Hard Landing The aviation insurance market was already hardening before 2020’s blistering economic blows. By Denny Jacob

At this point in 2020, the future of global travel remains unclear. COVID-19 has disrupted the aviation industry in an unprecedented manner. Flights are down drastically, and global supply chains are chaotic. The pandemic’s economic impact is likely to linger for years. The aviation industry and its insurers will not be immune to that stress.

Until 2018, which marked the start of a series of deadly, high-profile plane crashes, aviation insurance brokers had long enjoyed a soft market. Since then, rates have increased as claims become increasingly severe despite continuous improvements in aviation safety. The last two years saw aviation insurance capacity constrict as a few insurers left the market. And uncertainty surrounding the aviation sector swelled following the worldwide novel coronavirus outbreak.

While COVID-19 safety remains the aviation industry’s paramount concern, as it is in most other industries, the virus is just one of many risks causing the continued hardening of the aviation insurance market.

“The market had already changed prior to COVID-19,” says Eric Barfield, chief operating officer at AssuredPartners Aerospace. Even before the pandemic, “the premiums were up, and the underwriting restrictions were more demanding than they have been in 10 years,” Barfield says.

Then, COVID-19 made a tough situation even worse.

The Market at a Glance

The United States is home to fewer than 20 aviation insurance companies. They cater to the entire industry, which includes aircraft component manufacturers, private and corporate jet services, and airline service providers. Aviation insurance products must serve everyone who manages an aircraft, from the single-engine small aircraft pilot to the major commercial airlines.

There are three main categories of business in aviation insurance. The first is airline business coverage, which includes hull insurance (for the aircraft itself) and liability (for bodily injury to a passenger or property damage to third-parties on the ground that are unrelated to the airline). The second category is general aviation coverage. Eric Donofrio, regional chief underwriting officer for aviation in North America at AXA XL, says this covers “anything that is not airline and not military that flies.” That includes corporate jets, jets that people charter but don’t own, police helicopters and so on. The third category is product liability, which covers aviation manufacturers for their exposure to bodily injury or property damage claims arising from potentially faulty parts or assembly.

That may seem like a variety of aviation-related businesses seeking coverage, but recent years have still been challenging for aviation insurers. Why? A big reason is simply “attritional losses,” Donofrio says.

Consider foreign object damage claims, which arise from incidents like birds striking and damaging an aircraft. The average cost of such a claim is roughly $360,000, according to Allianz’s “Aviation Risk Report 2020: Safety and the State of the Nation,” published in association with Embry-Riddle Aeronautical University.

One positive note: The frequency of some types of aviation claims is down thanks to equipment safety improvements. But at the same time, aircraft repair costs are on the rise along with the legal settlement amounts from some aviation insurance claims.

“The primary risks that aviation insurers are insuring haven’t dramatically changed over the years,” says Brian Glod, U.S. aviation practice leader at Marsh. But, “the legal environment has changed. The costs of repair have changed. New risks have evolved.”

“What is the right level of premium in this new exposure environment?” — Eric Donofrio, Regional CUO, North American Aviation, AXA XL

Risk on the Radar

The key to understanding any P&C insurance sector, especially one as complex as aviation, is tracking trends. Allianz identifies major aviation insurance claim and risk trends in its 2020 report.

According to Allianz, top aviation claim trends include:

  • The high volume and growing magnitude of claims; Technology driving higher values and cost of repairs;
  • Grounding cases more costly;
  • Growing potential for larger liability awards;
  • Foreign damage object claims soar; and
  • Fueling accidents on the rise.

Allianz also cites these risk trends:

  • Pilot shortage and fatigue;
  • Over-reliance on automation;
  • Exposures increasing at flight schools;
  • More turbulence from climate change;
  • Drone disruption;
  • Cyber business interruption threat growing; and
  • Congested airports with more on-the-ground accidents.

So the trends are clear. But opinions among aviation insurance and risk experts differ as to how much each risk might impact flying in the future.

Regardless of the risk, the aviation industry and its insurers must continue to find fresh approaches to mitigating and covering them. It follows that aviation insurers have been raising rates and premiums to offset costs associated with addressing major exposures.

Also of note: Aviation has been the scene of a great deal of quota share placement. Here’s how it works: If a large airline needs $2 billion in coverage, a major insurer teams up with other carriers to share in a percentage of the premium in exchange for covering a percentage of the risk.

Quota share placement has been around a long time, says Steven Allen, head of aviation at QBE North America. But what the aviation insurance market is seeing now is, quota sharing is being implemented at a lower threshold. “That’s a good way to mitigate the severity (of the risk),” Allen says.

