03 January 2024
Airline Insurance Q&A
2023 proved to be another unsettled year for aviation and airline insurance buyers. As the year concludes, market challenges and uncertainty over potential losses linger, question is, how will these trends develop in 2024? In this feature Q&A, Nigel Weyman, Aerospace Global Executive at Gallagher Aerospace, looks back on 2023 and discusses the latest trends and market conditions in the airline insurance market.
How did market conditions develop in 2023, what new challenges did we see and how did this affect renewal negotiations?
As we reflect on the past year, it is clear that 2023 has presented another challenging period for both aviation and the insurance market, with renewals set against an all too familiar backdrop of market uncertainty, coverage challenges and heightened global volatility. 2023 was, however, a market of two parts with a distinct differentiation between Hull and Liability and Hull War/Third-party War Liability coverages.
Firstly, due to a low level of claims in 2022, the Hull and Liability sector attracted several new markets in 2023 as well as an increased appetite for market share from some existing insurers. This led to significant over capacity and consequently rates began to soften. The challenge of this situation was the allocation of shares across insurers when the important criteria of quality and continuity battle with ultra-competitive pricing. Different types of buyers have different priorities, some are more sensitive to historic relationships whereas others are purely price-driven, many are both. This dynamic led to some interesting debates and renewal outcomes.
On the other side of the coin, the war markets, both Hull War and third-party war liability, continued to be affected by the unresolved spectre of the Ukrainian/Russian conflict. Capacity remains tight, and although new markets appeared in 2023, the rating trend remains upward here. 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 clients’ specifics. I think we were largely successful in achieving these differentials.
The start of legal trials in respect of disputed Russia/Ukraine claims are scheduled to begin in 2024, but this event is likely to continue to hang over the market for some time. How is this uncertainty affecting the market?
As mentioned previously, these unresolved claims are still having a significant impact on negotiations, particularly in respect of war covers. 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. Some lessors announced partial recoveries from Russian state-owned insurance companies in late 2023, but in contrast, several aircraft lessors also filed fresh claims against insurers in London. 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.
Conflict in Sudan in April 2023 resulted in several Hull War losses and new unrest, conflicts and security incidents are being observed daily (e.g. Israel/Gaza). With War/AVN52 pricing continuing to trend upwards, what are your views on this coverage in the near-term?
Global instability and geopolitical volatility is undoubtedly high, and indeed, in recent years insurers have seen some notable aviation claims filed following such events. Our partner Osprey Flight Solutions issued alerts covering aviation-centric incidents and events over 200 countries in 2023, which supports this trend.
Sudan was a more ‘normal’ war loss but still produced claims in excess of USD 200 million. However, at the newly increased premium levels, as a standalone event, this is a loss which insurers can now absorb without too much overreaction. 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.
"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"
2023 observed numerous capacity changes and the imposition of coverage restrictions and limitations, what impact did this have and do you anticipate any significant change in the near-term?
Historically, when a major loss/event happens, coverages and limits are scrutinised and corrections and improvements are made. As such, what came into focus following the consequences of the Russia / Ukraine conflict were the limits for confiscation cover and the overall aggregate exposures in certain areas of the world. However, 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. Subsequently, aviation reinsurers reacted by reducing capacity, increasing pricing and applying coverage restrictions and limitations. Direct insurers are now paying more and having to retain bigger shares of loss and as a result, there is a lot of pressure on insurers. The year-end insurer results are something to monitor in Q1 2024 as underwriters’ success or otherwise in reaching their 2023 targets may influence future capacity deployment and underwriting approach.
Day to day aviation loss levels still appear 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?
One of the by-products of the pandemic, coupled with a heightened focus on the environment in the airline sector, has been the rapid retirement of older technology/aircraft types. Such models are now being replaced by new-generation, high-tech and more fuel-efficient aircraft. Positively, improvements in safety appear to have gone hand-in-hand with this modernisation of the world’s fleet. I believe this is a long-term trend for the better. Unfortunately counter to this is the severity issue that relates to the associated costs of repairing these new generation aircraft, when accidents do occur. Anecdotally we know this 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, but in the meantime, we are enjoying improved safety and I think we all appreciate that.
What do you see as the biggest challenges and/or threat to aviation insurance buyers in 2024?
One of the biggest threats in my opinion is an escalation in one of the current conflict areas. 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. As I outlined in our last edition of Plane Talking, if there was a hostile detonation of such a device, then there would be Automatic Termination of war-related coverages. Recent negotiations have resulted in increases the cancellation timeframe from immediate to at least 48 hours which now does allow some time for essential passenger repatriation and aircraft repositioning. Unfortunately though, there is still no market-wide position and so the wording of these cancellation provisions come in various iterations from insurers with a number of different subjectivities. While fundamentally they all give a window of cover for at least 48 hours following a single detonation, the biggest challenge and/or threat to aviation insurance buyers remains what happens next and what can be done to restore cover should an automatic termination be invoked?
As I outlined in our last edition, Gallagher has sought to resolve this by way of a new specific market facility, which is available to all clients and their brokers. The facility has the ability to provide replacement war liability cover for up to USD1billion, and is expected be a temporary arrangement to allow operations to continue whilst reinstatement on the original policy is negotiated. The market facility is subject to certain subjectivities but if you are interested in discussing this please contact us (or your own broker) whereby we will be happy to provide you with further information.
Lastly, to summarise, what can aviation insurance buyers expect in 2024, how do you see the market trending, and do you have any advice?
In the absence of a market-changing event, major capacity withdrawal and or deterioration in loss experience, we anticipate a continuation of current market trends into 2024.
We would expect the Hull and Liability sector to remain relatively stable with rates continuing the trend of Q4 2023. Insurer focus on premium income is something that isn’t going to change and so exposure growth will remain a key factor in renewal negotiations and in what is achievable in terms of technical rate reductions. In the War sector, we would anticipate rates will stabilise but global volatility is high, keeping pressure on this class, therefore it is unlikely we will see the return of rate reductions in this heightened environment.
Regardless of future trends, I am extremely confident that the Gallagher team is fully equipped to support our clients and we will embrace whatever new changes or challenges emerge in 2024.
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