However, for those of us who have invested our careers in these sectors, it is certainly a truism.
All of us have weathered a succession of challenges and upheaval — whether it’s the significant changes to the equipment and infrastructure following huge investment over the last 20 years in technology and safety, the impact of a variety of crises (9/11, SARS, Icelandic volcanoes), COVID-19 and it’s devastating and sadly ongoing blow, or the pure economic impact of the prolonged soft market conditions on the underwriting community. However, the industry collectively has demonstrated remarkable resilience over a long period of time, and I have no doubt this will be the case with COVID-19, albeit the recovery may well be as long as the actual impact.
There has been much discussion relating to market conditions, including COVID-19 and the related impact. So while not ignoring those critical issues I want to consider the longer term and how we as a market can respond in a post-COVID-19 world while discussing how we can provide more creative solutions to the challenges the industry will face. There are certainly well-publicised challenges, including the continuously changing travel restrictions imposed by the government. However, looking ahead to the risks beyond the horizon, our industry must begin to collaborate with the already highly advanced aerospace industry, to help them recognise and address future challenges. Our success in this, however, hinges upon our market beginning to ask itself important questions, as well as harnessing the wealth of data available to evolve the product to meet the needs of a sophisticated market and to differentiate risks more effectively. We can begin this process by asking questions such as:
- How do we begin to future proof coverage and policy structures to prepare for the next inevitable crisis and understand the triggers behind it?
- How do we do more than pay lip service in applying 21st century analytics to the incredible amount of data at our disposal?
- Can we better understand the journey towards ESG targets and goals, and can we respond to that positively?
It is important to acknowledge the breadth and scope of coverage that is already provided. At times, we perhaps take for granted the scale of risk transfer that exists within an aviation policy — especially if it is placed within the context of other “Property & Casualty” risks. This is even more noteworthy considering the relatively small volume of risks in our universe. However, despite coverage tweaks and increases in limits over the last 30 plus years, the product itself is still fundamentally the same.
Nonetheless, there has never been a better time to innovate, and if we think of an aircraft as essentially a flying computer spitting off thousands of data points, then I believe there are numerous opportunities to evolve our offering.
We genuinely appreciate the quality and depth of the data that our clients provide us in their annual presentations. However, because this information is inevitably provided at a high-level, we as a market still tend to focus on the core flight exposures such as aircraft fleet, departures, passengers, losses and operating environment etc., and have possibly not applied as much weight explicitly to the myriad safety improvements that have resulted from the investment in technology. More relevantly, performance against key safety benchmarks that airlines operate to is not measured by insurers in a “semi-live” environment and therefore it is difficult to align or adjust the product accordingly.
Speaking somewhat generally, the market as a whole only really differentiates between operators via the premium it charges based on operating characteristics, operating environment and safety standards. The core product itself is essentially the same regardless. That becomes a rather blunt strategy for all parties in a soft market as the spread between premiums on individual risks tends to get condensed and therefore is not reflective of the quality of the operators and the relative risk for insurers.
COVID-19 has also taught us that the traditional process of providing an estimate of exposures at the beginning of the policy and then only adjusting after expiry can be a flawed approach. Furthermore, the historical concept of an annual policy with a fixed inception date has already been challenged successfully by some existing products in the market.
While the full level of flexibility wouldn’t necessarily be appropriate or sensible for every operator, taking a more creative approach would also deal with the lack of differentiation and the homogenous outcome previously mentioned. This is relevant in any market environment, but more specifically in a challenging pricing cycle. How can we differentiate between two ‘identical’ risks other than on the loss ratio outcome? What assumptions can we make if their loss performance is the same? Is one operator’s ‘near misses’ on incidents against the other’s rigorous focus on safety data fully reflected in their outcome? I don’t believe our market can accurately or easily make that judgement consistently right now.
Would it therefore not be better to align our product with some of the core data points that airlines already provide us? Could we consider a more dynamic product geared to live exposures, which automatically reflects actual exposures on a monthly or quarterly basis? Should we be examining what the ‘keep me awake at night’ safety factors are for an airline safety department and offering a product that reflects their actual performance against agreed benchmarks with a small tolerance either way to reflect outside factors e.g. weather?
Clearly the insurance industry needs to generate a certain pot of premium to pay for attritional losses (which are remarkably consistent), claims inflation, reinsurance and other internal expenses, as well as some margin and a contribution to the large loss/CAT fund. This also needs to reflect the relatively high cost of capital needed to provide the breadth and scale of coverage mentioned above.
However, a dynamic, safety aligned product can more accurately reflect actual exposures, potentially enhance an operator’s focus on safety, remove some of the friction of the current product (especially in times of dislocation) and genuinely differentiate operators. There could also be incentives around ESG strategies and milestones on the journey to achieving whatever those long term goals are.
We don’t yet have all the answers to these questions, but I do feel now is an optimum time to open a debate around the future of our product and to start truly aligning the high quality of data an aircraft generates with the highly advanced analytics and ranking processes that should be available to insurers. The data, the technology and the skill sets needed all exists — all it requires now is our market’s engagement and willingness to explore the opportunities. What do we have to lose?
Never a dull moment after all…
CONDITIONS AND LIMITATIONS
This note is not intended to give legal or financial advice, and, accordingly, it should not be relied upon for such. It should not be regarded as a comprehensive statement of the law and/or market practice in this area. In preparing this note we have relied on information sourced from third parties and we make no claims as to the completeness or accuracy of the information contained herein. It reflects our understanding as at 29 September 2022, but you will recognise that matters concerning COVID-19 are fast changing across the world. You should not act upon information in this bulletin nor determine not to act, without first seeking specific legal and/or specialist advice. Our advice to our clients is as an insurance broker and is provided subject to specific terms and conditions, the terms of which take precedence over any representations in this document. No third party to whom this is passed can rely on it. We and our officers, employees or agents shall not be responsible for any loss whatsoever arising from the recipient’s reliance upon any information we provide herein and exclude liability for the content to fullest extent permitted by law. Should you require advice about your specific insurance arrangements or specific claim circumstances, please get in touch with your usual contact at Gallagher Aerospace.
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