Aviation operators across North America have been feeling the pain across multiple lines of insurance as the global pandemic and growing threats such as cyberattacks make it more difficult and costly to transfer risk.
Just as present risks are becoming more challenging, the industry’s boardrooms are also having to have one eye firmly fixed on the horizon, where emerging risks related to the environment, the workplace and corporate governance will soon demand more attention.
This article considers market landscape within the aviation insurance market as well as broader lines of insurance which are becoming increasingly complex for aviation clients.
The past three years have seen a considerable amount of change in the aviation-insurance market, as insurers looked to correct an unsustainable balance between incoming and outgoing cash flows.
Last year was a particularly difficult year for aviation, producing mixed cost results for operators. For some, the reductions in coverage and considerable rate increase already had been absorbed in years prior; for others, the correction was managed more incrementally, in ways that more reflected the performance of their aviation sub-sector, its premium/claims balance and the safety performance of the individual account.
Some insurers reduced market exposures further as airlines and general-aviation operators sought returns for aircraft that had been laid up during the pandemic, further shrinking the insurers’ cash bases and requiring more rounds of recovery activity.
We are, however, experiencing some promising developments in 2021. New entrants into the market and increased capacity from a number of existing insurers is expected to help stabilise the aviation insurance landscape.
While there are no crystal balls, below are some sector/product-specific factors which might provide some insights on rate activity in the coming months.
Within the aviation class, airlines’ renewals are arguably showing the most stability and coming closest to market sustainability. Observers are increasingly optimistic that upcoming renewal periods could see rates limited to single-digit increases; they may even remain flat for companies with strong risk profiles – provided industry losses remain stable.
The broad range of operations under this class does not provide an easy assessment of the current market conditions. However, loss-free operators with established risk profiles are very likely to receive lower premium rates-rises, if not flat renewals. At the other end, loss-active operations that challenge the potential for insurance market profitability will continue to receive corrective pricing, driven, in the main, by continued management pressure on underwriters to improve portfolios.
Within general aviation, observers of the rotor-wing subsector are less optimistic about rates in this class, which has experienced a number of losses of late, just as the hard-market cycle has begun to ease across the wider aviation industry.
The Canadian market alone has experienced numerous total losses so far this year, as well as some partial losses. It remains to be seen whether those losses will reverse the pace at which the wider hard market cycle is slowing. We are however optimistic that some good performers will see more favourable market results.
Any full picture of the aviation insurance market necessarily includes assessments on non-aviation lines of cover used by the industry. In general, an advancement in the underwriters’ analytical capabilities (and a renewed dedication to them) is driving record returns from some of their ‘specialty’ businesses. However, for buyers, finding cover in the specific areas below may prove challenging.
Areas we’re using increased analytics to drive strategy and support for clients include: directors and officers(D&O), cyber and in the U.S., workers’ compensation.
The D&O market has been particularly hard hit this year, following a long-term period of business uncertainty. Additional insurance capital was lost, and similar conditions already had been driving rate increases. Added to this were higher costs of defence and increased losses, most notably in the U.S. and Australia. The stubborn COVID-19 pandemic exacerbated this landscape. Widespread travel restrictions and lockdowns created more uncertainty for the providers of D&O cover, who in turn further restricted capacity for the aviation operators in the market.
Observers are noting a market in considerable transition, characterised by a growing number of restrictions, declines from insurers and high premium increases. Multiple aviation clients have reported that traditional D&O providers are setting restrictive limits on coverage implementing the need for excess placements to secure the same level of coverage.
While there are still providers willing to offer D&O insurance to aviation operators, expectations are that annual D&O rates may exceed 100% increases for the pending renewal period. Again, we hope much of the required correction has taken place, but it remains an area that will require vigilance.
Attaining coverage for cyber risks may prove even more challenging for aviation companies in the current market, where underwriting guidelines are changing almost weekly; insurance carriers have become increasingly reluctant to underwrite cyber related risks across the industry for clients who do not have a robust cyber security posture.
