The aviation insurance market has been hardening since late 2017, how have conditions developed in 2020 and how has the COVID-19 pandemic affected things?
Aviation Insurance

When I wrote my predictions for 2020 this time last year, the most severe challenge facing buyers was a continued but measured trend of increased rates and for insurers, the hope that this would harvest sufficient dollars to make their portfolio profitable after many years of poor results. The COVID-19 pandemic changed such predictions in a way no one could have possibly anticipated. The perfect storm for our interlocked industries had arrived. For airlines and aerospace businesses, there were massive reductions in operations and revenues, aircraft fleets almost entirely grounded and severe global lockdown travel restrictions. For insurers, a corresponding significant drop in premium revenue coupled with continued major loss activity and the fear that attrition losses were not reducing proportionally.

Our client’s businesses have been severely impacted by the pandemic, how has this impacted negotiations and what has the insurance market done to help?

The reaction from insurers was, for the most part, swift and sympathetic, but there can be little doubt that renewal negotiations were far more complex and challenging than those of prior years. As brokers, we were exceptionally busy trying to obtain maximum relief for our clients, amending policies and re-negotiating with insurers (where possible) large numbers of contracts to reflect a range of bespoke solutions including, immediate reductions in deposits, return premiums, extended terms of credit and extensions of policy periods at special low premium levels. All round, we commend the aviation market for its willingness to react appropriately (albeit given with some encouragement by the brokers!). It was a huge undertaking for all parties and consumed most of the spring and summer months since each negotiation was dependant on the individual circumstances and policy specifics of each client.

How have aviation insurers reacted during this challenging period and has their underwriting focus changed?

Once the various forms of relief had been achieved (where possible), the focus by insurers turned to what were the minimum premium levels that they must achieve to be able to remain in the business. The undeniable fact is that the vast liability limits required by clients and huge fleet values at risk (all with unlimited reinstatements) require substantial capital commitments and reinsurance programmes that, added to normal business costs, make a minimum income level vital for insurers. With this background, the 2020 renewal season was focused on finding a balance which reflects the revised outlook/circumstances of each client against the insurer’s determination for core rate increases well into double-digits. These rate increases were much higher than would have been expected without the impact of COVID-19 and were combined with overlying minimum premium requirements that pushed dollar premiums close to pre-COVID-19 levels despite an average 30% to 40% reduction in exposure forecasts. These have been some of the toughest and most impassioned negotiations that the market and clients have experienced for decades!

Aviation and aerospace losses were substantial in 2019, but 2020 losses are expected to be notably lower, what impact, if any, has this had?

There is no doubt that losses have been lower than in a typical year. Still, unfortunately, we continued to observe claims throughout 2020 with some significant fatal losses and ground incidents seen across the airline, aerospace and general aviation segments. It is too early to say just how the overall losses compare to recent years, particularly the attrition type losses as these figures take time to correlate. However, from our initial analysis on the numbers available to date, it is becoming clear they were significantly lower than average, albeit not as low as the reduction in operations and levels of inactivity would suggest they should be. This demonstrates the underlying risk and liability inherent in aviation and was a key factor to insurer’s remaining disciplined as the fear of reduced premium levels, alongside a ‘normal’ loss year would result in a very poor underwriting result. Insurers were also mindful of the heightened ground accumulation risk and their exposure to increased numbers of aircraft on the ground that the pandemic presented.

What happened in 2020 in respect of capacity?

Fortunately, COVID-19 had seemingly little direct impact on aviation insurance capacity levels. We did see a handful of market withdrawals, some entirely from the aviation class and others only from certain lines of business, but this was primarily due to longterm profitability issues rather than the pandemic itself. Likewise, there were ratings downgrades which impacted some renewals as well as reduced capacity deployment from a handful of markets but largely these were minor exceptions. Positively, we did observe several new market entrants in 2020 and capacity actually grew slightly in certain lines of business. Some carriers are clearly positioning themselves for growth having raised fresh equity for expansion, and enthusiasm for market share actually increased amongst some insurers as we got closer to the last quarter renewals, which may be significant for the future outlook.

Did anything else of note happen in the aviation insurance market?

Aside from pandemic related factors, the aviation insurance broking sector continued to make the headlines. The announcement of the pending Aon/Willis Towers Watson (WTW) merger and the emergence of several new broking start-ups caused some major personnel moves in the sector with large numbers of key aviation staff leaving established brokers to join these new entities. I would imagine this inevitably caused some significant disruption and resource issues for those affected brokers especially during such a challenging market period and an already exceptionally difficult year due to the pandemic. Fortunately, I am pleased to report that the Gallagher team was largely unaffected, retaining our key personnel and maintaining our focus on assisting our clients and delivering service excellence.

What do you see as the biggest threat to the aviation insurance market?

Changes in day to day work life brought about by the pandemic, such as remote working, has affected all industries in different ways but positively the aviation insurance market has managed to adapt well. However, our businesses have been built around personal relationships between clients, brokers and the insurers. We need to ensure that in this new world these relationships are retained in order to preserve that continuity of partnership that the loss of face to face meetings can gradually erode. Insurance of this nature is so much more than a simple commodity and it demands careful guardianship to keep its cost and coverage at the optimal level. It is therefore imperative that we as an industry do not overlook this.

Similarly, what do you see as the biggest opportunities?

For Gallagher, we feel we are perfectly positioned to grasp every opportunity. When there is disruption and uncertainty in the market, the huge level of resource that we possess and the continuity of our expertise within our global team can give us a real advantage and we will continue to exploit that to the benefit of all our clients.

In summary, what can aviation insurance buyers expect in 2021, do you have any advice?

In my opinion, the effect of COVID-19 on exposures and resulting rating levels was that the technical rate increases seen in 2020 were twice as big as they would have been had the industry not been devastated by the pandemic. The impact of these rate increases were somewhat masked by minimum and deposit premium conditions. In 2021, absent of abnormal loss levels, I expect insurers will have a very difficult time securing further technical rate increases. Exposures and operational levels will hopefully be moving a step towards pre-COVID-19 levels and this alone will deliver organic growth in premium. Insurers may not welcome this opinion but this ‘hold’ on rate increases would give our mutual aviation clients a chance to ‘gather.