A large proportion of airline insurance programmes are placed in the final quarter of each year. In this short article, the WTW Aerospace team looks at the constituent parts of the airline insurance market and describes the outlook for Q4.
The average size of an airline insurance programme means that it is broken down into different sections. These are placed in a variety of sub-markets that are aligned to different aspects of the risk. This reduces the potential for an individual underwriter to suffer catastrophic exposure in the event of a major incident or string of incidents.
Brokers use their market knowledge to take different sections of an insurance programme to the parts of the market that are most likely to be receptive to that aspect of a risk. As a result, distinct segments of the airline insurance market have prices rising and falling at different rates according to the underwriters’ perception of the risk.
Given the unique pressures that the airline insurance market currently faces, this article offers an overview of the conditions in each sub-market.
As the aviation industry started to move out of the pandemic-related lockdowns, there had been widely discussed concerns about the impact of COVID-19 on both the knowledge and experience of airline staff and the risk of bringing aircraft that had been in storage back into active service.1
The pandemic does not seem to have had a significant impact on either claims or insurance prices for 2022 renewals, and while parts of Asia have yet to ease their restrictions fully, it seems that this source of claims has been controlled.
There looks set to be three sources of claims in 2022 however. Firstly, while major claims have been limited in 2022 to date, there needs to be an allowance for attritional losses that are too small to represent major claims but still have an underlying impact on global premium requirements. Secondly, Russia seized leased aircraft with an estimated to have a value of more than USD12bn.2 These are likely to become constructive total losses due to irregular maintenance schedules and sanctions making the use of official parts unlikely. Finally, there is also the potential for further claims arising from civilian aircraft that might have been destroyed on the ground during the initial phases of the crisis between Russia and Ukraine (although it may be some time before these claims reach the insurance market).
At this point, it is difficult to be certain which sub-section of the market will end up with the claims relating to Russian seizures, as we discuss in more detail in our companion article on claims resulting from the crisis between Russia and Ukraine.3 Given the three sources of claims, there is a likelihood that overall claims on 2021/22 airline insurance policies will be significantly higher than the long-term sector average.
Using the recent July renewals for guidance, here is a quick overview of where the current position in the main airline sub-markets.
Hull and liability renewals so far in 2022 have been relatively stable where airlines and their brokers have been able to prove a positive claims history, have a proactive risk management strategy, and work in partnership with their insurers.
There were exceptions, especially where airlines have been closely involved with Belarus, Russia and Ukraine, but in the main renewals have been relatively positive for clients and pressures have tended involve restriction of coverage rather than increases in premium.
Q4 outlook: While there is pressure for price rises in the hull and liability sub-sector driven by a variety of factors not least of which is the scale of the loses emanating from the crisis between Russia and Ukraine, competitive pressure is likely to supress the rises in hull and liability premium.
Hull war insurers have already reacted to the Russia/Ukraine crisis and the wider economic and geopolitical uncertainty, but the ramifications of the Russian government’s seizure of leased aircraft have yet to become fully apparent. Nevertheless, in the past few months, we have seen hull war rates increase significantly.
Despite the increases, limitation of coverage has been imposed and reinsurance and retrocession (reinsurance of reinsurance) costs have risen considerably. This has made it an uneconomical class of business for some underwriters, particularly given the current level of risk volatility, and they have exited the sector as a result.
Q4 outlook: The coverage limitations and the price rises being driven by the retrocession markets make it likely that the price of hull war insurance will continue to rise considerably in the short- to medium-term.
The majority of claims relating to the seizure of aircraft assets by Russia are likely to be submitted by the leasing companies, so premiums in the contingent hull war market are expected to increase substantially, particularly given the extremely low base in 2020/21.
The magnitude of the claims that the airline sector faces on its 2022/23 insurance programmes means that underwriters need to find a way to recoup their losses. The challenge is that any attempt to increase contingent hull war premium directly could result in lessors refusing to buy cover at increased prices. Unlike the airline community, many lessors may not be under any contractual obligation to purchase insurance, except to protect their own balance sheets.
