The arrival of 2022 was greeted with optimism by airline insurance buyers. Claims were limited in 2021 and while active aviation insurers insisted that this was the result of the COVID-19 induced lockdowns putting the aviation industry into virtual hibernation, fresh insurance capacity was being attracted to the market. With exposure growth on the horizon, the ground was being prepared for increased competition, reduced pricing and a downward rating trajectory.
Then it changed.
The tension between Russia and Ukraine had been rising for months, but when the crisis erupted at the end of February 2022, there were very specific ramifications for the airline industry. The region over Ukraine was declared a no-fly-zone overnight and many aircraft were stranded on the ground. More significantly, it is thought that around 4001 leased aircraft, with an estimated value of more than USD 10 billion, were confiscated by the Russian government.
Aircraft being trapped on the ground in a war zone is the kind of risk that insurers account for when developing risk models, but the lessors’ losses were at the very extreme end of the loss scenarios. The sheer size of the lease claims is likely to have a profound impact on the direction of the market in 2023.
The first challenge that the crisis created for the aviation insurance sector was how would the lease claims be paid. Lessors notified both hull war insurers and hull and liability insurers of their intention to claim for the confiscation of aircraft by the Russian government and/or airlines.
Both markets were notified because of their different aggregate limits. If the losses are covered under the hull war policy, the claims will be subject to aggregate limits, meaning that lessors with the largest exposures would potentially only be partially covered for what is estimated to be at least USD 10 billion of losses. As we explained in a recent article that focused on the insurance ramifications of the crisis between Russia and Ukraine,2 if the claimants are successful in proving coverage exists under the hull and liability policies then there is no applicable aggregate and insurers could be required to pay the full amount.
The common view that evolved as 2022 progressed is that the insurance claim related to the losses is likely to sit within hull war, which saw dramatic price increases during placements in the final quarter of 2022. Aggregate limits in the hull war market could reduce the size of the claim.
The final quarter of any year has a high concentration of airline insurance programme renewals, offering insurers the opportunity to ensure that their airline books of business are balanced. This is likely to be important given the large lessor claims payments that lie ahead. Hull war prices are suggested to have doubled or even tripled in some cases as insurers have moved to balance their aviation books.
The second challenge has been pricing contagion in the excess AVN52e market, which offers extended coverage endorsements for aviation liabilities. This market is largely underwritten by the same insurers that support the hull war market, and significant, but slightly more incremental, increases in premium became standard from around March 2022.
The crisis unfolding in Ukraine and Russia forced insurers to reassess their positions and total exposure. Some insurers put their underwriting pens down temporarily and others withdrew from some parts of the market altogether. Capacity quickly became an issue as a result.
As capacity falls and pricing differentials become more pronounced based on policy limit structures, there will be a greater cost attached to “difference between” policy structures than “excess” based limit structures as insurers look to limit their own exposure. The drop-down pricing mechanism is also under focus and will carry greater cost going forward.
Trying to ascertain the direction of the reinsurance market is the third challenge. Several hull war insurers were accepting risks in Q4 2022, just before their reinsurance policies renewed on January 1, 2023. This means that they were underwriting without knowing their reinsurance costs. While the probability of price rises in the hull war market has been factored in, if the reinsurance market reacts more strongly than expected, there could be a stark effect on airline hull war pricing as 2023 gets underway.
Either way, from a coverage perspective, policy aggregates will continue to be restricted, confiscation aggregates will largely reflect the top valued aircraft and geographical exclusions will continue to hinder airlines with operations in Belarus and Russia, particularly where they are operating with high-valued assets and purchase large limits.
Pricing itself isn’t the only change. Coverage has reduced dramatically with aggregate limits slashed and geographical exclusions commonplace, particularly where an insurance programme has exposure to Belarus, Russia and Ukraine.
The fourth challenge that has faced the airline insurance market is the imposition of sanctions on Russia. Insurers have had to move quickly to interpret the sanctions put in place by the EU, UK and US governments throughout the crisis. Sanctions implementation was not uniform with insurers having to interpret them according to their corporate profile and the location of their head office. To an extent this fractured the market, with some insurers able to offer certain elements of coverage that others were mandated to deny.
Insurers' individual corporate approach wasn’t the only hurdle. As each insurer renewed its reinsurance protection programme, reinsurers were imposing geographic exclusions. As a result, some direct insurers were unable to offer coverage for airlines offering flights into and out of Russia, while others who renewed as early as April 1, 2022, were disallowed from offering coverage for overflights of Russia after their renewal.
This challenge eased as 2022 progressed and a better understanding of the sanctions frameworks emerged. The insurers that initially excluded Russia, whether from a moral or corporate jurisdictional standpoint, found themselves at a competitive disadvantage. In some cases, their stance has evolved and they are now granting coverage to flights to/from Russia or at least allowing overflying. This will allow greater flexibility for airlines renewing during the opening months of 2023.
Aside from the challenges created by the Russia/Ukraine crisis, market dynamics have been generally positive. There were only two notable incidents, the China Eastern Airlines loss in March 2022 and Tara Air loss in Nepal in May 2022. This contrasts with concerns that the hardware that had been left unused during the lockdowns combined with inexperienced or out of practice crews meant that the aviation sector could represent an enhanced risk.
Some placements made in the final quarter of 2022 actually enjoyed rate reductions where the programme showed positive growth and a good loss profile, but “as-before” rating generally seems to have been the norm as 2022 came to a close.
Insurers have been keen to stabilise hull and liability prices which form most of an airline insurance programme, mindful of the impact that potential claims emanating from Russia could have on their business costs as a result reinsurance price rises.
Despite this there is a potential that dormant or completely new capacity will become available in hull and liability market as appetite for premium income increases. As a result, in the right circumstances, limited rate reductions might be possible in 2023 where an airline is buying lower limits and can show sensible risk management strategies, improving loss histories and a willingness to engage positively with the insurance markets.
That said, conditions are likely to remain complicated for some time. The January 1, 2023 reinsurance and retrocession insurance renewals are likely to lead to price increases and possible capacity reductions, across much of the airline sector, not because of the imminent prospect of the Russian claims but because their own cost of business is rising and therefore insurers need to pass this on to the airlines.
The interesting juncture for airline underwriters will come when, and on which policies, the lessor claims manifest themselves and become payable and make the increases in insurers’ business costs more apparent. The strategic business approach to hold, retain or increase market share will be challenged by new market capacity and a potential continuation of falling ratings. Of course, this depends which side of the fence the insurers sit in this scenario, but there is little doubt that the outlook will vary according to the type of programme being placed.
As a result, we continue to advise airlines to engage with insurers early and take a proactive approach to the insurance markets. The withdrawal of some major insurers from the hull war and excess AVN52e classes, which we discussed in the Q4 2022 outlook3, show that underwriters are willing to review their positions and as a result, no assumptions can be made for the long term.
Coverage will continue to be a focus for insurers as they look to minimise their exposure and the pricing will take care of itself once everyone understands the implications, consequences and the cost of the crisis between Russia and Ukraine. There has been progress and some clarity has been achieved but it seems that 2023 will continue to be challenging.
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