Turbulence ahead for aviation insurance market

February 21, 2024

Andrew Metcalfe, Senior VP Aerospace, Sompo

The coming year will likely be a difficult one for the primary aviation insurance market as a number of factors contrive to mean the rating environment might not adequately reflect the underlying risks.

There is abundant capacity in the primary market and the most recent renewal round was markedly competitive. Set against that dynamic, rates for reinsurance coverage remain high as a result of significant historical loss deterioration in the non-war sector, and primary insurers are being required to take often large retentions.

And although the frequency of catastrophic aviation losses has slowed in recent years, there is little doubt that their severity has increased. The Lion Air crash in 2018 and the Ethiopian Airlines crash in 2019, which both involved Boeing 737 MAX aircraft, resulted in tragic loss of life and substantial insured losses that continue to mushroom.

In addition, one of the major impacts of the ongoing Russia/Ukraine conflict on the aviation market has been to drive structural changes in reinsurance programmes.

Speciality aviation insurers are now frequently required to expose much more of their capital than previously. And that means that large losses, exacerbated by the macroeconomic climate that is causing claims inflation related to the cost of materials and labour, for example, and the impact of so-called ‘nuclear’ jury verdicts in the United States, are likely to hit primary aviation insurers’ balance sheets hard.

Against that backdrop, total aircraft values are increasing significantly, year-on-year, as technology advances, particularly in the area of engine design.

In addition, lawsuits related to the Russia/Ukraine war are likely to be drawn out and settled over a lengthy time period. While in the hull-war and liability third-party markets the premium base has increased in response to this situation, in other parts of the aviation portfolio it appears that some underwriters are keen to continue to grow their books, perhaps in an attempt to outrun potential future claims.

And as well as the increase in the severity of catastrophic losses, attritional losses are also on the rise, albeit at a somewhat slower rate. A single catastrophic loss, or a series of large, or attritional, losses, could severely test the rating adequacy of primary coverages.

While aviation clients may be experiencing stable or even reduced primary insurance costs for 2024, this could change dramatically if losses occur. And a poor combined ratio performance by the market might prompt some capacity providers to reduce the capital they assign to primary aviation or withdraw from the market altogether.

There is also the risk that, if the airline insurance sector continues to be competitive, illogical behaviours will creep into sub-classes of the aviation insurance market, like general aviation and products. There is a clear need for aggregate exposures to be better monitored and embedded into pricing mechanisms.

Further challenges

As the primary aviation market begins to emerge from the hangover of the effects of the COVID-19 pandemic on the industry, a series of challenges are changing the underlying risk profile. For example, during the height of the pandemic, when travel was severely restricted, many experienced pilots left the industry, and many ground staff were laid off or quit.

The lack of pilot flying hours, and a reduction in the number of experienced pilots, has been a concern. While the airline industry has safety at top of mind, and sophisticated ways to manage it, this lack of pilot experience may alter the risk picture; indeed, a number of recent unstable airline approaches, while thankfully not resulting in insured losses, have underscored the need for safety to remain a top priority.

The same is true of ground staff and air traffic control. These medium-term talent challenges may also result in changes to the risk dynamic and risk professionals and their insurers will be mindful of these potential safety issues over the coming months.

Flying to a greener future

Another challenge – and opportunity – for the aviation insurance market is the need to support the aviation industry in its efforts to meet the net-zero target.

A great deal of work is taking place, and the aviation industry is heavily invested in research and development projects to create new products, improve technology and find more sustainable aircraft design and hybrid fuel sources, and so on.

The aviation insurance market has been supportive of these developments, providing coverage for prototypical technology and test flights, for example. This is, however, a complex and dynamic area. A lack of historical loss data means that the risk profile is becoming less predictable for insurers. This again feeds into concerns about rate adequacy – it is vital that these emerging risks are appropriately understood and priced.

Our market also faces talent challenges here. We need to recruit individuals with different skill sets, knowledge and expertise as we work to understand the changing risk dynamics, in an increasingly digital environment.

This will be a challenge over the next 10 years or so and our market will need to renew its focus on training, learning and development as we ready ourselves for the next phase of the aviation industry’s evolution.

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