Aviation insurance costs and safety culture

By any measure, 2020 was historically a bad year for aviation. The International Air Trans­port Association (IATA) calculated airlines’ total losses last year reached US$126bn, with passenger demand having fallen almost 66% compared to 2019.

For the industry’s insurers, who have had to return substantial amounts of premium to the commercial airline operators whose fleets largely sat idle during the current pandemic, it wasn’t much better.

This means that as we turn the page on a financially challenging year, and while airline businesses are only now starting to show fledgling signs of recovery, insurance rates will be going up again. That is, unless airlines can provide evidence of the kind of risk management that gives insurers the confidence to differentiate specific clients from the pack.

Insurers and their clients often talk about price differentiation come renewal season, but it is not often established. Why? Because, without evidence that documents elite safety practices, underwriters are only human, if they do not have facts, they make fundamental assumptions based on intuition or common market perceptions; these assumptions can be misinformed and do not benefit airlines that invest in advanced quality and safety practices.

With insurers trying to raise the premium base across the board this year, it is becoming increasingly clear that airlines will have to give enquiring underwriters the evidence they require to show that individual carriers ‘deserve’ to be considered ‘a better risk’ than their peers. This will inevitably require greater transparency into the detail of each client’s investment in safety, risk mitigation and quality-assurance programs.

The days of leveraging corporate size or the airline’s brand to drive home the best deal are gradually being replaced with justifications that show the insurance market that the financial relationship between the buyer and insurer is as a direct consequence of these significant investments concerning safety and risk.

Any number of events faced by airlines during their day-to-day operations can increase the carrier’s risk, and/or result in claims. Common causes of claims from aircraft owner/operators include: pilot error; damage from foreign objects; bird strikes; weather events; ground-handling incidents and geopolitical instability. The list goes on.

With the cost of aircraft repairs on the rise – and global claims stubbornly exceeding historic premiums – any evidence that an airline understands those risks and has strategies in place to mitigate them will be critical to build insurer confidence and their appetite for risk. This is increasingly so, as those airlines that share this information with insurers highlight those that have yet to do so. It is the key marker to differentiation.

In short, insurers are looking for the results of programs that measure an airline’s safety performance and discipline.

At a foundational level, the standard indicators for safety performance come from programs such as the IATA Operational Safety Audit (IOSA). But because these offer very basic safety indicators, when insurers are considering which airlines merit discounts on market premiums, they look for evidence that their clients are driven to exceed higher-than-average performance standards.

Sharing evidence of positive trends derived from advanced quality and safety practices – backed by safety performance indicators – shows how an airline’s specific challenges are being managed and helps insurers to build confidence in the policyholder’s risk strategy.

Unveiling a safety culture

There is a saying among auditors in the management-systems community that measurement is at the heart of management – ie, you cannot manage what you do not measure. The ‘big data’ era has given the aviation sector the tools required to do both.

While technology gave the airline industry the ability to capitalize on the vast amounts of data it generates, it is a strong safety culture that will ensure that lessons learned are put into action. Insurers are looking for evidence of extensive data capture that suggests a strong culture of hazard and event reporting, practices that also allow airlines to build understanding of their own risk environment.

Beyond data collection, brokers will warm to any evidence that intelligence generated from the data was used to inform the company’s broader risk management strategy, highlighting the path from data collection to the adoption of advanced practices.

Revealing performance trends not only gives insurers the confidence to insure an airline’s risks, but it also builds market appetite for an airline’s insurance business. This creates competition and expands the carrier’s options of potential underwriters across the insurance market.

Ultimately, a culture of data diligence and transparency also gives the insurer the ability and incentive to positively differentiate the client from the pack when the time comes to renew the programme and a degree of justification should a future accident bring into focus the insurer’s judgement.

An area where a culture of strong safety practices will make insurers pay attention is an airline’s record regarding ‘unstabilized’ approaches to landing and go-around performance.

IATA’s Flight Data Exchange continued last year to show a growing number of unstabilized approaches, as pilots prepared for landing; in the first half of 2020, the number of related incidents per 1,000 operations expanded against both 2018 and 2019 numbers. More positively, by the end of the year, IATA commented that the number of unstabilized approaches for passenger aircraft in 2020 were back in line with prior years.

As unstable approaches are relatively common causes of accidents, they are a concern for airlines and insurers alike. With numbers increasing, insurers will expect to see a safety culture, supported by data and training, that encourages pilots to 'go around’ for another, safer attempt at landing. For example, any airline, whose fuel-saving policy clashes with their weather-avoidance policy, is clearly going to be of interest to an insurer.

Training for these events should emphasise that any decision to execute a ‘go-around’ is not an indication of poor performance from the flight crew. It is prudent decision-making, as it errs on the side of safety. Having a culture that not only encourages this decision-making and generates data that supports the company’s related strategy - is very much a focus for the insurance community.

Of equal importance is the open and just culture within the airline itself. Hierarchy in the cockpit (and within the organization as a whole) as well as a punitive culture are highest on the list of threats to a safe operation.

The ability of each employee to report voluntarily and confidentially, without fear of reprisal, any act or omission that could jeopardize the safety of the airline is a critical element of an airline’s safety best practice. Technology can unveil what ‘went’ wrong, but only a human can report what ‘could have’ gone wrong; the former is reactive and the latter predictive. This is a fundamental differentiator that insurers take into account as they look to avoid potential claims (or at least charge sufficient premiums to counter their effects).

Company-wide awareness of risks

Senior executives at most airlines are well acquainted with the risks and opportunities within their area of operational responsibility. Whether that knowledge extends to the business’s full theater of risks can be less obvious; in fact, many companies themselves do not measure total business risk.

Understanding corporate risks is often compartmentalized within divisional silos such as legal, operations, human resources, IT, finance and management.

Come renewal season, insurers would look positively at any evidence that departmental risks are being shared across corporate divisions and are also understood and managed by upstream partners in the supply chain.

What tends to destroy the ability of the company to understand its risks - and how best to transfer, manage or retain them - is a procurement-based strategy. Risk is not a commodity to be traded, so insurers give little discount consideration to those buyers who treat it as such.

Buyers who understand the symbiotic relationship that exists - and possess the knowledge and understanding to retain risk rather than merely expecting policies to respond - stand a far greater chance of managing the comprehensive cost of their risks. They have all the data in their hands to manage all but the worst-case scenarios.

Demonstrating best practice can build insurance market relationships

Without evidence to the contrary, airlines can be held captive to common market preconceptions. If they operate in a more challenging region of the world, those preconceptions can act against its best interests. If left ‘untreated’, without evidence of a new dedication to safe practice, a non-committal reputation for safety and risk management can linger.

Misconceptions can be reversed by sharing safety-performance indicators that support positive trends, demonstrate best practice and reveal a company to be on a path to continuous improvement.

Airlines sitting high on the quality index will become frustrated if they observe insurers taking the current premium and applying tariff changes to premium rates that are unbalanced and historically non-differentiated. They will expect insurers to be brave and even award deserving airlines of counter-trend advantage at renewal.

Given the current dramatic change in an insured’s risk exposures, both negative and positive, allied to transparency of operational quality, gives insurers the opportunity to re-apportion their portfolio premium according to these quality metrics.

At the end of the day, just as airline insurance is an investment, sharing evidence of safety leadership is a critical foundation upon which strong relationships with the insurance community increasingly will be built.

Disclaimer

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 subsidiaries of Willis North America Inc., including Willis Towers Watson Northeast Inc. (in the United States) and Willis Canada, Inc.