BY Businesess.am.
Aviation insurance buyers face some of the most challenging renewals in more than a decade, as rising exposures and the war in Ukraine drive up costs, with some experts predicting the toughest conditions since 9/11.
With the easing of COVID-19 restrictions, airline passenger numbers are recovering from the slump in demand during the pandemic, with growth strongest in Europe and North America. Globally, passenger numbers are expected to hit 83 percent of pre-pandemic levels this year, up from 47 percent in 2021, and return to 2019 levels in 2024, according to the International Air Transport Association (IATA).
Rising passenger numbers mean increased exposures for airlines and potentially higher premiums, despite a relatively stable rating environment. In addition, the airline insurance market is digesting potentially large losses from the Russia-Ukraine conflict, putting rates, terms and conditions under pressure.
According to Peter Elson, chief executive officer of Arthur J. Gallagher & Co.’s aerospace practice, aviation renewals are likely to be among the most challenging in decades during 2022. “We will see more attention to the structure and quantity of cover and price of cover than any time since 9/11,” he said.
The bulk of airline renewals occur in the fourth quarter and Elson said insurers will likely be under pressure to increase rates.
“The airline insurance market for all risks is relatively stable, however, it is an uneasy stability due to the expectation of claims arising from the Russia-Ukraine conflict. The all-risk market is waiting to see how the Russia-Ukraine losses come through, where they will land and how their reinsurance programmes may be impacted,” he said.
Claims related to the Russia-Ukraine war have been notified to the aviation market, which provides both all-risks and war coverage under separate aviation war policies to airlines, as well as contingent coverage to aircraft leasing companies. About 400 commercial aircraft leased before the war are still in Russia and may be unrecoverable.
In May, the world’s largest aircraft lessor AerCap Holdings NV announced it would take a $2.7 billion hit after more than 100 of its jets were stranded in Russia. AerCap said it has filed a $3.5 billion insurance claim related to trapped aircraft and equipment and has already received $200 million in payments from insurers. Another lessor, Air Lease Corp., said in April it would write off aircraft leased by Russian airlines valued at $802 million, and that it would seek to recover losses from its insurers.
Despite the potential scale of losses, “ample cover” is still available in the aviation all-risk and war markets, albeit at a higher cost, Elson said.
The immediate impact of the war in Ukraine has been on hull war capacity, appetite and pricing, said David George, managing director for aviation at Marsh Specialty, a unit of Marsh Ltd. “We have already seen some major withdrawals from the market, which is perplexing given that no claims have been paid as far as we are aware and rates are increasing by circa 100 percent,” he said.
Capacity is available for most airline placements, however, the higher the aircraft values the more of a squeeze there will be, said George. “Insurers are generally maintaining US dollar capacity but now applying this to annual aggregate limits, not aircraft values. This will potentially restrict placements and it appears that aggregates will be restricted to three times maximum hull values,” he said.
The main airline insurance market has remained competitive throughout the pandemic and continued to provide broad coverage and stable pricing, George said.
“These conditions attracted new players to market and unlocked dormant capacity from existing insurers during the pandemic. While rates have been artificially high, in many cases due to reduced exposures, there is a sense among the underwriting community that current premium levels are below those required to sustain profitability,” he said.
Insurers are seeking various coverage restrictions, including geographic limits to exclude Russia, Belarus, Crimea and Ukraine, George said. “Some insurers are indicating that they will not provide coverage for force majeure landings in these countries, which we believe is an unreasonable position,” he added.
Prices in the airline insurance market are likely to be driven by the aviation reinsurance market, which could see large losses from the Russia-Ukraine conflict, Elson of Gallagher said.
“The shape and direction of the market will be determined more this year than in past years by what happens in the reinsurance market, in particular reinsurers’ assessment of the impact of Russia-Ukraine losses and their response to it,” he said.
