Author: Steve Eccles, global head of aerospace, AIG

The aviation industry has survived the existential crisis of COVID-19. The worst is now behind us and passengers are slowly returning to the skies even with governments remaining overly cautious about re-opening borders.
Aviation Insurance

The insurance industry is one that thrives on relationships and connectivity. It has been impressive to see how we have all adapted to the challenges that we have had to overcome. My onboarding at AIG was entirely virtual and completely seamless. Video calls, electronic slips, negotiations without looking at your counterpart straight in the eye have all become the ‘norm’ whilst we all continue to work remotely.

For the aerospace industry, however, connectivity is its ‘raison d’etre’: it brings people together. Therefore, the dramatic decline in the ability to connect during 2020 has severely challenged business models.

I am sure most of us thought that 2021 would see a return to some sort of normality, but I am now convinced that the aviation insurance market we return to will be markedly different to the one we left. Although the importance of connectivity will remain.

Within the insurance industry, there have been significant changes in the broking world with start-ups, acquisitions and mergers. From an insurer’s perspective, these are fascinating developments and present opportunities on many differing levels to all stakeholders, not least our customers. The last three years have seen brokers transition from a softening to harder marketplace whilst seeing new market entrants look to disrupt the established broking houses. Indeed, this publication was previously published by a broker with a different 3 letters to AJG. Nothing lasts forever in our market, with the only constant seemingly being change.

For airlines, the potential return to more regular flights presents new challenges, including both pilot and aircraft readiness for returning to service, as well as potentially catastrophic ground accumulations. We have also witnessed increased levels for passenger award settlements. Insurers are closely tracking how increased liability payments influence exposure assessments, which will, in turn, be pivotal in how we rate our business. The last 14 months have challenged assumptions regarding expected claims, with spikes in award settlements as well as deteriorating reserves across the industry due to prior year accidents.

The uncertainty regarding the future trend of liability payments creates volatility. One way to offset this would be greater industry-wide accuracy in claims reporting and reserve setting. Close co-operation between insurers and clients will enable improvement in these skills in the future.

We are also seeing some clients looking for different solutions due to internal cost pressures. The economic pressures faced by our clients and pressure on business models within the aviation industry make it only natural that there is increased focus and sensitivity to the pricing and rating of all the products that support the industry, insurance included.

From an aviation insurance rating perspective, underwriting returns had been under pressure pre-2020. In 2019, the industry had started to see adjustments in both terms and rates in the market; not just in the airline market but in all sectors – aerospace, general aviation, space. Insurers are focusing on the minimum premium levels they must achieve for their operations to remain sustainable, and adjusting their appetite accordingly. We have also seen the reinsurance market harden due to reduced exposures and changes in the established loss reserves held for claims.

This meant 2020 presented the perfect storm: pressure on insurer returns, increased reinsurance costs and capacity withdrawal driving rates to the highest level for some time. As Nigel Weyman from Gallagher pointed out in the Q4 2020 edition Plane Talking: “The last set of renewals have been some of the toughest and most impassioned negotiations that the market and clients have experienced for decades!”. For insurers, the focus has been on generating an underwriting return on a bottom-line basis. While the correction was overdue, this clearly adds to a challenging year for the aviation industry.

At AIG, we will continue to grow in our chosen business segments, but we recognise that in order to offer our clients consistency and stability, we will need to be willing to make tough decisions at an account or portfolio level. There are numerous factors that go into the rating of any individual risk and we see that there is not a ‘one-size-fits-all’ solution. Having supported our clients throughout 2020, we will again balance an understanding and commercial response with our ability to meet the cost of the capital we require to continue offering the substantial policy limits enjoyed by our customers. The key will be to keep talking.

With clear communication, a partnership approach and consistent behaviours from all parties, we will be well-positioned to support the aviation market through these challenges and those in the future.

Looking forward, it is clear that insurers will be judged on the ease of trading with them – we recognise that never before has empowerment of underwriters, responsiveness and accessibility been as important as it is now, especially as we continue to navigate the new ‘hybrid’ working environment. As I said, connectivity and close relationships remain key to navigating the future.

If anything, this last year has made me appreciate the importance of human contact and the unique buzz the ‘market’ brings more than ever. I hope when we return to the new ‘normal’ we all have greater appreciation for one another than we had before lockdown.

As the global vaccination programmes are starting to have the desired effect in protecting our families, friends and colleagues, we can all hope that we will shortly be able to return to visiting loved ones wherever they may be. I have every confidence that the aerospace industry will play an important role in bringing people back together in a safe way, and the insurance industry will be there to support you.

Steve Eccles
Global Head of Aerospace, AIG