06 January 2023
Airline Insurance Q&A
In this feature Q&A, Nigel Weyman, Aerospace Global Executive at Gallagher, looks back on 2022 and discusses the latest trends and market conditions in the airline insurance market.
As we entered 2022, pandemic challenges were easing and the aviation insurance market was starting to ‘soften’.
Unfortunately, the Russia/Ukraine war emerged, how did conditions develop and how has this affected renewal negotiations?
The invasion of Ukraine has had a huge impact on certain sectors of our business. Initially, the concern was for the aircraft trapped and possibly lost within Ukraine, which represented a sizeable potential loss to Hull War insurers many times greater than the entire class premium. As a consequence, rates doubled for most buyers, coverage changes were introduced, aggregate limits were reduced and the non-cancellable extension was no longer available.
However, this concern proved to be minor compared to the threat of claims for the fleet of leased aircraft that were being operated by Russian airlines. The inability for the leasing companies to repossess their aircraft coupled with severe sanctions has made this a very complex coverage issue.
An additional anomaly was that all these aircraft were not registered in Russia and therefore if deemed confiscated, sub limits that usually apply to ‘confiscation by Government of Registration’ were not a protection to insurers.
The magnitude of the loss is massive, reportedly some USD35bn of aircraft, and depending on whether this is an All Risks loss, a Hull War loss (or both) or a loss that insurers can successfully deny will have huge ramifications on future pricing of premiums. The legal proceedings are already underway.
It is clear from the latest insurer results and reported legal proceedings, it will be some time before we have clarity over Russian aviation claims, as such, how do you see this uncertainty affecting the market?
The insurer stance of denying these claims means we have seen little in terms of immediate insurance premium consequences. Depending where the losses fall (if the leasing companies are successful) however, this is likely to be a market changing event. The loss could be bigger than the World Trade Centre but, unlike the liabilities of that loss, this would be a cash loss. If that wasn’t enough bad news for insurers, they were also unexpectedly hit in Q4 with a huge deterioration in loss reserves in the Aerospace products sector.
This shook the market but, in truth, shook the reinsurance market more as this was where most of that deterioration will be paid. Consequently, substantial increases in reinsurance costs are now happening. Direct insurers are having to take larger retentions and quota share capacity is shrinking. This all amounts to increased cost of doing business and therefore pressure will be on direct insurers to move the dial on pricing in order to recover some of this cost from their buyers. That said, unless this also translates into shrinking of capacity or there is absolute underwriting resolve, the dynamics of over supply versus demand will continue to affect the ability to increase rates. We will monitor with interest the early 2023 renewals.
What happened in 2022 in respect of capacity and coverage levels, and do you anticipate any significant change?
Notwithstanding these Swords of Damocles hanging over the market, trading in 2022 was very buoyant with new capacity entering and existing markets often trying to increase market share or fighting to preserve it. This resulted in a more favourable environment for buyers than might have been expected under the circumstances. Rates softened against a backdrop of unexpectedly high growth from airlines and some of that growth was exchanged for discounted technical rates.
This combination still produced increases in dollar premiums and was highly attractive to insurers leaving surplus capacity on most risks. A healthy position for buyers to be in which was naturally capitalised upon by brokers on their behalf.
Day to day aviation loss levels remain down on ‘normal’ years but many airlines are now back operating at or above pre-pandemic levels. Do you see this as a fundamental shift in safety or is it still just a short-term anomaly?
The remarkable and unexpected recovery of passenger demand has led to concerns that safety would be compromised creating a spike in losses. In reality, the majority of airlines have taken a measured and well planned restart campaign and have scaled their operations to reflect their resources (or the resources of service providers). Claims have not trended upwards as much as one would expect and overall the year looks to have the potential to be profitable, despite several ‘close call’ incidents. Other issues have not gone away, such as rising hull values and increased repair costs, with supply chain and labour issues and new generation/composite aircraft costing multiples of their alloy equivalents to fix. Social inflation trends also persist with the severity of liability awards continuing to escalate. Fortunately these factors are not specifically influencing rating levels just yet.
Aviation underwriter and broker personnel movement was significant again in 2022, what impact, if any, has this had?
The roller coaster of personnel movements in both the aviation underwriting and broking sectors has continued unabated. This has left some operations short staffed and others with big financial undertakings that now need to be matched by revenue. This will further add to the tensions in the market, as once again competition for market share becomes a priority. These are all good ingredients for the buyers outlook, but, will it all end in tears for some of these players?
What do you see as the biggest challenges ahead?
The big challenges for 2023 are the outcome of the lessor losses (should this be resolved). While earmarked as an ‘earnings’ event for most (re) insurers, some financial commentators have warned it could impact on capital for a few outliers. The magnitude of such losses could change the market landscape and make for a very different trading environment. Add into the mix the previously highlighted increases in reinsurance costs and it is difficult to argue how a hard market is not imminent.
However, I am always amazed at the resilience of aviation insurers to whatever adversities they face and extreme reactions are typically heavily mitigated.
What opportunities do these challenges present?
The opportunities that lie ahead are exciting for a broker like Gallagher. We have a huge team of talented operators that can navigate through whatever market conditions prevail. We have spent this last renewal season laying the foundations for a robust defence against any extremes of movement in market conditions with long-term structures and healthy support for continuity markets.
We are committed to innovation and finding solutions to challenges and we are confident of delivering a better outcome for our clients than average.
Lastly, to summarise, what can aviation insurance buyers expect in 2023, how do you see the market trending, and do you have any advice?
Airlines are seeing massive improvements in yields and as a result are making headway in dealing with accumulated losses and repaying loans, passenger and freight demand remains strong and safety standards continue to be high. If this trend continues unabated then airline insurance buyers will be in a healthy position going forward showing further growth in operations.
From an insurance buying perspective, on the All Risks side, balancing the high profile loss issues, and aforementioned challenges is the fact that there are actually a number of insurers who were not exposed to the leasing losses (fondly called ‘survivor markets’!). These markets have an unabated appetite to trade on, and coupled with new capacity seeking market share, these will be two positives in the armoury of brokers negotiations in 2023.
For Hull War and Third Party Liability War, capacity is and will likely remain tight. The spectre of the leasing losses has created a very tough negotiating environment and further increases are possible.
Inevitably, the actual result will again depend on the specifics of each buyer and in turn the skill, preparation and strategies employed by their insurance broker.
My advice to buyers has not changed, make sure you have the right broking representation and individuals working on your account, start your planning and renewal discussions early, look to differentiate your operation, invest in continuity, focus on reducing attritional losses and importantly ensure your business is prepared and has budgeted appropriately. Adopting these prudent measures does make a real difference in the overall results available.
Gallagher are market leaders in this specialist sector and I am confident that our talented team can navigate our clients through whatever prevails.
The Walbrook Building 25 Walbrook London, EC4N 8AW
Let's talk
Arthur J. Gallagher (UK) Limited is authorised and regulated by the Financial Conduct Authority. Registered Office: The Walbrook Building, 25 Walbrook, London EC4N 8AW. Registered in England and Wales. Company Number: 119013.