Aviation insurance buyers face extremely challenging 2022

Aviation insurance buyers face some of the most challenging renewals in more than a decade, as rising exposures and the war in Ukraine drive up costs, with some experts predicting the toughest conditions since 9/11.

With the easing of Covid-19 restrictions, airline passenger numbers have been recovering from the slump in demand during the pandemic, with growth strongest in Europe and North America. Globally, passenger numbers are expected to hit 83% of pre-pandemic levels this year, up from 47% in 2021, and return to 2019 levels in 2024, according to the International Air Transport Association. 

Rising passenger number mean higher exposures for airlines and therefore potentially higher premiums, despite a relatively stable rating environment. And on top of this, the airline insurance market is currently digesting potentially large losses from the Russia-Ukraine conflict, putting rates, terms and conditions under pressure. 

According to Peter Elson, CEO of Gallagher’s aerospace practice, aviation renewals are likely to be among the most challenging in decades during 2022. “We will see more attention to the structure and quantity of cover and price of cover than any time since 9/11 [the terror attack on the World Trade Centre in 2001],” he told Commercial Risk Europe. 

The bulk of airline renewals occur in the fourth quarter and Elson’s gut feeling is that insurers will be under pressure to increase rates. 

“The airline insurance market for all-risks is relatively stable, however it is an uneasy stability due to the expectation of claims arising from the Russia-Ukraine conflict. The all-risk market is waiting to see how the Russia-Ukraine losses come through, where they will land and how their reinsurance programmes may be impacted,” said Elson.

Claims related to the Russia-Ukraine war have been notified to the aviation market, which provides both all-risks and war cover under separate aviation war policies to airlines, as well as contingent cover to aircraft leasing companies. About 400 commercial aircraft leased before the war are still in Russia and may be unrecoverable. 

In May, the world’s largest aircraft lessor AerCap Holdings NV announced it would take a $2.7bn hit after more than 100 of its jets were stranded in Russia. AerCap said it has filed a $3.5bn insurance claim related to trapped aircraft and equipment, and has already received $200m in payments from insurers. Another lessor, Air Lease Corp, said in April it would write off aircraft leased by Russian airlines valued at $802m, and that it would seek to recover losses from its insurers. 

According to Elson, Russia/Ukraine-related losses have yet to play out. “It is reasonable to expect that, given there appear to be large losses from the Russia-Ukraine conflict, programmes will be called upon to respond and pay claims. At this stage, a lot of those claims have not yet fully crystalised in insurers’ books, and some have not even been formally posted with the market. Where those losses fall ultimately is yet to come to a conclusion,” he said.    

Despite the potential scale of losses, “ample cover” is still available in the aviation all-risk and war markets, albeit at a higher cost, Elson said. The Ukraine war has had an “immediate impact” for some ancillary covers, for example the war risk market has responded quickly and with substantially higher pricing, he explained. However, the core all-risk product is relatively stable, he said. 

“Short of peace breaking out tomorrow, these events are pushing towards claims being lodged and paid by the market, and the market responding with some pricing reaction. Insurers will also be looking more closely at their customers’ risk profile, their aggregate [exposures] and how to manage those, while at the same time making sure the market continues to provide a good and viable product,” said the broker. 

The immediate impact of the war in Ukraine has been on hull war capacity, appetite and pricing, according to David George, managing director for aviation at Marsh Specialty. “We have already seen some major withdrawals from the market, which is perplexing given that no claims have been paid as far as we are aware and rates are increasing by circa 100%,” he said. 

Capacity is available for most airline placements, however the higher the aircraft values the more of a squeeze there will be, said George. “Insurers are generally maintaining US dollar capacity but now applying this to annual aggregate limits, not aircraft values. This will potentially restrict placements and it appears that aggregates will be restricted to 3x maximum hull values,” he said.

Profitability

The main airline insurance market has remained competitive throughout the pandemic and continued to provide broad cover and stable pricing for clients, according to George.

“These conditions attracted new players to market and unlocked dormant capacity from existing insurers during the pandemic. While rates have been artificially high, in many cases due to reduced exposures, there is a sense among the underwriting community that current premium levels are below those required to sustain profitability,” he said.  

“Marsh highlighted this to insurers during the pandemic and the problems that were being stored when traffic returned to ‘normal’. We have been successful in managing rates and premiums for many clients as the pandemic subsides,” he added.

Capacity in the aviation hull and liability market remains positive, continued George “We do not expect there to be a shock change to this, or premium levels, while the claims outcome of the Russian conflict is undecided,” he said.  

However, insurers are seeking various coverage restrictions, including geographic limits to exclude Russia, Belarus, Crimea and Ukraine, said George. “Some insurers are indicating that they will not provide coverage for force majeure landings in these countries, which we believe is an unreasonable position,” he added. 

George feels that coverage negotiations will concern clients more than premium increases in the next renewal season. “One of the biggest risks for all aviation policyholders at the moment is the cancellation provision following the hostile detonation of a nuclear weapon. Within the liability policy this is automatic and immediate, and could in effect ground the global fleet without notice in the event that a tactical nuclear device is employed in a local theatre of war,” he said. 

“We are working with the market to address this, however insurers are so far reluctant to act or to consider steps to have a framework in place to reinstate policies on a pre agreed basis,” he added.

Pricing

Prices in the airline insurance market are likely to be driven by the aviation reinsurance market, which could see large losses from the Russia-Ukraine conflict, according to Elson. 

“The shape and direction of the market will be determined more this year than in past years by what happens in the reinsurance market, in particular reinsurers’ assessment of the impact of Russia-Ukraine losses and their response to it,” he said.

“Renewals for airlines are more complex than they have been for many years. We see very clearly that airlines today need more visibility and creativity and attention to the structure and pricing of cover than they had done for many years in the softening market, where pricing and costs were reducing and therefore not so much preparation and skill were required to get a reasonable result,” Elson said.

To get the best treatment at renewal, buyers engage with the most experienced and resourced brokers and start their renewals early, according to George and Elson. 

“The days when it would be okay to come in a week or two before renewal and expect a satisfactory outcome – that is not the environment we are in. The difference between getting a good outcome and a poor outcome is a lot of work with the market and broker well in advance of renewal,” said Elson.

Underwriters are keen to explore ways to differentiate between clients, said George. “We recommend that buyers develop greater knowledge of a particular risk by accessing services through either risk management bursaries provided by insurers, or with their broker,” he said.