It is really due to a combination of factors. If I can just give a high-level view of this and perhaps a little bit of how it differs from some of the other areas.
Firstly, in many of these specialty lines we've seen a dramatic collapse of underlying insurance capacity in many of these sectors. For example, we've seen a number of the larger Lloyd's syndicates who were putting out $150 million lines in some of these specialty areas, their gross lines have dropped to $50 million or even $25 million at January 1. Therefore the total available risk capacity has shrunk very significantly. Feeding on from that, insurance rates have been driven up in all fields and the terms and conditions under which the insurance policies have been written have also been very significantly tightened and improved.
On top of that you've got reinsurance rates which have increased on the excess of loss products and you have terms and conditions of coverage tightened both on those and the proportional treaties. Where proportional treaties may be available (which has been very difficult this year) conditions and brokerage have been reduced on these.
So really you have a situation where these specialty lines have benefited from significantly tightening underlying insurance pricing, capacity and terms. Then overlaid on these, the market has seen continued increases in reinsurance rates which started in 2001 and have continued in 2002. So essentially you have a double leverage effect which has strongly benefited these specialty lines. To echo comment regarding the Property Catastrophe field, I think it is fair to say that all of these lines appear to be strong and certainly the reinsurance marketplace for these lines of business is a pretty good place to be at this time.
I've drawn comments from a number of other people in the marketplace including brokers and other markets, so it is really not an XL Re specific thing. One of the comments that I saw from one of the brokers was to say: during the past few years underwriters have operated under a price-driven market and insurance buyers have often obtained the widest coverage for the lowest possible price. Now insurers will be dealing with reduced capacity and greater net risk retentions. In fact, it led the UK risk managers ssociation (AIRMIC)to advise its members that most insurance premiums will be significantly higher on renewal with increases from 30 to 300 percent, depending upon the class of insurance, and financial limits will almost certainly be lower, deductibles higher, and coverage may be fragmented. I think that is definitely what the market has generally seen through this renewal season.
Having said that, there have been a number of areas that have caused this renewal market to be quite late in omparison with previous years. The issue of terrorism coverage, the clarification of what coverage would or would not be available. Secondly, in some of these specialty markets the reinsurers are more reliant upon retrocessional capacity than perhaps in the Property or Casualty areas. The retro capacity, particularly in London, was tough to come by and therefore there were delays in obtaining that and in getting reinsurance placements made. And I think there was a significant element of client or buyer denial. They just did not want to accept the facts that were being presented to them. They were partly shopping around, partly taking time to re-analyze their business approach or plans before they gave firm orders. So there was a significantly delayed renewal season. In fact, we are still in the process with a number of accounts. But those areas that have not yet been finished are moving ahead very quickly.
Turning to specific lines of business. I'll start with the energy business, onshore and offshore.
Generally speaking the onshore energy pricing business has returned to the levels that were seen probably in about 1986 and 1995 which were the peaks of the previous two cycles. The market has probably seen about 150 percent cumulative rate increase over 1999 through 2002. This was particularly emphasized with 2001 having a very serious chain of losses in the onshore energy market of about $3 billion. In fact, the premium base is up from about $1 billion as the low to somewhere in excess of $3 billion. Overall capacity for a single risk has reduced from about $3.5 billion - $4 billion to approximately $1 billion - $1.5 billion, so as I was saying earlier, dramatic reductions in overall capacity. We hear in the marketplace to even place a $1 billion of capacity is quite a struggle and the brokers need to corral all the available capacity to be utilized to achieve it and that would therefore mean that they would have to pay top dollar in order to generate that capacity.
We are also seeing loss limit policies replacing many of the original full value policies that were envogue in the marketplace and catastrophe sublimits are a constant feature in these coverages, and deductibles have been increased probably at about 200 percent of their expiring levels with a minimum of a $1million for the physical damage and 60 days for the business interruption.
