Many have called Martin Stevens the father of the modern aviation insurance market. Martin has certainly been a major architect in that market, having led the AIG’s aviation business since 1987, building it into a major leader of some of the world’s largest airlines.
His views today carry weight in a market environment that is ever changing. He notes, for example, that exposures have more than doubled in the last 14 years and yet premiums have reduced by around two thirds over the same period — $1.2bn compared with $3.8bn.
We believe his words add value and clarity to the open question of market direction and the value the airline market affords clients today. Read our interview of him below.
What changes have you seen in the 40 years you’ve been in the market? What were the highs and lows of the aviation insurance industry?
Certain events were key moments in history as well as for the industry. The immensely tragic event of 9/11 for instance. It marked a watershed in so far as we never anticipated something on that scale ever happening. Of course underwriters had looked at worst case scenarios such as a mid-air collision over the World Trade Centre but no one had ever envisaged that aircraft would be deliberately flown into the World Trade Centre and the Pentagon all on the same day. So it is no surprise that there was some confusion initially. We had entered into a new era that we did not yet fully understand. To a certain extent underwriters stopped underwriting for the first week after 9/11.Very quickly however we realised we were going to have to issue notice on terrorism and war liability coverages and hull war coverages.
What about personal highs?
My high point was building AIG into the market leader. My first full year at AIG was 1980 and we hit $20m in gross premium. By 1987 I was in charge of the London aviation operation and we built the business to a peak of over $600m by 2007.
You played a leading role creating some of the airline premium rating models still used today; you must be incredibly proud of that.
I didn’t really think of it in that way, I just had a differing view to others on how best to evaluate the risk. Before the tragedy of 9/11 airlines’ aircraft liability was rated on a Revenue Passenger Miles/Kilometres (RPM/RPK). But in those days the majority of losses occurred on either take-off or landing so I felt that it was more relevant and fair to look at departure/passenger rates. 9/11 was the catalyst for change and although you still see some airlines rated on and RPM/RPK basis they are the exception rather than the rule.
AIG is a major leader across all areas of aviation and especially the airline sector. Do you think the current soft market environment will continue across the industry and which area concerns you most across the aviation class?
A concerning feature of the current market is underwriters’ desire to maintain market share despite the basic economics which suggest that it would be prudent to refuse some risks. The market won’t turn through losses. 2015 was one of the safest years on record. I believe there were 9 fatal accidents, the lowest number ever, apart from 1986 when I think there were two. It looks like 2015 premiums on airlines is around $1.2bn and we know that with even those few fatal losses we are still looking at losses in excess of $1.2bn.
At AIG we have adopted a realistic approach based on the value we deliver and derive from individual customers. Unfortunately we have lost long-standing customers simply because it didn’t make sense to cover risks at uneconomic premium levels.
Do you think the reinsurance market and its own capacity direction still influences the direct market as much as in the past?
I think the reinsurance market is affected in the same way as the direct market. Over-capacity in the market has led to less reinsurance. The result is that either reinsurers are looking to come into the direct market themselves or offer more capacity to the market with the consequent downward pressure on rates.
Exposures have more than doubled in the last 14 years and yet premiums have reduced by around two thirds over the same period – $1.2bn compared with 3.8bn. Yes the skies are a lot safer than they used to be. New technology has done wonders. But attritional losses, the cumulative effect of smaller claims, are something that we need to look at particularly as terms and conditions have improved over the years. For example the level of hull deductibles hasn’t changed since the 1980s. The effect is that big losses, when they do occur have a disproportionate effect.
And yet we are still seeing new start-ups and new entrants into the market?
Absolutely. I think that to a certain extent this is down to the rating agencies giving some carriers benefits for diversification of risk. But you have to wonder how the carriers might react to large losses given their operating margins.
What other outside influences do you see affect the market as some feel interest rates/lack of windstorms etc. create overcapacity as that loose capital has to find a home somewhere. What will it take to change the market?