New technology also is playing a crucial role in curtailing aviation risk. These tools include traffic collision avoidance systems that inform pilots about what’s around them, and enhanced ground proximity avoidance systems that alert pilots when their aircraft is in immediate danger of flying into the ground or an obstacle. Another safety leap was the introduction of automatic dependent surveillance broadcasts — now required by the Federal Aviation Administration (FAA) — that relay air traffic signals to pilots.

Technology is now key to keeping people safe when they fly. But it also introduced fresh risks to the aviation market, Barfield says. For instance, pilots are not always well-versed in the new, high-tech tools that show up in their cockpits. That could lead to an automation mismanagement issue while flying the airplane. “The biggest risk-mitigation tool continues to be training,” Barfield says.

It’s vital to note here that insufficient pilot training on a new flight control system was named as one of the fatal flaws that caused two crashes involving Boeing 373 MAX airplanes: Lion Air Flight 610 went down in the Java Sea on October 29, 2018, causing the death of 189 passengers and crew members, and Ethiopian Airlines Flight 302 crashed on March 10, 2019, killing all 157 people on board.

Not to be ignored by aviation insurance professionals: Cyber risk. More technology in aircrafts translates into more generated data and digital exposures. Cyber risk ranks among the top concerns for aviators, according to the Allianz Risk Barometer. Consider that 34 information technology outages between 2015 and 2017 impacted 11 U.S. airlines by causing disrupted or cancelled flights, according to Allianz. And there is no standard throughout the industry for managing these growing cybersecurity exposures.

COVID-19: How Airlines are Protecting Travelers

The safety of passengers and employees is the top priority of U.S. airlines. Since the onset of the novel coronavirus pandemic, carriers have been working closely with Congress, the Trump Administration and federal agencies including the Centers for Disease Control and Prevention (CDC).

Airlines are following — or exceeding — all guidance from the CDC to help contain and stop the spread of COVID-19. Carriers have added layers of protection to help protect passengers throughout their journey, from requiring facial coverings to enhancing cleaning protocols, such as electrostatic and fogging procedures. Some have implemented new boarding procedures and reduced beverage service to limit interaction.

Most aircraft also have High Efficiency Particulate Air (HEPA) filters, which generate air as clean as an ICU. According to the CDC, “Because of how air circulates and is filtered on airplanes, most viruses and other germs do not spread easily on flights.”

Here are just some of the common commercial airline procedures in response to the pandemic and corresponding safety concerns:

Airlines have increased their cleaning procedures between flights. They are utilizing disinfectants that are effective against viruses to supplement regularly scheduled cleanings.

Employees and guests are required to wear masks while traveling.

Airport signage reminds guests to “Mind Your Wingspan” with stickers six feet apart at ticket counters, baggage drops, customer service centers and gate areas.

On planes, EPA-approved disinfectant is used on customer areas, such as seatbelt buckles, armrests and window shades and in team member areas, including jump-seats and crew rest seats.

The seating policy has been relaxed on most flights with roughly 50% of all standard middle seats blocked to allow for passenger distancing.

Source: Airlines for America® (airlines.org)

On the Horizon

After any historic event, insurers examine their policy language to make sure that verbiage is even clearer about what is covered and what is not. Even though COVID-19 hasn’t resulted in mass claims across the entire aviation sector, this industry will still be impacted. For instance, aviation insurers may end up losing a significant portion of their premiums this year because exposures are down due to dramatically diminished flight activity.

Insurers were already losing money on aviation policies, according to Brian Glod with Marsh. Now their premiums will be gutted as they look to reset and get their business plans moving in the right direction for the future.

Aviation insurance market watchers expect insurers in the space to come out with clarifying endorsement forms for coverage.

Glod anticipates some sort of premium protection or minimum earned premiums will be a normal requirement from insurers going forward as a potential response to scenarios like COVID-19.

The aviation workers’ compensation segment also is in limbo because of COVID-19, says Steven Allen with QBE. Typically such claims wouldn’t be covered.

Allen also notes that some state legislatures are working to retroactively avail coverage for claims resulting from the coronavirus.

COVID-19 has introduced a new world for every industry to navigate. In aviation, as elsewhere, safety will continue to be of utmost importance. Eric Donofrio with AXA XL concludes: “The challenge for us is going to be, what is the right level of premium in this new exposure environment to make sure that the insurance companies can be profitable to be around for the future.”