The aviation industry is recovering. The insurance market remains alert.

Date 14.9.2022

While the current pandemic has been unprecedented both for the industry and humankind in terms of its disruptive impact, it’s not the first challenge aviation has ever dealt with. Previous challenges were presented by the September 11 terrorist attacks in 2001, the SARS outbreak from November 2002 to July 2003, and the Global Financial Crisis in 2008, just to name a few.

Historically, pandemics such as SARS have been shown to have a “V-shaped” or in some cases a “W-shaped” recovery in the aviation industry.

Despite these downturns, aviation has still proven resilient in handling abnormalities and securing long-term growth. Based on past experience, COVID-19 will not prevent airline traffic from stabilizing, although the effect of the pandemic has been the most devastating compared to other crises.

“The appropriate insurance coverage doesn’t mean “ticking a box” on a company’s risk register, the insurance should really protect you from the financial consequences of risks.”

Although a lot has changed since the COVID-19 outbreak started, key factors influencing pilot demand remain the same. Age-based retirement combined with fleet growth has played a significant part in the creation of new pilot jobs. Third-party analysis forecasts that over 11,000 additional aircraft are expected to join the active worldwide fleet, raising the demand for pilots to 264,000 over the next ten years. The same source also states that around 3.8% of commercial pilots will be retiring or leaving the profession every year, leading to the demand for 126,000 new commercial pilots over these ten years.

It sounds paradoxical, but the airlines’ operations are gaining speed. Not only did some European airlines not fall off a cliff during the crisis, they also managed to invest in their future. Ryanair has opened 3 new bases for summer 2021 and signed a purchase agreement for 75 new Boeing 737 MAX aircraft. Wizz Air was running 81 percent of its regular operating schedule in August 2020 and went on to open 18 new bases during its 2021 fiscal year.

General Aviation (GA) insurance

COVID-19 is also having an impact on the renewal rating thought process of insurers. Insurers have noticed higher than normal lay-up returns and policy renewals presenting increased numbers of aircraft facing ground risks only and/or aircraft being deleted from the schedule. Some insurers have also unfortunately suffered payment defaults, although overall client bankruptcies have been minimal. These factors are being taken into account when pricing each renewal – increasing prices.

GA rates have notably increased in recent years and underwriting results are now looking for more positive for insurers against what was a backdrop of soft market conditions and poor performance over a number of years. Subsequently, confidence in the GA segment has improved, capacity is increasing, and we are now seeing an overall deceleration in GA rates.

Despite the increased capacity, insurers remain disciplined in their risk selection and deployment and in general, the larger the hull value and/or liability limit, the lower the levels of capacity and competition will be available.

Due to the diverse nature of GA operations, losses are in general much harder to track compared to other segments with only a handful of incidents typically deemed high-profile enough to gain media attention.

As is typical in the GA segment, we did observe a steady flow of incidents throughout the second quarter, including various landing mishaps, collisions, and ground incidents, but fortunately known fatal losses were low. 

Insurers also have concerns around return to service plans, pilot hours, and the mechanical failure of aircraft that may have sat dormant for long periods during the pandemic. In this respect, working with your broker to supply the right underwriting information and highlight key points will help differentiate your operation as a preferred risk, paying you dividends through the end result that is achieved.

Impact of tornados and hurricanes on aviation insurers

Not only has the COVID-19 pandemic devasted the aviation industry, natural events have also played a role.

In 2020 there were 29 named tropical or subtropical cyclones, 12 hurricanes, and five major hurricanes worldwide.

Just a short case study: on March 2020, a tornado stuck John. C. Tune Airport in Nashville, damaging many aircraft. On average, there is usually approx. 154 general aviation (GA) aircraft based at this airport. 92 aircraft were damaged or destroyed, with a total sum insured of 110 million USD.

Hurricanes are widely covered events for two very good reasons. The first is that they do tremendous damage and cost lives. The second reason is that they are reasonably predictable, which also explains why they end up being relatively low-impact events for aviation insurers.

The reported and collected data indicates that hurricanes make up the smallest portion of ground weather-related hull loss events for aviation insurers. Approximately 40% of ground hull loss actively due to weather perils arises out of tornados, while almost 50% arises out of hail or flood events and the remaining balance comes from hurricanes.

In addition, many of the high-valued hull claims arising from tornados are surprisingly the result of hangar collapses. While modern hangars are designed to withstand strong winds and should certainly make a difference in the assessment of hail exposure, the damage to aircraft was just a bad for the hangared aircraft as it was for those parked on the ramp, if not worse, irrespective of the quality of the hangar. However, in no way is anyone advocating for removing airplanes from hangars when bad weather is approaching! Hail is especially expensive for aviation insurers, as it is typically a widespread event affecting many aircraft at once.

A new threat in aviation: cyber risks

As the world moved in an increasingly digital direction in 2020 due to the pandemic, cyber threats in general also increased, with an average 139% increase in ransomware attacks in Q3 2020 compared to Q3 2019 (as said on http://www.business-standard.com/article/technology/ransomware-attacks).

Coming out of the COVID-19 pandemic the reliance on technology continues to increase across all sectors, including the aviation industry. The aviation industry sits at the top of the list of sectors which will have to make use of new tools and technology. It is now more important than ever that airlines and aerospace entities understand their cyber exposure.

The cyber Insurance market can be a difficult place for airlines and aerospace entities to navigate as a result of high-profile losses and a concern around legacy systems used in the industry and handling a high volume of third-party information. 

Even when only looking at the airport area, one should consider all of the following points as critical cyber risks: check-in and baggage and flight rostering, route planning and risk assessment, digital marketing and information security governance, online booking and loyalty points, aircraft maintenance and management systems. 

With post-pandemic budgets squeezed and investment focused on making air travel as seamless as possible, there is little change left on the table for cyber security. It is imperative that companies understand their cyber risks and assess whether some of these risks can be transferred to the insurance market. 

You might be surprised by the impact of cyber attacks; insurance just “for effect” is not sufficient

Insurance brokers shall put forward methodical questions and uncover whether the insurance policies have been designed to protect the company or are simply a measure to “tick a box” on a company’s risk register. This could lead to limits far below the expected impacts of incidents, such as data breaches, or even mean that you completely lack coverage for events that occur. 

The revitalization of the aviation industry has produced the increased interest of insurers in underwriting risks. More than ever, there is a growing interest in helping brokers who have experience in these specific areas of insurance – they can correctly identify and evaluate insurance risks and propose optimal solutions. This cooperation brings benefits especially to clients: the insurer analyzes the risk overview in detail and can thus set the conditions that precisely determine the client’s needs and its insurance requests.

Hana Kulhová

Head of the Aviation Department of RENOMIA, a. s.

 



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