04 April 2024
The Extreme Weather Challenge: How Can Insurance Support Industry Innovation?
Extreme and unpredictable weather is becoming more prevalent due to climate change. 2023 was the warmest year on record – by some distance. Global temperatures were 1.48°C warmer than the 1850–1900 pre-industrial level and 0.17°C higher than 2016, the previous hottest year.
Weather volatility will likely remain at current levels or possibly deteriorate further, and it is creating significant challenges for operators. Recent studies have confirmed that turbulence has increased over the last few decades. The North Atlantic is one of the world’s busiest flight routes. At a typical point on the path, research from the University of Reading has found that severe turbulence increased by 55% over the total annual duration from 17.7 hours in 1979 to 27.4 hours in 2020. Moderate turbulence increased by 37% from 70.0 to 96.1 hours, and light turbulence increased by 17% from 466.5 to 546.8 hours.
The changing atmosphere may also be responsible for the rise in a particular type of turbulence, Clean Air Turbulence (CAT), which has increased by 15% in the last four decades and is expected to increase by 10% to 40% by 2050 if no action is taken. Pilots find it difficult to detect CAT as it is above the clouds and is not related to bad weather; it is caused by wind shear, which can be created by sudden changes in wind speed and direction when flying above 15,000 feet.
Turbulence can be costly for airlines, as it is responsible for injuries, damaged aircraft, delayed flights, inspections and investigations. The USA National Transport Safety Board has stated that turbulence is the most common cause of accidents aboard aircraft, with flight crew sustaining 80% of the injuries.
A notable example of weather volatility impacting aviation safety was the case during a flight from London Heathrow to Singapore Changi Airport in October 2022. Due to severe weather, the Boeing 777-300ER entered a holding pattern near the airport. However, running low on fuel, the flight had to divert to a nearby airport, Batam Hang Nadim International Airport, Indonesia. Unfortunately, the weather pattern also moved, and the pilot could not land the plane on the first attempt. The aircraft eventually landed with less fuel than the final reserve fuel requirement, prompting an investigation by the Singaporean Transport Safety Investigation Bureau (TSIB).
The TSIB found that the flight crew could have diverted earlier and stated that in the face of a more unpredictable flying environment, “it may be prudent for pilots to interpret operating procedures in a more conservative manner if air traffic control cannot provide definitive updates”.
The airline has since has taken several actions in response to the incident, including updating its training on inflight fuel management, diversions to alternate airports, and the declaration of low fuel state.
Extreme weather has also caused considerable disruption to operators across the globe in the last year. In June 2023, over just two days, more than 16,500 flights were delayed, and nearly 4,500 were cancelled from New York airports due to intense thunderstorms.[1] The following month, a Delta Airlines plane was forced to make an emergency landing in Rome after being severely damaged during a hailstorm. While in October two Azul Airbus A320neos sustained considerable damage after being caught in a hailstorm over Brazil.
In July last year, temperatures rose above 40°C in parts of Greece, and wildfires engulfed Greek tourist hotspots Rhodes and Corfu – leading to mass emergency evacuations and two pilot fatalities after a firefighting aircraft crashed. Airlines and travel companies were forced to cancel flights and holidays and repatriate thousands of tourists. Operator Jet2 partially attributed a GBP14 million profit loss to the wildfires in November.
Frequent heatwaves could force airlines to cut passenger loads. In July 2023, Persian Gulf International Airport experienced temperatures of 66.7°C. Heat of this magnitude can make it more difficult for planes to take off as the air becomes denser, making it harder to generate the lift necessary to become airborne. Some runways may not be long enough and could force aircraft operators to reduce take-off weight.
Sustainable Aviation Fuel (SAF) is estimated to produce 80% less CO2. Phasing out jet fuel entirely would eliminate aviation emissions by 2050 but will entail significant cost increases.
Mitigating climate challenge
Various industry initiatives are underway to mitigate and solve these challenges, both directly and indirectly.
One method to reduce the impact of CAT is to avoid the four primary jet streams that encircle the Earth. Yet this option has obvious drawbacks, and the industry is also working hard to develop technological solutions to address the problem. NASA has created an infrasound microphone that can hear ultra-low frequencies generated by turbulence, and the app Skypath can monitor turbulence, similar to how Google Maps monitors congestion.
Sustainable Aviation Fuel (SAF) is estimated to produce 80% less CO2. Phasing out jet fuel entirely would eliminate aviation emissions by 2050 (which, while important, is not a complete solution to net zero in itself) but will entail significant cost increases.
E-kerosene can be produced using electricity derived from renewable sources, water and CO2. Hydrogen is generated by electrolysis, and then CO2 is added to create synthetic kerosene. To be effective, e-kerosene must be made with an abundance of solar and wind power, and currently, there is simply not enough on demand. These forms of renewable energy are intermittent, and we are still years away from developing the necessary storage capabilities. New production plants for green hydrogen, CO2 direct air capture and synthetic fuels must also be built.
In November 2023, the aviation industry celebrated a significant milestone, with the first transatlantic flight powered by cooking and animal fats taking off from London Heathrow and landing at JFK International Airport in New York. This breakthrough hints at a future where planes are powered by biokerosene – rapeseed, jatropha seeds or old cooking oil. Small production plants already exist, but producers must expand production considerably to meet demand.
