Rates in the aviation market are at the bottom of the cycle. Losses for 1999 are expected to exceed premiums by £310m. Jack Hurst examines the causes.

While the reason why the EgyptAir flight 990 crashed 60 miles off the coast of Massachusetts early on Halloween morning is still being established aviation insurers face mounting losses.

The ten-year-old jet, a twin engine Boeing 767 which had logged over 30,000 flight hours and more than 6,900 flights, was carrying 202 passengers and 15 crew - all of whom perished.

Theories about the cause range from deliberate crashing by a suicidal co-pilot to a thrust reverser malfunction. There is even speculation that Mossad, Israel's secret service, may have been involved as there were 33 Egyptian Air Force pilots on board.

Whatever the truth, the aviation market will be left with a huge bill. Even before the crash insurers were heading for their second consecutive unprofitable year. Although commercial airline fatalities in 1999 have decreased from 1998 (276 compared to 715 at the end of October 1999) hull losses have increased from £475 million in the whole of 1998 to around £560m so far for 1999.

Under International Air Transport Association (IATA) rules, EgyptAir is strictly liable for 100,000 Special Drawing Rights (£86,000) per passenger but could face unlimited damages if it was found to be negligent. According to market sources, EgyptAir has around £780m of liability coverage. The hull loss is said to be valued at £33m. Both the hull and liability risks are reinsured with aviation markets worldwide.

Worldwide losses in 1998 reached a massive £1.1bn, far outstripping premiums of £560m. In 1999, losses are expected to exceed premiums by £310m. The total net loss of £850m in the past two years is double the net profit the market achieved in the previous two years.

Despite these heavy losses, the market is unlikely to see much of a general upturn in rates. Underwriting capacity is estimated to be 150% to 250% of buyer demand with underwriters still chasing market share.

Also, many insurers are in the middle of multi-year reinsurance programmes so may not be facing reinsurance cost pressure themselves.

Airlines with a poor experience though are likely to face rate hikes averaging between 30% and 50% and some underwriters are becoming reluctant to write multi-year policies for these airlines.

EgyptAir's own renewal could not have come at a worse time. According to market sources, its coverages renewed just days after the crash and, as a result, faced enormous rate increases.

The market is unlikely to return to a profit in 2000 but things may improve thereafter.

Underwriters and brokers may not agree on many things but they are all agreed that the market is at the bottom of the cycle and things have to get better. Whether that is wistful thinking remains to be seen.