We now have double the exposures, twice the fleet value and twice the number of passengers flying than 15 years ago, At the same time the cost of claims settlement has gone up as the cost of aircraft and liability settlements has gone up. For example the list value of an A380 is about $400m and there are 160 A380’s in service. And yet the global premium has been falling. Against this backdrop I don’t think a big loss or Solvency II will change the market. It is possible that a big windstorm loss, could suck capital out of the market but most aviation business is underwritten by, what I would term, strong companies. It may be that external influences could have an effect on agencies/MGAs or mono-line carriers.
What innovations would you like to see insurers introduce that could change the emphasis and direction of our industry and provide greater value to the client?
Ultimately what clients need is protection for their balance sheet. I have said for many years that we should move away from a mono-line mentality. This means having a better understanding of all the risks an airline faces and offer insurance and risk management services that meet those requirements, not just the aviation aspects. I think we also should be looking to the future and raising awareness of new risks such as cyber and environmental risks. That’s certainly what we, at AIG, are doing.
I think some mono-line players within the aviation market would struggle to meet client needs in this wider context.
Does it make sense to reblend the excess terrorism third-party 52E policies back into the all risks?
Terrorism cover has not gone back in to these policies because the reinsurance market has resisted so you have to write terrorism separately. I think if the reinsurance market changed its position, then the direct market would follow.
Do you think there’s an argument for bringing the hull war cover back into the all-risks policy?
I believe it makes sense to maintain the separation. In an increasingly unstable world where global terrorism and local conflicts are increasing, hull war cover is valuable. My fear is that by bringing hull war cover under all risks it will mean that in a year or so the premium charged will not be commensurate with the risk. It would simply be added to all risks cover. An interesting parallel is that when the terrorism product was first introduced after 9/11 the rate was originally $1.85 and soon settled at around 72 cents. The current price is 2 cents which I don’t believe is either the correct price for the risk or is sustainable.
Do you think there is value in a long-term policy arrangement? And who does it favour, the client or the insurer?
Possibly, but I’m really not sure what the appetite is amongst underwriters in such a soft market. I can see benefits for both insurers and airlines depending on the risk and the strength of the relationship. And we also have to take account of the regulations pertaining to long-term policies.
What do you identify as the greatest risk to insurers and their future commitment to the class?
I think the biggest risk is the growing overall exposure that underwriters accept in a market where premium rates are soft.
Over the last few years, you’ve seen things like cost of working and buyer furnished equipment included for little or no charge and yet there is exposure. Look at AF447 or MH370 and consider search and rescue costs which were covered up to policy limits. It is all these add-ons that aviation underwriters might use to attract business, at little or no additional charge, that can add significantly to claims costs.
As many consider you a founding father of the current market, have you got a message to all your colleagues in the wider sense within the industry?
I have thoroughly enjoyed my 42 years career in this industry. When I started underwriting was more of an art than a science. Today’s challenges are quite different from those I first experienced . Currently there are questions about how we rate elements of coverage, like liabilities for example, despite improved data analytics and other scientific tools at our disposal. The market is constantly changing which makes it interesting with many interesting people.
So I would say that underwriters should embrace change and not lose sight of what the business is all about- delivering products and services that our customers value and not simply chasing market share at any cost. And I hope they enjoy it as much as I have.
Will the industry on both the underwriting and broking side be more and more restricted to the larger players? Is there room for small underwriters and small brokers in the airline insurance business?
Probably, particularly with the bigger clients. There is room for niche brokers in general aviation, or in aerospace business (i.e. product/airports), but I certainly think with the big manufacturers and airlines, it is going to be the big brokers and probably the Big Four.
On a final and lighter note, what are you looking forward to in your retirement?
I have never had gardening leave in my life. I left Norwich Union in 1979 on a Friday and started at AIG the following Monday. The longest time I ever had off is 5 weeks when I had a heart attack in 2004. So I am looking forward to putting my feet up.
Guest blogger John Rooley is CEO of Willis Towers Watson Aerospace, based in London. John joined Willis in 2007 and has more than 22 years’ experience in aviation insurance and reinsurance.