Aviation lessor disputes ‘hang over’ market to keep rates high: Gallagher

Legal proceedings brought by aircraft lessors with planes left stranded in Russia after it invaded Ukraine are likely to take years to resolve, creating continued uncertainty for insurance buyers and putting upwards pressure on rates, according to Gallagher. Rates for hull war and third-party war liability rocketed in the wake of the outbreak of war in Ukraine, but Gallagher says it fought off “arbitrary” rate increases for its aviation clients in 2023. Writing for the broker’s latest Airline Insurance Market Update, aerospace global executive Nigel Weyman says: “The challenge for the brokers on behalf of their clients was to push back and resist large and somewhat arbitrary percentage increases (as had happened in 2022) and argue for logical technical rates that reflected each individual client’s specifics.” Weyman says legal trials for disputed Russia/Ukraine claims are due to begin this year and are likely to “hang over the market for some time”. He says this uncertainty is impacting negotiations between airlines and their insurers, particularly for war cover, where capacity is tight and rates are high. “The start of the first legal trials scheduled for 2024 covers a large portion of the claims, but various other court proceedings will take place in different jurisdictions around the world and claims are complex and could take further years to resolve,” he warns. While some lessors confirmed partial recoveries from Russian state-owned insurance companies towards the end of last year, several have filed fresh claims against insurers in London, and the potential for claims against the market remains significant, Weyman says. “Regardless of any settlements, the overall quantum of potential claims is still significant and it continues to send ripples of concern through both the direct, reinsurance and retro markets. This dispute will continue to hang over the market and insurers will remain cautious until this is resolved,” he says. “The potential magnitude of losses from this particular event are substantial, with a large portion of this loss likely to fall on the reinsurance market,” he explains. Weyman says aviation reinsurers were quick to cut capacity, raise prices and impose coverage restrictions, which in turn put pressure on insurers to take on more risk and charge clients more. The market also recorded a war loss from conflict in Sudan in April last year and geopolitical risks have heightened following fresh conflict between Israel and Hamas, which all put upwards pressure on rates. Weyman says the Sudan loss produced claims of more than $200m. “Looking ahead, global volatility and security risks are likely to stay under the spotlight for the foreseeable future, with underwriters on high alert and monitoring their portfolio exposures more and more closely,” Weyman says. He says escalation in current conflicts will be one of the biggest threats to aviation insurance buyers in 2024. “Specifically, if this led to one party using a tactical nuclear weapon, then airline operations in particular could be directly affected in terms of both operational conditions and insurance coverage,” with war-related coverages terminated in such an event, adds the broker. Besides war risks, increased costs of repair for new generation and high tech aircraft will add further pressure to insurance rates, Weyman predicts. He says that while modernising aircraft will undoubtedly improve aviation safety, the longer-term trend could see higher rates for larger loss costs. “Anecdotally, we know this [costs of repairing new generation aircraft] is significant, and inflation is having an impact, but we don’t yet know the true cost. Inevitably, this will have an impact on rating levels at some point in the future,” he warns. The aviation market is also reeling from the loss of the first Airbus 350 following a collision between the Japan Airlines jet and a smaller plane at Tokyo’s Haneda Airport this week.

Aviation lessor disputes ‘hang over’ market to keep rates high: Gallagher

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