Existing cyber policy-holders are seeing fewer insurance markets interested in quoting for renewals as well as overall capacity reducing with some clients unable to renew or maintain their same level of coverage as per prior years. Those that were able to attract quotes in the first half saw their annual premiums jump by 50% or more with the second half seeing 100%+ despite not experiencing losses and having strong controls in place. Those clients without effective, verifiable cyber strategies in place are simply being declined. Further, multi-factor authorisation (MFA) is an absolute requirement for businesses; without basic defences such as MFA in place, cyber risks may be an uninsurable risk at present.
Attacks against businesses – even smaller enterprises -- are up significantly and the cost of failure to adequately defend a company’s digital systems is also rising. For example, the average monetary demands from ransomware attacks on policyholders’ servers across all business sectors almost tripled over the course of last year (2020), Coalition said. The average ransom demand rose from just over US$440,000 in the first half of 2020 to $1.3 million in the second half, before falling marginally to just under $1.2 million in the first half of this year, according to the report.
The severity, frequency and sophistication of attacks has risen and the trend for increasing periods of business interruption has also increased significantly as companies are at times unable to recover successfully from backups, leaving weeks if not months of disruption to the company which could lead to reputational damage as well.
One cyberinsurance provider recently told a specialist insurer to the aviation sector they were receiving 15 notifications of ransomware attacks a day, with many of the victimised companies already invested in cybersecurity measures.
With cyber threats escalating, insurers that are quoting are demanding that aviation companies have defensive strategies that recognise their cyberrisks and fully address them.
As we consider the broader marketplace for our aviation clients, one area we also see significant scope for development is that of environmental, social and governance (ESG).
Looking forward, demands from investors, employees and the broader public for investment in ESG strategies are expected to rise on decision makers in the aerospace, defence, government and security industries.
With public pressure mounting to build more sustainable businesses, one in four investment dollars across industry in the U.S. is now going through an ESG lens, according to a recent report by Cowen.
The financial sector is seen as leading the way, particularly with regard to climate sustainability. But even global defence contractors are taking the first steps towards more socially responsible product portfolios.
As sustainability demands grow on corporates, insurance brokers are fielding an increasing number of enquiries from aviation clients for insights, and potential product options. As global initiatives gain cross-industry prominence, it is anticipated that operators – including air-transport companies and their suppliers – will need to begin proving sustainability strategies to access funding.
With leading insurance markets seeing climate change as a clear opportunity for the industry, product development is expected to continue to grow at pace.
If the aerospace industry’s loss-free operators are wondering why their premiums continue to rise, it is important for them to view themselves as part of a pool of operators that insurers consider holistically when assessing their participation in the market. Further to recognise that these markets often provide capacity across insurance segments such as property and casualty which has seen continued impacts from natural catastrophes.
What is key is working with your broker to consider your specific risks, run related analytical exercises and create an insurance program which is fit for your operations.
While it’s true that the losses of the few affect the premiums of the many, the market cycle does not have to affect all equally; it can affect some more than others. In this environment, it becomes important for the better performing operators to differentiate themselves from their peers.
Those who communicate to insurers effective, robust and continued diligence to risk management practices and have a working relationship with their brokers and insurers will be the best positioned to defend their businesses against the inevitable shifts in the insurance industry.
It is just as important for high performance operators to have regular evidence driven discussions with brokers about risk profiles and loss ratios, as it is for them to ensure that insurers have intimate knowledge of their company’s elite safety culture and related best practices.
Insurance isn’t just about the payment of claims but also can provide essential services for when accidents and incidents happen. Having access to professionals who can diligently support you in a time of crisis can be of critical value. Ahead of these unfortunate situations, proactive workshops can also prove vital, including delivery of internal risk and crisis management workshops that develop crisis management skills and emergency response planning.
In all, the future is complex and uncertain. The support of good risk management partners through the right broker and insurance providers will play a pivotal role in resilient risk management practice.
Willis Towers Watson hopes you found the general information provided in this publication informative and helpful. The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal advisors. In the event you would like more information regarding your insurance coverage, please do not hesitate to reach out to us. In North America, Willis Towers Watson offers insurance products through licensed entities, including Willis Towers Watson Northeast, Inc. (in the United States) and Willis Canada Inc. (in Canada).
