Airline insurance providers could start to leave the market in search of more profitable sectors in 2006, pushing up premiums for airlines in the process.

Following post-9/11 price increases a flurry of new entrants to the market has led to potential overcapacity, says AON Aviation global practice manager for aviation Steven Doyle.

AON thinks airline insurance premiums for 2005 passed $2.1 billion. "Everyone believed the $2 billion threshold would be a line in the sand," says Doyle.

The trend towards increased safety, with 2005 "the fourth relatively safe year in succession", according to AON, will mean that premiums continue to fall, barring a catastrophe. However, if severe losses lead to a cut in profitability for insurers, some could decide to leave the market, Doyle says. And that could lead to higher premiums for airlines, he says.

In the context of an air transport industry becoming safer each year, any losses that do occur take on a higher significance, AON says. "Incidents will always happen, and the financial magnitude of these losses and the reaction of the insurance community will remain an unpredictable factor."

In the manufacturing sector, expected reductions in premiums following the introduction of improved aircraft safety systems "have not always translated to improved premium levels", AON says. Doyle says this is because of the long time spans involved in airline loss blame feeding through to manufacturers.