Aviation – Turbulent times for aviation sector
The aviation insurance sector must navigate some uncertainties as it heads towards the forthcoming renewal season.
According to several speakers at the Aviation Insurance Association Conference in Miami, the market continues to wrestle with high competition, low premium revenues, rising claims costs and a forever-changing risk management landscape.
Among these speakers was XL Group CEO Michael McGavick, who told the conference: “Broadly speaking, across the marketplace we as insurers have actually been declining in relevance. The rates currently being charged for risk are not sustainable. In this environment, the only way to grow is consolidation.”
Those within the sector are used to dealing with their fair share of turbulence, however a series of hugely significant – and in some cases still unsolved – international airline disasters in the past few years have arguably moved aviation insurance more into the spotlight than ever. Philip Lepp, managing director at Sydney Charles, speaking at what will be the busiest time for airline market renewals as the aviation insurance market approaches the final months of 2016, comments: “We would expect to see airlines with low limits incorporated with high growth to achieve a higher rate reduction, compared to airlines which have sustained major losses [or have a] poor attritional record.”
The highest profile of these major news stories has been the mysterious and ongoing tragedy of flight MH370, which vanished on 8 March 2014 while travelling from Kuala Lumpur to Beijing with 239 passengers and crew onboard. Despite a search led by Australian, Malaysian and Chinese authorities, investigators have uncovered few traces of the Boeing 777 and the multinational operation is now the largest and most expensive aviation investigation in history, covering more than 33,500 square miles of ocean floor and reported to have cost more than $160m.
Previous claims made in September of this year that fragments found from the Malaysia wreckage appeared to show burn marks were later proven to be unfounded, meaning both the airline and insurers are no closer to determining the cause of the accident.
Speaking about the present situation, Tabitha Pike, senior aviation underwriter at Hiscox, says: “This case is currently due to go to arbitration in the coming months but unless any new developments are revealed by the investigation team, then the outcome will be based on how the all-risks and war market are willing to split the settlement amounts.”
Malaysia Airlines has previously stated that 42 families have already collected compensation payments from the carrier, thought to be around $175,000 for each close relative involved in the tragedy. However, in return claimants are understood to have agreed not to pursue any future lawsuits for negligence or criminal acts – even if the fate of the aircraft becomes known at a later stage.
Ms Pike continues: “It is difficult to predict how the forthcoming airline renewal season will play out; however, many carriers are reviewing their position within the market and their tolerance of rate reductions on risks that are suffering from high attritional losses.”
In the meantime, the UN’s aviation agency has announced that real-time tracking of airliners will now be introduced in a further attempt to stop such disappearances ever happening again. But for insurers, the effects have already been felt during the past 24 months. “The hull war market has been affected by several losses over the past few years, with in excess of $700m worth of claims from 2014 to 2016,” says Mr Lepp of Sydney Charles, “Aegis, Arch, Ark, Argo, Ascot, Channel and Hardy have all withdrawn from the hull war market in the past few years, with other markets completing internal analysis to review their continued participation in this market. But with substantial capacity in the hull war market, we would expect to see ‘clean’ airlines receive reductions year on year. Many London aviation insurance brokers will be using their hull war lineslips, which would provide beneficial rates to their clients due to their brokers maintaining a specific group or single market throughout their financial year.”
The Blame Game
Since the aforementioned disappearance, Malaysia Airlines has also had to deal with the catastrophe of flight MH17, which broke apart in mid-air on its way from Amsterdam to Kuala Lumpur on 17 July 2014, over eastern Ukraine, leaving no survivors from the 298 people onboard the Boeing 777. In September, the joint investigation team, which included representatives of the Netherlands, Ukraine, Australia, Malaysia and Belgium, said the plane had been shot down with a BUK missile fired from a mobile launcher brought into the country from Russian territory, findings which have since been criticised by Russian officials who said they were “deeply dissatisfied” with the results of the investigation. The disagreement is ongoing, with new evidence presented in October of this year by the investigation team. If the plane is proven to have been shot down, experts say the hull loss would be paid by the hull war market, as the hull coverage would be on a war-risk policy separate from the standard hull coverage.
Another high profile case was the crash of EgyptAir Flight MS804 in the Mediterranean Sea in May. This has since been attributed to a fire near or inside the cockpit, according to Egyptian officials. Traces of the explosive material TNT were found on debris, as new evidence seems to point to deliberate sabotage of the aircraft, which plunged into the sea while flying from Paris to Cairo.
Recent crashes have damaged Egypt’s tourism industry and if mechanical or human failure is found to have played a role in the Flight MS804 crash, it would further threaten business for the carrier. XL Catlin is the lead underwriter for the plane, an Airbus A320, whose hull is said to have been worth $18m. It already agreed in June to advance compensation payments of $25,000 to families of the 66 people killed during the flight.
War risk clauses
So what are the war risk clauses that can affect such claims, as the cases mentioned? One primary example is the ‘50/50 Provisional Claims Settlement Clause AVS 103’. Ms Pike of Hiscox explains: “[This clause] essentially states that if the insured has bought a hull all-risks policy, which contains the war and hijacking exclusion AVN48b; and they have also bought a hull war risks policy, which provides cover for some of the exclusions in AVN48b, then the hull all-risk insurers and the hull war risks insurers agree to advance to the insured 50% of the claim each if it cannot be determined under which policy the valid claim should attach, such as when the cause of the claim is unknown. The case is then put to arbitration to decide which insurers should be liable in full.”
When asked if the market appeared happy with how it is functioning at present, Mr Lepp concluded: “The aviation insurance market will have to harden in the future. Airlines will have to seek alternative brokers who will be able to assess their needs to seek the best coverage suitable for them. Strong relationships will be key to providing reassurance to airlines that their coverage is bespoke to their operation.”
What is war risk?
War risk insurance is a type of insurance that covers damage due to acts of war, including invasion, insurrection, rebellion and hijacking. Some policies also cover damage due to weapons of mass destruction. War risk insurance generally has two components: war risk liability, which covers people and items inside the craft and is calculated based on the indemnity amount; and war risk hull, which covers the craft itself and is calculated based on the value of the craft.
33,500: The search for Malaysian Air flight MH370 covered 33,500 square miles of ocean floor and reportedly cost more than $160m
$700m: There has been over $700m worth of losses within the hull war market between 2014 and 2016
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