One of the main drivers of the price of insurance is the number of claims that are made against an insurance policy in any given year.
Without stating the obvious too much, claims influence the price of insurance in two ways. Firstly, there is the direct influence: if there has been a claim against an individual insurance programme, the price is likely to go up unless the insured can clearly show that they are taking steps to ensure that a similar claim doesn’t happen again. Even then, depending on the nature of the claim, the price of insurance can remain inflated for several years as insurers looks to recoup their losses.
There is also the indirect influence, which operates in two ways. In the case of the airline insurance market, for example, if your fleet is comprised of a specific aircraft type that is known to have developed a problem, or if you are flying into an airport where there perceived to be political or weather-related risks, then the chances are your insurance will be more expensive than a fleet of similar value with different aircraft or operating in a different region.
The second way this works is that if major claims have occurred elsewhere in the sector, insurers will raise prices to ensure that their portfolios can remain balanced in the long term.
This secondary indirect influence is likely to be prevalent as airlines look to renew their insurance programmes for 2023/24. The claims environment for 2022/23 at first glance has been relatively benign, with only two major incidents recorded, both in Asia. The first, a domestic China Eastern Airlines flight, was lost in March with 132 people on board, and the second, a Tara Air loss with 22 people on board in Nepal, was lost in May.
The challenge for the airline insurance sector is that while these are the only two major reported incidents, the claims related to the Russia/Ukraine crisis are expected to be very significant and they are only just starting to trickle out. We discussed the expected claims and their potential size in this article towards the end of 2022, but the main point is that the total claim could be more than $10 billion.
This is potentially one of the largest claims that the aviation sector has faced in recent memory and is likely to have significant ramifications for the profitability of the aviation book of business overall.
The current level of uncertainty means that it is difficult to assess the market impact. The evidence for the renewal season at the end of 2022, when the majority of airline insurance programmes are placed globally, suggests that while there is tenson in certain sub-sectors of the overall market, rates are dropping, largely where exposures are growing to pre-COVID 19 levels. Overall premiums remain reasonably high.
With the exception of the Russia and Ukraine crisis, claims have been relatively low overall, but there are two issues that are worth highlighting. Firstly, there was a spate of runway overruns during the last few months of 2022, with incidents taking place in Canada, France and Panama. The incidents do not appear to have had a common cause and were relatively low value from a claims perspective, but they are worth noting because some industry analysts were suggesting that there might be an increase in incidents in the post-COVID-19 recovery period because pilots would be relatively rusty.
Meanwhile, weather related claims continue to be a cause for concern, with hail claiming a relatively high position on the aviation risk management agenda. Hail can do significant damage to an aircraft when it either in flight or on the ground and airlines and insurers are trying to develop ways to reduce the risk of damage. The use of composite materials in the construction of the current generation of aircraft make them particularly susceptible to hail damage because any impact can lead to large sections of a damaged aircraft’s body needing to be replaced at high cost.
As ever, positive engagement with the insurance markets is the most effective way to get the best out of the current conditions. A key part of this is ensuring that underwriters understand the risk mitigation techniques have been put in place to reduce claims.
The current generation of aircraft types is very well understood from an insurance perspective which simplifies risk pricing most of the time. The insurance challenge arises in relation to events such as the crisis between Russia and Ukraine. It will take time for the market to absorb the related claims, but it is possible for individual airline insurance programmes that are not directly exposed to the crisis to proactively manage their exposure. Engagement with insurers is key to a positive result.
WTW offers insurance-related services through its appropriately licensed and authorised companies in each country in which WTW operates. For further authorisation and regulatory details about our WTW legal entities, operating in your country, please refer to our WTW website. It is a regulatory requirement for us to consider our local licensing requirements.
