Biko Meletse Willis South Africa 24 February 2015 - Airline Catastrophes & how this has impacted on the Industry

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Biko Meletse Willis South Africa 24 February 2015 - Airline Catastrophes & how this has impacted on the Industry
Airline Catastrophes & how this
has impacted on the Industry
Biko Meletse
Willis South Africa
24 February 2015
Biko Meletse Willis South Africa 24 February 2015 - Airline Catastrophes & how this has impacted on the Industry
The Aviation Industry
The Early Years

“Until now I have never really lived! Life on earth is a creeping, crawling
  affair. It is in the air that one feels the glory of being
  a man & of conquering the elements. There is an exquisite
  smoothness of motion & the joy of gliding through space – it is
  wonderful!”
                                                          Gabriele d’Annunzio, 1909

“…last year some 80 people in the state of Missouri were kicked to death
  by mules, over the same period only 8 commercial pilots lost their
  lives. Fine, so long as one remembers that mules probably outnumber
  airplanes by about 100,000 to 1.”
                                                              Washington Post, 1927

“Add a new thrilling experience to your holiday!”
                                     Publicity Slogan for the LZ129 Hindenburg, 1937

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Biko Meletse Willis South Africa 24 February 2015 - Airline Catastrophes & how this has impacted on the Industry
The Aviation Industry
The Early Years

 “It may with some degree of confidence be predicted that for some time to
     come commercial aircraft will be mainly used for long hauls of mail,
     well-to-do passengers, & high-grade goods of small bulk.”
                                                      Sir Osborne Mance, 1943

 “The introduction of the 747 into commercial use will pose considerable
    problems. It is not so much a new concept of machine, for the 747 is
    based upon tried & proven aerodynamical concepts, but that the pure
    size & complexity of the airplane are almost beyond comprehension to
    an industry used to the DC8 & 707.”
                                                              David Dann, 1969

 “In one fell swoop we have shrunken the earth.”
                                                              Juan Trippe, 1970

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Biko Meletse Willis South Africa 24 February 2015 - Airline Catastrophes & how this has impacted on the Industry
The Airline Industry
Today

 The A380 aircraft was introduced into commercial service by Singapore Airlines in 2008
     Development goes back to the late 1980’s

 A380 Facts & Figures
     72.7 metres long
         Equivalent of 2 Blue Whale lengths
     The wings are 54% larger than the B747
     The aircraft weights 590 tons
     If the wiring is laid end-to-end it would stretch from London to Edinburgh
         320 miles
     The aircraft can carry 3,000 suitcases & 525 pax & can fly at a speed of 620 miles per hour

   Less than 3 litres jet fuel per 100 passenger
   kilometres used matching the efficiency of
   most modern compact cars

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Biko Meletse Willis South Africa 24 February 2015 - Airline Catastrophes & how this has impacted on the Industry
The Airline Industry
Today

   3.1 billion passengers carried by airlines in 2013

   8.7 million people employed directly in the aviation industry

   35% the value of world trade shipments carried by air transport

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Biko Meletse Willis South Africa 24 February 2015 - Airline Catastrophes & how this has impacted on the Industry
The Airline Industry
Today – The Challenges

 Industry competition fierce
     Cut-throat business

 Huge capital investment costs
     Cost of an A380 in excess of USD400,000,000

 Ongoing technological change & improvement

 Volatile fuel costs

 Fuel efficiency
     1.5% industry targeted fuel efficiency from 2010 to 2020
     Requires 12,000 new aircraft at cost of USD1,300,000,000,000

 Greenhouse gas emissions

 Public health threats
     Ebola                                                     “The airline sector’s net
 Security                                                      profit is less than zero.”
                                                                                  Warren Buffet

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Biko Meletse Willis South Africa 24 February 2015 - Airline Catastrophes & how this has impacted on the Industry
The Airline Industry
Catastrophic Events

 Pose a threat to corporate survival

 Reputational effects
     Highly emotive
        Publicised

 Complicated & unpredictable liability issues involving different nationalities
     Spread & penetration of USA litigation standards
        Montreal Convention 5th jurisdiction
     Large legal costs
     Long tailed claims

 Rise in criminalisation of air accidents & charges directed against management in
   personal capacity

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Biko Meletse Willis South Africa 24 February 2015 - Airline Catastrophes & how this has impacted on the Industry
The Aviation Insurance Industry

“I looked at the damaged machine, & I thought of the future bookings that
    would now have to be cancelled, of the wages that would still have to
    be paid even though no money would be coming in, of expensive
    advertising that would now have to be written off. I was in a black
    despair. It was one of my passengers who jerked me out of it. She
    asked whether the machine was insured. Of course it was!”
                                                         Sir Alan Cobham, 1926

“Willis Aerospace can trace its roots back to 1911 when an aviation policy
  was placed for a flying school.”

