It is now more than eight months since the long-brewing crisis between Russia and Ukraine erupted and while there are still several unknown factors that could play out in a variety of ways, we are starting to get a better understanding of the ramifications for the airline insurance markets as the Q4 renewal season gets underway in earnest.
The crisis between Russia and Ukraine has had tragic consequences for people and businesses across both countries, but its impact is also being felt further afield. In the aviation industry, alongside with the challenges that war zones create for aircraft routes and the potential loss of civilian aviation hardware on the ground, the Russian government also seized around 400 civilian aircraft that had been leased to the country’s carriers.1 This has the potential to result in the largest aviation claim and the largest aviation war claim in history. It could take years to resolve.
Multiple sources have estimated that the confiscated aircraft have a combined value of USD12bn or more.2
12bn+ The estimated combined value of confiscated aircraft.
The insurance market will have to find a way to absorb these claims as well as claims resulting from any civilian aircraft potentially lost on the ground in Ukraine. These claims will have to be accounted for at the same time as the minor hull incidents that are too small to classify as major claims but still have to be taken into account when calculating the efficiency of the global aviation book of business.
Bringing these three sources of claims together means that global airline claims in 2022 have the potential to be significantly larger than an average year.
There are complications though. For a start, it is difficult to carry out loss assessments while the crisis is ongoing. This will slow down the claims process, and the absence of certainty makes the process of insurance pricing challenging to say the least.
Secondly, for several years prior to the outbreak of COVID-19 hull and liability premium in the airline insurance market is estimated to have fallen short of claims in any given year. As a result, underwriters overall have struggled to make a return on their airline book of businesses. There will be winners and losers in this depending on the distribution of claims, but prior to the pandemic, the price of hull and liability insurance had been rising as underwriters sought to ensure that their books were balanced.
Thirdly, there is also the question of where the claims will land. Lessors are said to have notified hull war and hull and liability insurers of claims following the confiscation of aircraft within Russia. If the claims fall under hull war policies, they will be subject to aggregate limits. This means that potentially lessors with the largest exposures will only be partially covered and claims may be limited to around USD10bn. If coverage is proved to exist under hull and liability policies however, there is no applicable aggregate and insurers could be required to pay at least USD12bn.
Discussions in the market at this stage suggest that the claims are likely to be covered under hull war policies. As a result, prices in the hull and liability market are not rising at this point, with renewals generally being placed as before, or even enjoying rate reductions for growing programmes with a good loss profile attracting positive market engagement.
The long-term challenge for the airline insurance market is that every time prices start to rise to bring premium in line with claims from the airline book of business, new underwriting capacity is attracted to the sector. This competition supresses prices.
During the various national lockdowns, aviation activity dwindled. This coincided with relatively harder market conditions as underwriters aimed to build market discipline and bring the overall hull and liability premium into line with estimated expected claims.
Low claims activity coupled with rising prices attracted new underwriting capacity and as we came into 2022, prices were starting to reduce. After the eruption of the Russia and Ukraine crisis we find ourselves with a potentially unprecedented level of claims being made against a market that had been softening.
As we have seen repeatedly during the eight-month crisis, conflict sometimes moves quickly, so would a peace agreement between Russia and Ukraine reduce the potential for price increases in the airline insurance markets? A great deal would depend on the type of peace that was brokered and whether the sanctions against Russia remained in place. It would also depend on what has happened to the seized aircraft and the fate of the commercial aircraft thought, but not yet proved to have been damaged or destroyed on the ground in Ukraine.
The problem with the aircraft that have been seized is that even if they are returned, they may have to be declared to be constructive total losses for two reasons. Firstly, as the crisis has gone on, the aircraft have now been away from their owners for more than six months. As a result, they will not have been maintained according to standard schedules.
Secondly, the nature of the sanctions means that any replacement parts used on the aircraft may not have been supplied by accredited manufacturers. This will have repercussions from an insurance point of view.
As a result, even if peace is achieved, prices on the airline insurance market are likely to rise in the short- to medium-term. How quickly it returns to something like an equilibrium is difficult to ascertain at this point, but with the Q4 renewals in full flow, a challenging round of negotiations in the airline insurance market seems likely.
For more on the Ukraine crisis and related content, see the top right of this article.
1 Lloyd’s of London prepares to fight over picking the tab up for $10bn Russian-seized planes
2 Western sanctions have stranded hundreds of airliners worth an estimated $12 billion
