Author: Peter Elson
However, as the first quarter concludes, there are clouds on the horizon and the outlook is now less clear following the unfortunate events taking place in Ukraine. The question is, how will this situation impact on the aviation insurance market and what can airline insurance buyers expect in the months ahead?
Premium and rating trends
While the first quarter must be considered a quiet period in terms of airline renewal numbers, from our analysis the underlying conditions showed little change from those seen at the end of 2021. Overall rates remained relatively flat in Q1, but renewal activity was somewhat limited, with this period experiencing the lowest number of airline renewals than any other quarter. The actual results of Q1 continued to show rate variation between each individual risk, with flat renewals, decreases and indeed increases all evident.
Based on our knowledge of forthcoming renewals now finalised and or those that are currently in negotiation, indications would suggest that the All Risks rating trend is holding stable as we enter in to Q2. The current Russia/Ukraine situation has however brought uncertainty to the outlook, with aviation insurers now facing substantial claims. It is very early days, but positively most of the aviation market has remained calm, and we are yet to see any real knee jerk reaction from underwriters. While we cannot disregard the potential negative impact to future market conditions and rating, for now we expect to see a continuation of the current trend albeit with some upwards pressure on All Risks pricing, and a more significant increase in rates on War and Excess War TP business.
The second quarter is a slightly busier period for airline renewals, but it is not really until July that we will start to see the larger carriers and Groupings renewing, which will give us a far better barometer of just how the market is trending.
Despite much conjecture in the market and media, the Russia/Ukraine situation is developing rapidly so it is premature to make loss assumptions. Insurers and media are suggesting a range of possible outcomes, including the materialisation of the aviation insurance markets largest ever loss event. Indeed, ratings agency S&P recently published a report highlighting three notably different scenarios and values for potential aviation insurance losses. The first scenario was a base-case assumption of $6bn in losses, the second of $12bn and the third of $15bn, with around 50% of these losses falling on reinsurers. Significant losses are predicted, but we must acknowledge the uncertainty surrounding the situation and that it may take many years to settle the ultimate losses incurred.
Perhaps the one thing we can say with certainty now is that this situation and these sanctions implications have undoubtedly created a host of additional challenges and increased workload for the market, at a time when brokers, clients and insurers are all continuing to contend with the complexities of pandemic affected negotiations.
Capacity levels remained stable in Q1, unchanged from year-end, and after levels increased and new entrants appeared in 2021, most accounts found added options available to them at this renewal, which had a positive impact on the results. For now, airline capacity levels remain strong and we expect this to hold, at least in the short-term. Longer-term capacity levels will depend on just how the Russia/Ukraine situation plays out and what happens in terms of losses. Of course, should substantial claims manifest, which insurers are liable to pay, then there is the future risk that insurer management will re-introduce underwriting restraints and we could see the withdrawal of some markets, but for now, we expect insurers to remain calm and assess the situation as it develops.
While not directly capacity related, we have continued to observe significant staff movement amongst insurers. Several high-profile senior underwriters and multiple other sector specialists have moved companies in recent months and it will be interesting to see what happens once these individuals start working in their new positions.
Hull War and Excess War TP
At the end of last year increased capacity, appetite and competition were all having a softening effect on Hull War and Excess War TP pricing. The consensus was that rates in these subsectors would continue to soften throughout 2022, and indeed, as we navigated the early months of this year, we recorded further moderation. Unfortunately, as we write this update we are now looking at a very different outlook for this market.
In recent weeks, the war market has unfortunately become a prominent topic of discussion following Russia’s invasion of Ukraine. This situation, and the subsequent UK, EU and US sanctions imposed against Russia, have the potential to produce substantial claims for this sub-sector and become a significant loss event for the whole aviation market, as mentioned earlier.
In terms of insurance pricing, with the prospect of losses and heightened geopolitical instability, the perceived risk for these two covers has increased and insurers are reacting to the uncertainty. As we write this update, we are starting to see a notable uplift in both Hull War and Excess War TP rating requirements but fortunately, at this stage the overall market response hasn’t been as severe as some might have anticipated. A handful of insurers have however disappointingly, adopted a notably hard stance, quoting substantially higher rate increases than their peers on new renewals.
Pricing aside, we have also seen class insurers issuing notices of cancellation to review coverage and/or seeking to remove geographical territories under the Hull War and Excess War TP policies, as they reassess their risk exposure. This is a developing situation and historically this class of business is known for reacting strongly to market events and losses, so this is perhaps unsurprising. With heightened focus on coverage and exposures, airlines with policies renewing in the coming months of 2022 should now be prepared to face added pricing pressure and underwriter scrutiny on renewal.
In terms of losses, we recorded one fatal commercial airline loss during the first quarter of 2022. This involved a China Eastern Boeing 737-800 which crashed in the mountains of southern China’s Guangxi region on a domestic flight. All 132 people on board were killed. Additionally, we also recorded an airline incident involving a DHL Aero Expreso B757-200 cargo aircraft which skidded off the runway and broke in two following an emergency landing at Costa Rica’s Juan Santamaria international airport. Fortunately the crew was unharmed. In terms of insurance, standalone, we would not view these losses as particularly impactful ones considering the relatively low aircraft values and estimated liabilities. That said, we must be mindful that these losses have coincided with the losses from Russia and Ukraine, and so will only serve to heighten the current situation.
As mentioned, the scale of losses from this conflict is potentially huge. Various insurance policies in place are now subject to sanctions and there is uncertainty as to which any impacted insureds will attempt to claim against. Which policies the majority of claims fall under and indeed how insurers respond, will ultimately determine the size of the loss to the market, but at this stage, it is premature to speculate. We must also be mindful of any potential peace agreement in the coming months and how this might affect sanctions and play a part in what transpires.
We are aware of several Hull War losses however, in respect of damaged and or destroyed aircraft in Ukraine. The values and specifics are unconfirmed and it is not clear whether all of the affected operators had active hull war cover at the time of loss, and whether these will result in claims, so it may be some time before this is determined.
With the aviation war market producing a modest annual premium of circa USD 150 million, just a handful of aircraft losses have the potential to wipe out one if not multiple years of income, so all parties will be closely monitoring this situation in the months ahead.
- We expect to see a continuation of the current trend albeit with some upwards pressure on All Risks pricing, and a more significant increase in rates on War and Excess War TP business
- The Russia/Ukraine situation has brought uncertainty around the longer-term trending
- Some element of losses will fall on the reinsurance market and if substantial this could have a greater impact on insurance pricing across all classes
- Particular policy aspects now provided are being reviewed, and we would anticipate a heightened underwriter focus on terms and policy coverage
- This is a rapidly developing situation so things can change, but we hope insurers will stay calm and take a measured and constructive outlook following a full assessment of the actual situation as it evolves.