has been led by a Canadian-based insurer. There is a distinct advantage to being a leader market, given that a known lead insurer has preference to obtain negotiated terms at a higher premium. The lead insurer also gains the benefit of the extreme capacity currently enjoyed by the aviation insurance purchasing public.

Since arriving in Canada three years ago, Catlin has worked very hard trying to position itself as a preferred domestic aviation insurance market. Within the small world of aviation insurance, this represents an important coup.

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There is a distinct advantage to being a leader market, given that a known lead insurer has preference to obtain negotiated terms at a higher premium.