03 October 2024
Uncertainty Takes Flight
The last time I had the opportunity to contribute to this publication was during the height of the COVID-19 pandemic in 2020. It was an era defined by unprecedented challenges in both our personal and professional lives - families confined under one roof, balancing work, education, and health in a world of uncertainty.
Paul Trueman, International Head of Aviation, Everest Insurance International
The pandemic hit the aviation industry particularly hard. Mass groundings, furloughs, and redundancies were the norm as available seat capacity dropped to approximately 20% of what was available pre-pandemic. During that time, I emphasised the critical role of the insurance industry, particularly aviation insurance, in providing stability amid the turmoil. This, after all, is at the heart of our value proposition—enabling our clients to endure and even thrive, in the face of adversity.
Reflecting on that turbulent period today, it is easy to understand why many anticipated calmer skies would follow the pandemic. Reality has proven otherwise. We are now confronted with significant geopolitical conflicts, escalating tensions in various regions, and societal unrest—an environment where change and uncertainty are the only apparent constants. To put it simply, the old has become the new normal.
Looking back and lessons learned
For underwriters in the aviation insurance industry, looking back at the COVID years can offer valuable lessons. Before the pandemic, airline underwriters were emerging from a period of chronic unprofitability, exacerbated by tragic events such as the Boeing MAX losses. These challenges prompted necessary rate increases, driven by a fundamental economic principle: stability in pricing and coverage cannot be sustained in insurance markets without, at a minimum, the expectation of a financial margin.
The pandemic years, followed by the recovery phase, have brought strong underwriting profits to the aviation insurance market. With reduced global air traffic, underwriting results improved as planes and people remained grounded. As we approach global pre-pandemic traffic levels in 2024, this recent profitability is welcome news, yet it also serves as a sobering reminder as it is being significantly fuelled by a dramatic reduction in global fleet activity, underscoring the precarious nature of our industry’s recent success.
At this point, it is important to recognise the diversity of available risks to underwrite within our market. While major airline and manufacturing risks often dominate the conversation, our industry encompasses a wide spectrum of risks across various subclasses and geographies. We can underwrite not only airlines and manufacturers but also hull war, war liability, leasing, and general aviation, to name some of the other core classes - each carrying its own dynamics and challenges. The largest segment, general aviation, remains a true global market, albeit concentrated primarily in North America. Thus, focusing solely on major airline and manufacturing risks provides an incomplete picture.
So, where is our market headed?
As the adage states, the only constant appears to be change, and we have to be prepared to learn from the old because it is now the new normal.
The future of the market
At this point it is better to focus on the simple facts affecting all aviation insurance market subclasses to determine the likely direction of travel:
- The market has produced underwriting profit, driven by higher rates and reduced aircraft activity.
- The market is growing as our clients' underlying exposures grow.
- Underwriting capacity appears buoyant, with strong capacity across most subclasses potentially leading to rate pressures as supply outstrips demand.
- Recent profitability remains threatened by potential losses, with the ongoing Russia-Ukraine conflict looming as a significant risk to trigger potentially the largest claim in aviation insurance history.
- Market divergence exists between aviation insurance and reinsurance underwriters, with reinsurance costs rising and increasing balance sheet exposure for direct underwriters.
- Inflation is real, driving up the cost of claims and further pressuring profitability expectations.
Taken together, these simple facts point to an undeniable reality.
While recent profitability has been a positive development, it has been achieved under exceptional circumstances - fuelled by reduced exposure due to a global pandemic. As underwriting capacity increases, rates may face downward pressure in an inflationary environment, which will erode margins. These gains are highly susceptible to conflict losses if they come to fruition. In this event, the divergence between the reinsurance and direct market will be so vast that it will subsequently create volatility in capacity levels and the underlying rating environment.
Much like during the pandemic, we find ourselves in a period of global uncertainty, affecting both our personal and professional lives. While facing different circumstances, it nevertheless feels like we are in a period of turbulence similar to when I last wrote an article for this publication.
The world remains an uncertain place. As the adage states, the only constant appears to be change, and we have to be prepared to learn from the old because it is now the new normal.
The Walbrook Building 25 Walbrook London, EC4N 8AW
Paul Trueman
International Head of Aviation
Everest Insurance International
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.