The price of insurance in the general aviation sector is set by a variety of factors, which can be specific to individual organisations, regional or global. At this point in 2023, there are four main global factors in play, some of which may push prices up, some are neutral and others will be likely to lead to pricing reductions.
Aircraft values have risen significantly in recent years, resulting in a shift in the adequacy of insured values in existing insurance policies. There has also been a shift in the resale market with more aircraft changing hands than anticipated as the industry tries to rebalance itself after the COVID-19 lockdowns.
Inflation is also a challenge for insurers, with the cost of business rising at a rapid rate over the last 18 months. With everyone operating in the same environment in this respect, insurers are likely to find it difficult to pass these costs directly on to an insurance programme and as a result the costs are likely to have to be absorbed. Inflation costs seem likely to be poised to become an important subsidiary factor in renewal discussions over the next few months.
The crisis between Russia and Ukraine and the ensuing sanctions on Russia and its allies has been a major feature of discussions over the last 18 months. Russia’s decision to confiscate an estimated 400 leased civilian aircraft as tensions increased has had significant ramifications across the entire aviation insurance sector. Many of the leasing companies involved are taking legal action against insurers as they try to recover losses which are estimated to be in the region of $12 billion.
Insurance programs for the leasing community are seeing significant premium increases and the imposition of more restrictive coverage, with aggregate limits of indemnity introduced into renewal policies.
However one area that is being watched closely is recent engagement between certain Russian airlines and leasing companies, where financial agreements are being sought to purchase the aircraft concerned. Any reduction in potential claims would be monitored closely by the underwriting and broking community alike.
Towards the end of 2022, the aviation reinsurance markets saw substantial increases to the Boeing Max losses. The majority of these claims will flow through into the reinsurance market because the retained aspects of the claims have already absorbed the direct insurance proportion, and the size of the claim means that they will inevitably impact all sub-sectors of aviation insurance.
The costs of the Boeing Max claims have been passed back to direct insurers when renewing their reinsurance programmes, however at this stage and despite their best efforts, direct insurers have not been able to pass these increased costs onto clients due to over capacity and competition, which we will cover later in this outlook.
Hull war has traditionally been treated as an add-on to most hull and liability insurance programmes, but the increase in tensions in eastern Europe had meant a significant reassessment of the position. Unfortunately, this position was only exasperated by the recent fighting in Sudan which resulted in a number of aircraft being destroyed and claims being made under the hull war programmes of operators. This combination of factors in addition to reduced capacity has meant the hull war market is challenging and clients can expect increases for the foreseeable future, with the only mitigation being an operations geographic scope.
Environmental, social and governance (ESG) programmes have become increasingly prominent over the last couple of years given the perception that insurers face a growing exposure to risks that fall under the ESG banner.
Clients are increasingly being asked by insurers to demonstrate their ESG credentials and whilst this has not directly led to an impact on pricing, it is clear that the market is moving in this direction.
Closely related to ESG, there is also an increased focus on sustainable aviation initiatives and products such as sustainable aviation fuel (SAF) and electric vertical take-off and landing (eVTOL) vehicles.
From an insurance perspective, SAF is unlikely to present a significant hurdle given that it is in the main a modification to existing fuel types. eVTOL is causing more discussions, but the insurance sector is adept at supporting new forms of aviation through the market as long as their testing and safety regime is transparent and well documented.
General aviation market capacity increased during 2022 and into 2023, driven by fresh insurers looking to capture market share, and existing insurers looking to maintain their positions.
This has meant that whilst the narrative has focused on Ukraine and Boeing, in the hull and liabilities market capacity and competition has outweighed any negative impact upon pricing.
Accounts perceived to be safety driven, with good loss records and positive engagement with the markets and industry bodies are seeing offers of capacity in excess of 100%, further driving pricing competition.
How long will this last? As flight activity increases we may see loss ratios tip from positive to negative on a market wide basis, however based on the current outlook the conditions look competitive, with the exception of hull war as we have detailed above.
The key driver from a client perspective is engaging with your broker early, formulating a clear risk management strategy and engage proactively with your insurance partners.