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Biko Meletse Willis South Africa 24 February 2015 - Airline Catastrophes & how this has impacted on the Industry
The Aviation Insurance Industry

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Biko Meletse Willis South Africa 24 February 2015 - Airline Catastrophes & how this has impacted on the Industry
The Airline Insurance Segment
Some Factors

 Airline insurance is situated in the international market place
       Subscription market place
       High value USD exposures
       High value USD accumulation exposures
       High value USD static asset exposures
       Global Liability exposures
          Long-tailed legal liability factors
          Large associated legal costs

 Airline insurance capital intensive
     International capital providers

 Long probability factors
     “One-a-second exposure”
     Lack of trending

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The Airline Insurance Segment

Causes of Losses: Airline Claims

                                                            9%
                                  23%                 4%
            26%

                                                12%                          37%

          8%
                                      18%       15%
               9%
                          16%                                    22%

                No. of Claims                          By Value
                    Plane crash                            Plane crash
                    Ground handling                        Over/undershot runway/taxiway
                    Mechanical failure                     Ground handling
                    Hard landing                           Mechanical failure
                    Damage by foreign objects              Hard landing
                    Other                                  Other

                                                                                           | 10
The Airline Insurance Segment
Causes of Fatal Accidents by Decade (percentage)

               Cause             1950s   1960s   1970s   1980s   1990s   2000s   All

 Total Pilot Error                57      56      43      46      51      54     51

 Pilot Error                      42      36      25      36      28      29     31

 Pilot Error (weather related)    10      17      14      18      19      17     15
 Pilot Error (mechanical
                                   6       4       5       2       5       4     5
 related)
 Other Human Error                 2       9       9       6       9       7     7

 Weather                          15       9      14      14      10       8     12

 Mechanical Failure               21      19      19      20      18      26     20

 Sabotage                          4       4      13      13      10       9     9

 Other Cause                       0       2       1       1       1       0     1

  Concern regarding LOC-I

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The Airline Insurance Segment
Exposures

 Hull All Risks coverage

     Aircraft hull values       USD 400,000,000

     Liability limits           USD 2,250,000,000

     Spares Location limits     USD 500,000,000

 War & Allied Perils coverage

     Aggregate limits           USD 1,500,000,000

                                                     Accumulation limit at Toyko

                                                     Airport   USD7,000,000,000

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The Airline Insurance Segment
Historical Market Trends – Hull All Risks

  Huge rate increases following 9/11 events
      Reduction in frequency & severity of losses since 2001
      Very few wide-bodied high value losses in past 10 years
         Reduced fatalities

  High capacity levels
      New entrants
         No significant departures

  Buyers market
      Consistent rate reductions over the years

  Total market premium reduces continuously
      Total market premium in 2013
         USD1,400,000,000
      Loss sensitive with possibility of future volatility

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The Airline Insurance Segment
5 Year – Market Results

             $3 000                                                    250%
                                                                       225%
             $2 500
                                                                       200%
                                                                       175%
             $2 000
                                                                       150%
             $1 500                                                    125%
                                                                       100%
             $1 000
                                                                       75%
                                                                       50%
              $500
                                                                       25%
                 $0                                                    0%
                           2009     2010     2011     2012     2013
           Premium        $2 000   $2 065   $1 913   $1 677   $1 461
           Claims         $2 515   $1 988   $1 227    $946    $1 472
           Loss Ratio     125.8%   96.3%    64.1%    56.4%    100.8%

                                                                              | 14
The Airline Insurance Segment
2014 – Major Airline Losses in Excess USD10 million

 Date of Loss                Operator        Aircraft Type               Location of Loss                  Fatalities

  January 5th    Air India                   A320            Jaipur International Airport, India               0

  January 26th   Pacific Air Express         B737            Honiara Airport, Solomon Islands                  0

 February 13th   Jetstar Asia                A320            In flight, over Java, Indonesia (Ash Cloud)       0

   March 8th     Malaysia Airlines (MH370)   B777            Unknown                                          239

  March 13th     US Airways                  A320            Philadelphia Airport, USA                         0

   April 14th    Golden Myanmar              A320            Yangon Airport, Myanmar                           0