Excess of loss onshore energy market is not a large market in and of itself. There is a fair amount of proportional treaty business placed in the past. That's been rather difficult to renew this year. Excess of loss pricing has risen in the order of a minimum of 50 percent to an excess of 100 percent, where the experience has not been good.
The offshore energy market has a similar picture relative to total capacity. Down from about $3.6 billion to about $1.5 billion. New business, which was written through the first nine months of 2001, achieved rate increases of 200 percent and deductible increases in the order of 300 percent. That would bring the market back to about the 1992 pricing levels, though it is in fact slightly below the peak of the market which was seen in 1995 for the offshore energy business. We have now also seen at January 1 a large number of policies in the offshore energy market that are coming out of long-term agreements, in other words, multi-year policies, so we're going to see much larger rate increases take effect on those. So the energy market has had pretty bad experiences you'll know from the onshore losses and offshore losses such as Petrobras. Capacity has declined dramatically, and we've seen large increases in rates and deductibles.
Turning to the marine market. The marine insurance market has also suffered badly, particularly in the hull area. There were continuing price increases through 2001, but probably only in the order of about 15 percent on average. But we believe at January 1, 2002 renewals that rate of increase has more than doubled to in excess of 30 percent. So over a two-year renewal cycle there has been in excess of a 50-percent rate increase on the hulls. It's really been the large, prestige hulls that have needed the most correction in prices. The smaller to medium-sized hulls have probably fared a bit better. There's now significant impact to continue this process as pro rata reinsurance capacity in the hull area has become very scarce.
The cargo market has tended to be more stable. It has seen similar sort of rate increases to the hull side, but the results were nowhere near as bad as on the hull insurance market. The excess of loss market, as I mentioned, is very heavily dependent upon retrocessional capacity for many of the players in that marketplace so it was a late renewal. The retro markets coming in had a great increase in price and a significant tightening of terms and conditions. The marine retro market was impacted by a number of severe losses in 2001, including the Petrobras oil rig, the Air Lanka war aviation loss, the World Trade Center of course, and the Toulouse onshore energy loss. One of the moods in the marine market, particularly the marine retrocessional market, has been to exclude some of the embracing coverage that was previously given. Political risk is an example of this, onshore refinery exposure is another example. And of the losses I mentioned, generally speaking now in 2002, you will only expect to see the Petrobras loss covered under marine retro facilities. The other losses would not receive coverage under those. There's been a significant change in the way those covers are being written. At the same time retro rates have risen, obviously depending upon experience not everybody had the same experience, from 50 to in excess of 100 percent.
Looking back into the marine reinsurance field, one of the trends we saw during 2001 was for the general programs to be fragmented with a greater deal of specific coverage being placed. That trend is being continued to an even greater extent in 2002.
Interestingly enough, even though the majority of the specifics were placed new for 2001, these have seen significant rate increases with anything up to a doubling over last year's prices coming into effect. As a sort of benchmark, the top end of general programs which may have been paying as little as two percent rate on line for the top end of the program is now paying a minimum of five percent rate on line, so again dramatic increases at higher levels of exposure. So on the marine reinsurance side we have seen more specifics placed, tighter coverage, and rate increases pretty much across the board and in many cases at multiples, especially at the top end of the programs. Having said that it is a late renewal season and there's still work in progress on these areas.
The one area that the market was trying to work was what is called the composite programs, particularly in the London market which could include marine and non-marine coverages. For the main part those did go away, but there were still some composite programs placed in the market so it was not a uniform position on those.
Moving on to the aviation side. The aviation insurance market was probably the most impacted by the WTC September 11 event relative to its market size. Pre-World Trade Center, pre 9/11, the aviation market was already seeing pricing improvements. But post World Trade Center it removed any doubt or hesitation as to whether this was going to be a gradual rate of improvement and it became a very sudden and rapid rate of improvement.
