09 January 2025
Airline Insurance Q&A
In Plane Talking's feature Q&A, Nigel Weyman looks back on 2024 and discusses the latest trends, challenges and market conditions in the airline insurance market.
2024 was another unsettled year for the aviation industry and its insurance market. However, despite fresh challenges, heightened global volatility and uncertainty over lingering losses, we find ourselves amidst a somewhat soft market environment. The question is, how might trends develop in the coming months and what could this mean for airline insurance buyers in 2025? In this feature Q&A, Nigel Weyman, Global Executive at Gallagher Specialty, looks back on 2024 and discusses the latest trends, challenges and market conditions in the airline insurance market.
Q) How did market conditions develop in 2024 and how did this affect renewal negotiations?
As we predicted in this publication, market trends from Q4 2023 carried into 2024. We stayed cautious as legal trials regarding Russia/Ukraine lessor claims began, but in the end, there was little impact on pricing, and these losses remain unresolved entering 2025.
In the Hull and Liability sector, rates continued their softening trend as market conditions weakened due to few major losses and excess capacity. With virtually no insurer withdrawals in 2024 and established carriers protecting their share from newcomers eager to grow, a strong buyers' market emerged. Consequently, by the later part of the year, double-digit rate reductions were commonplace, albeit individual exposure growth and claims records were decisive factors in what was achievable.
In respect of the Hull War class, rates also softened through 2024. Hull War has recently undergone a period of recalibration with huge increases applied in recognition of both potential Russia/Ukraine lessor losses and major hull claims from Sudan and Ukraine. This recalibration has allowed insurers to establish a far stronger premium base, putting the class in a much healthier position. Add in a combination of no new major hull war losses in 2024 and an increase in overall capacity and underwriting appetite, and pricing has stabilised significantly. New capacity, which had missed the losses of prior years, helped fuel competition, keeping rates in check, and by year-end pricing had flattened out and small reductions were once again achievable.
The AVN52 class saw little new capacity in 2024. Any extra capacity available to war insurers seemingly went to the Hull War class, where premiums are multiples higher. This left minimal surplus capacity for AVN52 liability limits, maintaining pressure on this class and creating some challenges. Although pricing stabilised through 2024 and began to flatten out by year-end, the yearly average still shows an overall increase.
Q) Legal trials in respect of Lessor-related Russia-Ukraine claims began in 2024, but as yet remain unresolved. How is this uncertainty affecting the market?
Considering the daunting potential size of these losses, possibly many billions of dollars, the market attitude seems to be amazingly calm, at least for the moment. It has been reported that a small number of insurers have agreed out of court settlements, with details remaining highly confidential, but even these have not caused any ripples so far. Perhaps the combination of partial recoveries by lessors directly from Russian operators and the expectation for insurers that their own potential losses will be mitigated by reinsurance recoveries has led to this outlook.
Looking ahead, the UK element of the Russia/Ukraine trial has been adjourned until an unspecified date in January 2025 and various hearings in other jurisdictions such as the US are yet to commence, so ultimately this dispute is likely to continue to hang over the market for some time yet. How many claims become payable and in turn, how insurers react will play a key role in what transpires in respect of future trending, perhaps more so in the latter months of 2025, should there be some verdict/resolution.
"With virtually no insurer withdrawals in 2024 and established carriers protecting their share from newcomers eager to grow, a strong buyers' market emerged."
Q) Global conflict, geopolitical volatility and heightened tensions are at an all-time high. Against this backdrop, War pricing softened in 2024. What are your views on this market and what might we expect to see in 2025?
As commented previously, pricing in the War market has recalibrated substantially in recent years, with the overall dollar premium pot having grown from circa USD180m in 2021 to an estimated USD1bn today. This represents a much stronger base from which insurers can weather ‘normal’ war losses. The unresolved Lessor-related Russia/Ukraine claims are somewhat a ‘Black Swan’ event and may impact the hull war class, but underwriters have (to some degree) already factored this scenario into recent price increases and as such we would hope that any further reaction is measured to maintain a stable trading environment.
Looking ahead, insurers' attitudes will also likely be affected by the new US President Elect's decisions when he comes to office in early 2025, with various possible outcomes. Optimistically, I hope for reduced conflict, similar to the ceasefire between Israel and Hezbollah, which would allow for better rates for clients. Nonetheless, we remain cautious as the war market remains highly reactive, and pricing dynamics can change very quickly.
Q) Following on from the topic of global conflict and geopolitical volatility, 2024 saw the advent of a 48-hour market extension endorsement aimed at addressing the War Liability ‘Automatic Termination’ clause. What are your views on this?