Q4 outlook: Price rises are likely to remain significant for at least a year as the insurance sector moves to ensure that it is on stable footing in the long term. A great deal will depend however on where the claims fall as we discussed in our recent article examining the ramifications for the airline insurance market of the crisis between Russia and Ukraine3.
Premiums for Excess AVN52E have risen considerably according to WTW Aerospace estimates, driven by insurers’ need to reinflate their income in the face of unprecedented claims from the war peril sectors. Insurers protect their underwriting activities with reinsurance, and Excess AVN52E reinsurance is frequently packaged with other war risk covers such as hull war. The expected losses in the hull war or contingent war sectors are likely to lead to increased reinsurance costs for combined hull war and Excess AVN52 covers including Excess AVN52E.
Q4 outlook: Some underwriters have stepped back from the market and prices are likely to rise as a result. Clients are unlikely to notice a significant change because Excess AVN52E represents a relatively low proportion of an airline insurance programme overall.
While there is still uncertainty about where in the insurance market the claims related to the Russia/Ukraine crisis will be placed, underwriters need to be covered by reinsurance and ultimately retrocession.
Despite this, there was little sign of the reinsurance markets raising prices during the July 1 renewals. This is unlikely to continue during Q4 as insurers and reinsurers take steps to ensure profitability.
One of the reasons for this is that retrocession markets have already increased prices. If the retrocession market, sometimes referred to as retro, reduces aviation reinsurance capacity, capacity will contract across the aviation sector as a whole.
This will have a knock-on effect on pricing in the reinsurance and direct insurance markets. Any limitation of coverage imposed by the retro market will be immediately sent up the chain, at which point direct insurers will have to decide whether to run certain risks on a net basis, which is unlikely given the level of risk, or exclude these risks to fall in line with their own reinsurance protection.
Q4 outlook: Prices are likely to rise across the reinsurance markets, driven by retrocession activity. The fact that retro prices have risen so quickly suggests that the increases may not be sustained in the long term, but they are likely to remain in place for a full renewal cycle.
There is a chance that some form of de-escalation in the Russia/Ukraine crisis will be negotiated. While it would be comforting to think that this would lead to an immediate softening of the airline insurance market, this is unlikely to be the case.
Primarily this is because, as we discussed in the companion article3, the leased aircraft seizures have happened, they are likely to become constructive total losses and they will need to be covered by the insurance market in some way. Each day that they remain unrecovered takes them further from their regular official maintenance schedule. This would make the aircraft exceptionally complicated to cover from an insurance perspective even if they were returned on the day that tensions eased.
Secondly, it would depend on the kind of peace that was brokered. If the sanctions against Russia and Belarus remained in place, the aircraft that have been seized may be lost for good.
Ultimately, the airline insurance sector has only been relatively profitable over the last few years because of the low level of activity during the COVID-19 pandemic. Even if the geo-political conditions improve, underwriters will try to maintain discipline for at least a full insurance renewal cycle to ensure that their airline portfolios are balanced over the long term, particularly in the hull war market. That said, it is possible that there will be more room for negotiation in the hull and liability market.
Despite the unprecedented short-term challenges however, the airline sector remains an attractive place for underwriters to do business in the main. Safety continues to improve, and enhanced data makes it more and more possible to identify potential issues before they become claims. As such, we would expect that as prices rise, underwriting capacity will be attracted back to the markets, which in turn will start to exert downward pressure on prices.
How long this process will take depends on decisions being made far away from either the insurance or the aviation sectors.
For more on the Ukraine crisis and related content, see the top right of this article.
1 Aviation trends post Covid‑19: Nine issues to watch as the industry prepares for take-off
2 S&P worst-case scenario for Ukraine conflict pegs specialty losses at $35bn
3 Assessing the airline insurance implications of the crisis between Russia and Ukraine