   July 17th     Malaysian Airlines (MH17)   B777            Ukraine                                          295

   July 23rd     TransAsia Airways           ATR72           Penghu, Taiwan                                   48

   July 24th     Swiftair / Air Algeria      MD83            Mali                                             116

 December 28th   Air Asia                    A320            Indonesia                                        162

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The Airline Insurance Segment
2014 Major Losses > US$10m

                                                             Aeroflot
                                                             ($16m)

  US Airways ($18m)
                                                                          Golden Myanmar
                                                                              ($10m)               TransAsia
                                                                   Air India                        ($16m)
                                                                    ($11m)

                                                                        Malaysia Airlines
                                                                         (MH370 $54m)*        Jetstar Asia
                                                                                                ($10m)

                                                                                Air Asia (Indonesia)
                                                                                       ($46m)
                                                                                                             Pacific Air Express
                                                                                                                   ($12m)

                  *Hull Reserve of US$108m is split 50/50 between Hull & Liabs & Hull War

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The Airline Insurance Segment
2014 – Hull All Risks Market Trend

  Catastrophic losses – in particular MH370 & MH17 Liability reserves – produce an aggregated
   market loss figure in excess of USD1,000,000,000

  Many underwriters face 2014 trading loss

                                                                                  MH17

  Underwriters initial reaction
      “Market turn” has to occur
      At least 30% increases

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The Airline Insurance Segment
Hull All Risks Market Trend

  Q4 saw flat Hull All Risks rates

      Q4 premiums +5%

  2014 average premium increase +1.5%

  Expected “market turn” does not occur

  2015 conditions still appear favourable to airlines

      Buyers market continues into new year
      Catastrophic losses have therefore had very little market impact
      Excess capacity a major factor
         4 new underwriting entrants
      Split market may develop between those who have suffered major losses and those that have not

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The Airline Insurance Segment
Airline Capacity
Hull All Risks

                        London
                         38%
                                                       Lloyd's
                                                       61.25%

                    RoW
                   41.60%

                            Europe
                            30.83%

                                     Total Capacity*
                                        217.35%

                                                                 | 19
The Airline Insurance Segment
Historical Market Conditions – Hull War & Allied Perils

                         $150

                         $125

                         $100
         US$ Millions

                          $75

                          $50

                          $25

                           $0
                                  05     06     07     08     09     10     11     12     13
                        Premium   145    120    126    130    130    125    100     85     75
                        Claims    0.00   0.00   0.03   0.00   0.00   0.00   0.00   0.55   20.5

                                                                                                 | 20
The Airline Insurance Segment
Historical Market Conditions – Hull War & Allied Perils

  Clean loss history from 2002 to the end of 2012
      Last large losses in 2001

  Excess capacity of approximately 175%

  Continuous rate reductions over the years in the absence of
   losses
      Soft market

  Market premium estimated at USD75,000,000
      “Call” rates for hotspots

  Great concern over market premium as does not cater for a
   single high valued aircraft

  2013 LAM loss occurs
      Pilot suicide

                                                                 | 21
The Airline Insurance Segment
Market Trends – Hull War & Allied Perils

  Range of losses occur:
        MH370
        MH17
        Karachi & Peshawar airport losses
        Tripoli airport losses

  Total annual market loss estimate
      USD563,000,000

  Large renewal rate increases forecast for balance of 2014 into 2015
      Underwriters reaction:
         Market needs to be reflated by +300%
      Capacity levels still at 200%
      Rate increases in 2014 fail at large
      “Market turn” not attained
         Modest increases to flat rating results in 2014

                                                                         | 22
The Airline Insurance Segment
2015 Market Outlook

There are only three major events that will significantly affect the current downward trend of Airline
Insurance Pricing
 1. Reduction in Market Capacity due to:
      Management disaffection towards current unsustainable premium levels resulting in complete
       withdrawal from Airline Underwriting
      A reduction in participation in order to minimise the “risk-to-reward” ratio
      Investment Capital moving to opportunities with greater ROI than Airline Insurance
 2. A significant catastrophe or series of major losses
      2014 demonstrated that aviation experience alone will not be enough to drive a change in market
       conditions and therefore wider industry losses would have to be experienced
 3. A significant increase in attritional losses which erodes underwriters net retained premiums and
    premium reserves to unsustainable levels

             Underwriters will look for a more balanced portfolio between
             airline, general aviation & other aviation segments to mitigate
                        the downward cycle in the airline segment.

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