A total of three major aircraft losses this year should halt the decline in aviation insurance rates, states a preliminary report released by AM Best on the insurance implications of the crash of Malaysia Airlines Flight MH-17.

It said: “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. In spite of a number of large losses in recent years the market has remained profitable, largely due to the positive development of prior year claims reserves, and competition remains fierce.

“Three consecutive large losses this year — the disappearance of Malaysia Airlines flight MH-370, hull losses due to fighting at Tripoli airport and the downing of Malaysia Airlines Flight MH-17 — should now halt the decline in aviation rates. However, increases will be constrained by the high level of capacity serving this market.

“For the niche aviation war risk market, losses this year will considerably outweigh premiums written and insurers are expected to react with substantial rate increases. The rate increases will be constrained by the high level of capacity serving the aviation market,” said the Best report.

The rating agency also said that Allianz SE, through its speciality lines subsidiary, Allianz Global Corporate & Specialty, is the lead reinsurer on aviation hull and liability risks for Malaysia Airlines. Allianz has a Bermuda presence with Allianz Risk Transfer (Bermuda) Ltd located at ‘Overbay’ on Pitts Bay Road.

Best continued: “As an industry leader in the global aviation market, the Lloyd’s market is also likely to be affected by passenger liability claims, as will a number of global reinsurers.

“Due to the nature of the loss, a complex and lengthy settlement period is anticipated.”

They added Lloyd’s Syndicate 609, which is managed by Atrium Underwriters Ltd, which in turn is owned by Bermuda-based Ariel Holdings, has confirmed that it is the leader of the hull war policy for Malaysia Airlines. “The syndicate and its coinsurers have agreed to settle the hull war aspect of the loss and collection of funds has been instigated. However, the agreement to settle is on the basis that the early assumption regarding the key facts remains correct: i.e., that the plane was shot down and it is the insurers that wrote the airline’s hull war policy, rather than its all risks policy, that are liable.”

“The total insurance loss will comprise passenger liability claims and physical damage to the aircraft. Passenger liability claims will be covered as part of aviation “all risks” policies.”

Best pointed to The Montreal Convention, which provides for a payout of approximately USD 175,000 to each family, also permits families to sue the airline and the aeroplane’s manufacturer for additional damages. However, said the rating agency, the airline’s liability exposure per passenger will be capped unless it is deemed to have been negligent.

“The liability loss will be shared between the insurance and reinsurance markets.”

Best recounted on July 17, 2014, Malaysia Airlines Flight MH-17 crashed over the Ukraine-Russia border on route from Amsterdam to Kuala Lumpur. It said that US intelligence reports indicate that the plane was shot down by a surface-to-air missile fired from territory controlled by pro-Russian separatists. There were 298 passengers and crew members on board the plane, the majority citizens of The Netherlands. All were killed when the plane crashed.

“Recovery efforts continue, although access to the site has been challenging, given that the Ukrainian government is not in control of the area where the crash occurred.”