This small improvement in the automatic cancellation conditions was welcomed and massively important from a societal and safety perspective. It would allow some coordinated repatriation of passengers and help avoid an initial grounding of aircraft in the event of a hostile detonation of a nuclear weapon or outbreak of war between two or more major powers. However, it remains that there are currently various iterations of this amendment (number of detonations, areas where it is applicable etc.) with some insurers offering 7 days of cover (albeit with a provision to give 48-hours’ notice of cancellation), so this endorsement is far from being a unanimous and uniform market wide resolution. As such, what should remain in focus for airline risk managers is what would happen after this 48-hour window has expired. How do you create the possibility for your operations to continue or resume if it is deemed safe to do so?
Ultimately, just three options exist:
1) Wait for reinstatement of coverage on your current policy – unlikely to be achieved within 48 hours, more likely to take days if not weeks due to the sheer volume of requests/insurer workload.
2) Rely on a Government indemnity/intervention – possibly the ideal solution but, from past experience (e.g. the 9/11 attacks), Government attitudes vary from country to country and indemnities may be limited in scope/cover.
3) Secure an alternative commercial solution – Gallagher’s unique market facility is designed to act as a bridge of cover to quickly enable you to continue to fly beyond the current 48-hour extension. This solution can provide USD1bn of cover subject to the dedicated panel of insurers prior to agreement.
Over 100 global airline operators (so far) have prudently subscribed to option 3 in response to increased hostilities in Ukraine and the Middle East. This facility is available to all airlines, and it remains a unique risk management solution to give peace of mind that your operations can continue beyond any 48-hour window should the worst happen. If you have any questions regarding this topic and your insurance policies, then please do get in touch with us.
2024 observed further insurer personnel moves, what impact did this have, and do you anticipate any capacity change in the near term?
A feature of the last couple of years has been increased competition by way of new capacity and existing markets vying for market share/income. The demand for talent that this kind of competitive market environment stimulates leads to a certain amount of ‘musical chairs’ in the underwriting world. However, this is often a case of familiar faces in different places, and whilst all very interesting typically has little influence on wider market dynamics.
"New-generation aircraft and engines are much more expensive to repair or replace than older models, yet deductible amounts for claims have not changed for decades."
Q) It is said that while major accident rates are low, day-to-day aviation insurance claims are increasing again as air traffic returns to pre-pandemic levels. Do you see this as a cause for concern?
The aviation industry continues to show yearly improvements in safety due to advancements in technology and knowledge used in operations, making air transport arguably the safest way to move from 'a' to 'b'. However, these advancements come with increasing costs of physical damage claims. As our new claims engineering expert, Andy Pickford, mentions in his article later in this edition, new-generation aircraft and engines are much more expensive to repair or replace than older models. Despite this, deductible amounts for claims have not changed for decades, even though insurers have suggested raising them to match higher values and counteract rising claims costs. Additionally, individual liability awards are also increasing, with ‘thermonuclear’ settlements (>USD100m) becoming more frequent.
For now, composite aircraft represent less than 7% of the global commercial passenger aircraft fleet, and nuclear settlements are not the ‘norm’ (yet), which is limiting their influence on the current rating. However, Insurers are monitoring claims trends closely, and inflationary increases will eventually impact ratings, but the timing is uncertain and unlikely to affect the anticipated trend in 2025.
Q) Lastly, to summarise, what can aviation insurance buyers expect in 2025, how do you see the market trending, and do you have any advice?
As always, any prediction here is subject to no market-changing event (of which there are several lurking on the horizon), but absent that, buyers can probably expect 'more of the same' in 2025, with a continuation of the current buyers' market.
In the final days of 2024, we witnessed a series of airline losses including two tragic fatal crashes involving Azerbaijan Airlines and Jeju Air, and notable landing incidents involving KLM and Air Canada Express aircraft. While these losses alone, are unlikely to prompt a market reaction, they will impact year-end underwriting results for insurers and add early pressure on the market as we enter into 2025. Any further losses in the coming weeks could exacerbate the situation.
Meanwhile, the possibility of the much-discussed lessor loss dispute reaching resolution and hitting the market sometime in 2025, almost certainly before the big renewal season of Q4, could also change the landscape.
With this in mind, we must continue to stress to buyers: plan for and, where possible, buy long term, nurture your relationships with your core markets and make sure you are using the best broker.
As the leading and most highly resourced aviation insurance broker, the Gallagher team is fully equipped to support our clients, and we will embrace whatever challenges or opportunities emerge in 2025.
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