The critical challenges for scaling up SAF production are technology, cost and process efficiencies. The scarcity of land limits the intensive production of bio-kerosene, and its use is controversial as it risks taking the space required to grow food. For example, to produce enough biofuel to supply the UK aviation industry would require half of Britain’s farming land.
Biofuels are feedstocks drawn from household, commercial, agricultural and forestry waste, along with waste industrial gases. Nearly 5x the total quantity of biofuels produced globally in 2019 might be required to meet net-zero under current demand and energy intensity. Meeting this target would require ethanol and biodiesel industries to grow 4x faster than they did in the early 2000s.
Hydrogen has proved to be a challenging fuel thus far as the volatile gas only becomes liquid at 253°C and must be stored in special tanks. Therefore, plans must be developed to manage the extra space and weight requirements.
Air Liquide, in collaboration with Airbus and France's largest airport operator, Group ADP, has been exploring the potential of hydrogen in the aviation industry for the past three years. The company is also a member of the H2Fly consortium which recently achieved a successful flight of an aircraft that runs on liquid hydrogen.
Universal Hydrogen has developed special tanks (or modules) to hold liquid hydrogen, which can be trucked to the airport. The modules are designed to slot straight into the aircraft, where they can be plugged into the propulsion system.
Airbus is planning to launch a hydrogen-powered passenger plane by 2035. A study conducted last year by the European campaign group, Transport and Environment, projected hydrogen aircraft would account for 65% of intra-European traffic by 2050.
Electric engines or batteries on planes would undoubtedly solve the direct emissions problem, but the batteries are currently too heavy and have insufficient storage capacity. Eviation Aircraft is building an all-electric jet. It plans to launch the first regularly scheduled electric flight in under three years with space to carry 12 passengers between Norway’s coastal cities, Bergen and Stavanger.
Insurance support
Despite the initiatives mentioned above and considerable investment to date, operators specifically, and the full infrastructure of the aviation industry generally, cannot reasonably be expected to mitigate all aspects of the challenges generated or exacerbated by extreme weather events without support. As partners of operators and other aviation entities, insurance stakeholders should spend greater time and effort focusing on potential weather-related ‘pain points’.
It is worth noting that the ‘traditional’ aviation insurance suite of products procured by operators does have the ability to provide some limited assistance in circumstances where extreme weather events lead to property damage and/or bodily injury. For example, the direct costs associated with repairing hull damage to a (single or fleet of) aircraft caused by hailstorms would be ‘insured’, and there have been examples of such events leading to meaningful claims for the aviation market in recent years.
However, what is not typically provided for, except in limited circumstances where operators opt to purchase specific ‘loss of use’ cover, is any form of contribution towards the wider business costs associated with disruption caused by extreme weather events. To take the example of multiple aircraft being damaged by hail, the ‘painful’ costs to airlines are the consequences of the inability to operate those aircraft e.g. cancelled flights leading to lost revenue and re-positioning expenses. Even the aforementioned ‘loss of use’ cover is imperfect, with excess periods to consider, as well as the typically sub-limited nature of this coverage.
Outside of the ‘core’ aviation insurance market, there are pre-existing ‘non-traditional/alternative’ risk transfer mechanisms that operators could investigate. Policies that rely on weather-related parametric triggers can be structured through alternative risk transfer teams. Yet, there are many variables to consider, including but not limited to peril definition (specific or agnostic), exclusions, the chosen metric(s), the trigger(s) mechanism, the pay-out formula, levels of self-insurance and renewal structure.
The often complex and unique nature of these policies means that the upfront ‘cost’ can be perceived as prohibitive. For insurers, the challenges of large maximum possible loss scenarios, the lack of portfolio spread and no guarantee of renewal create a requirement to be conservative with initial rate on line aspirations.
Going the extra mile
In a holistic sense then, the insurance market is currently only providing a limited level of support for industry in this area. This then begs the question what more can both brokers and insurers do to support our mutual client base?
There are specific examples of products in other adjacent areas that could inspire. One leading European insurer has launched an Excess Emissions Insurance for marine operators. This product is an extension to a pre-existing marine hull and designed to indemnify a vessel’s carbon output under circumstances where this vessel undertakes an additional unforeseen voyage caused by a covered risk that results in ‘excess’ emissions. The policy pays out with carbon credits equal to the amount of ‘excess’ emissions. Structuring something comparable for aviation operators should be possible.
However, as aviation insurance practitioners, there is a need for self-awareness around the fact we are not ‘experts’ beyond our core area(s) of competency. There is, therefore, a definite need to listen to clients to understand where the acute ‘pain points’ are before jumping to product definition.
In this spirit, Gallagher has formed an Aviation ESG Working Group (whose remit includes extreme weather) whose initial focus is on understanding the current activity and viewpoints of core stakeholders, including insurers, individual clients and industry groups/organisations. Canvassing of opinions completed to date has uncovered plenty of positive sentiment from insurers, but the desire to help is complicated by a marked uncertainty over how best to assist.
Both extreme weather and the aviation insurance market are here for the long term, and although the latter is beginning to focus on how it can assist operators with the former, as in other areas, there is a need for tripartite partnership between clients, brokers and insurers to design products and services that are both sustainable and useful.
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