For the aviation insurers they have seen price increases in two areas. Firstly in their war business where the war premium has been increased by multiple of probably tenfold of that which is was, and the airline insurers will now expect to generate somewhere in the area of $2 billion of war premium under what is called the AVN52 Surcharge. At the same time, the airline hull and liability insurance rates have also increased very dramatically. So the total airline premium is now probably somewhere in the region of $3.5 billion to $4 billion in total. Profit commissions and no claims bonuses have all but disappeared from annual placements. They were a significant part of the marketplace and the amount of differentiation in the terms that a lead insurer and a following insurer might receive are significantly reduced. Of course, you may recall that the airline insurance has a peculiarity called vertical marketing where not all the players on the placement receive the same premium.
The airline business has been significantly effected since September 11. We had the American Airlines crash in Queens on November 12. But probably more significant than that has been the withdrawal of capacity from Fortress Re, the North Carolina managing underwriter that wrote on behalf of three Japanese insurance companies. Again, I'm sure you're all aware of that. But Fortress Re really dominated the sub $500 million loss area for the airline reinsurance industry. There were also a player in other fields such as marine and even property retro. But really their most significant impact was in this aviation reinsurance area. This overall has led to dramatic changes in the aviation reinsurance field. As I mentioned, there is double impact from the increase in the underlying rates, some of which interestingly enough will feed through into the 2001 policies as a significant benefit because so much of the renewal of the aviation airline business is done in the last quarter of the year. It is those who have seen the first big rate increases coming through. In terms of trends in which the aviation reinsurance market has moved, it has sought to tighten conditions, our reinstatement provisions have been severely limited, especially at the higher end, the general market move has been away from risk-attaching coverage to losses-occurring coverage. This means that reinsurers have a tighter control on their exposures as they develop and the run-off of their exposures once the cover has expired, and it also means that during the 2002 period, the losses-occurring coverages have significantly less exposure in them than the expiring risk-attaching coverages. It is somewhat analogous to when the casualty market moved from occurrence to claims made in the mid-eighties. There will be build up of exposure from this point on, but at the moment the losses-occurring coverages have significantly less exposure than the risk-attaching coverages. Having said that even though there is much less exposure, the rates that the reinsurers have been able to attract have gone up significantly and for the standard losses- occurring coverage it has been anywhere from 50 to 100 percent rate increases that have been seen. There is still some risk-attaching coverage available at certain points in programs and for certain cedants. But it has been very restrictive indeed.
Turning briefly to the aerospace market. This is not a particularly large market again, but it is quite a significant one. Market capacity, which was well over a $1 billion for a single launch. Notional market capacity was probably about $1.3 billion for a single launch. When I say notional capacity that is the theoretical aggregate of all the participants' maximum lines. That's not to say that people would necessarily commit their maximum lines. This has dropped down to below $1billion. That is quite significant because most people would normally commit roughly only half their maximum line on a launch and the largest launch values out there are in the $500 million region for the Ariane 5. As a result of poor experience that the space market has seen, but also significantly because of the reductions in capacity, we have seen major improvements in the terms under which the launch and in-orbit policies are written. Previously the launch policies were issued with up to five years in-orbit coverage attached to them. This is now been brought back to one year only and the rate that was in the region of 12 percent is now probably more in the region of 16 to 17 percent with the significantly-reduced in-orbit coverage. In-orbit writing themselves, probably the rate has gone from about 1 to 1.5 percent annual to 2 to 2.5 percent annual.
Just recapping what I said at the beginning. The Specialty lines are driven as much by the underlying insurance pricing activity as the pure reinsurance pricing activity. And here we have seen very strong movements and the market is effectively generating a double leverage from that. The insurance prices have gone up, the insurance capacity has gone down. Reinsurance capacity generally in this area is down. I don't think that we've seen the new markets particularly becoming involved in this area, at least at this stage, and therefore there hasn't been a flood of capacity into these Specialty lines markets. So I would expect to see these trends continue in the marketplace through 2002."