In this feature, Dzung provides answers to a series of questions, posed by Gallagher Aerospace, covering a range of topics involving both the aviation industry and insurance market.
You recently joined LRA-S, what is your vision for the future?
I have been fortunate to be in the aviation insurance market for more than 25 years and have been passionate since my first day as I guess have all of us working in this amazing and always moving industry! It is fascinating to see how our industry is so linked with the geopolitical environment and the global economy following the Covid crisis, and now we are currently assessing the ramifications of the tragic invasion of Ukraine by Russia on our market.
Joining LRA-S Group was a great opportunity to be part of a pure player in aerospace and a brand with a unique history of some 70 years.
I am convinced, indeed, that a nimble and focussed structure is essential when today, more than ever, we have to be attentive and on the side to our client in this uncertain and complex environment. The autonomy of what we do at LRA-S, free from external non-aviation influences is a real advantage, having our focus right to respond to our client’s concerns, from the very top of the company to our empowered underwriters and claims handlers.
I am confident it is a major benefit in achieving our goals and product offering. Gaining the preference of our clients and brokers is our mission statement for the future development at LRA-S. Going forward, we are working on two priorities: to strengthen our technical expertise, leveraging data to better support our client and secondly to develop our international market footprint as well as our lead position in France.
Insurers speak about wanting to innovate the aviation insurance product, what if anything, would you like to change?
What customers are expecting from our market?
A stable and a financially sound market to support and protect their assets and liability against the black swan exceptional event; a tailored approach for differentiation and fair pricing; quality of service and an efficiency to quickly pay the claim, hence providing a good value for the price. Putting aside the volatility of the cycle inherent to the catastrophe nature of the aviation risk, I think collectively our market is doing even more than just ticking the boxes.
We should remember that although not perfect, some may say not very sophisticated, the product works. Every second, 24 hours a day, 7 days a week, an aircraft is departing with an average limit of $1.5 billion, covered by our market, which is roughly equivalent to the global estimated premium for the year! Importantly, a hull claim today that could be up to $300 million would on average, be paid within a week.
In our very mature co-insurance structured market, innovation for our aviation product is a difficult topic. It should rather be further considered how insurers can go beyond our product; how can we partner on risk prevention; how can we support the non-transferred risks knowing that $10 billion attritional claims are today not transferred! How can we mitigate the impacts of the climate change? How can we better support business interruption? Parametric insurance; alternative risk transfer, are definitely areas where our market should partner for solutions to our customer concerns.
We should accelerate and modernise the way we are trading. The issue is not only to be digital but to set up a blockchain market, a genuine e-trading global market place encompassing clients, brokers, lawyers, loss adjusters and underwriters, all trading for the entire value chain, from client coverage issues to claims indemnification. It will definitely bring a significant gain in efficiency and speed as well as a securitization, trust and collection of data; a real benefit for all parties. However, it will only be possible with a collective market willingness.
Aviation companies are adopting a range of initiatives to address ESG issues, how do you view this and can those clients with strong ‘green’ credentials benefit from any special recognition in terms of rating and pricing?
Obviously, LRA as an insurer is to support the aviation industry as it strives to meet their goals of carbon neutral status by 2050. Today, investing to reduce carbon emissions is a matter of survival for aviation companies and it is not a choice but a necessity. This question goes hand in hand with the development of new technology and advances with fuel and the propulsion powering aircraft sustaining completely non fossil fuel-based flight. It will represent circa 90% of the equation, the remaining 10% being the optimization of ground and flying operations. New technology has historically benefited the improvement of flight safety, which it goes without saying, should be imperative for future operations. Nevertheless, in view of the stringent timing agenda, this remains to be seen, and any other pricing consideration is a more esoteric question.
As an insurer, how to support our client in this transition is a complex question that should not be solved simply by a “green washing underwriting policy” or by granting premium reductions to “green” operators able to invest in new technologies or use sustainable aviation fuel (SAF). Indeed, the implementation of such a strategy, at this stage, would penalize companies which do not have access to these new resources, but whose operations are nevertheless essential to the growth of the territories. The social component of ESG must be kept in mind; hence we should be more attentive to the trajectory for transition than the pure environmental scoring itself. At LRA, we are currently working to integrate this component in our client quality assessment as a factor of our line size and support.
Lastly, we are engaging in a sustained eco-responsible action to compensate our own carbon footprint through the implementation of our own greenhouse gas reduction as well as sponsoring innovative reforestation projects. We are now considering the funding of research in the field of sustainable aviation fuels and insurTech starts up of the green economy.
Lastly, what can aviation insurance buyers expect in 2022, how do you see the market trending?
This is the obvious question as ever! The certainty is that uncertainty is today part of the day-to-day existence for all of us. The big unknown at this moment, is the ramifications of the Russia - Ukraine war and its effects on the aviation insurance market. There are still a lot of questions, but it could be a true game changer for the market in view of the magnitude of the potential loss for aviation war insurers and reinsurers. Besides that, the uncertainty over traffic recovery from the pandemic crisis that tomorrow will have to deal with an energy crisis; the change of paradigm for business travels and the challenges linked to the decarbonisation pressure. These are all in addition to the enduring uncertainty of loss patterns and social inflation, that although may seem benign in comparison, are real concerns. We all have to learn to navigate through a more complex environment.
Anyway, what is the situation of the aviation insurance market today?
Following a continuous deficit for the last 7 years, the aviation insurance market looks to have finally returned to profit in 2021. However, we should keep in mind firstly, that this favourable year was linked to the level of aircraft operation and passenger traffic, which was still half pre-Covid levels, and secondly that this recovery year is not compensating for the losses cumulatively experienced over the past 10 years and so the market remains in a very significant deficit.
A normalization of the market pricing in combination with a strong rebound in traffic passenger in 2022 would have no doubt seen an increase in insurance capacity. However, with the Russia-Ukraine conflict, for the moment the market steps into the unknown.
If I may make a final comment, whilst volatility of the aviation insurance is inherent to the nature of the risk, it is critical to promote sustainability in the long-run. Our challenge as a market is to find this right equilibrium between fair pricing for the client as well as adequate premium to cover not only the claims, but the cost of risk and necessary remuneration for capital providers.
As a market, we should remind ourselves of the historical mistakes that have been made, if we wish to maintain the stability and financially sound support expected by clients and brokers alike.